October 1, 2011

'Go Anywhere' Funds: Easy to Like, Harder to Qualify

Say hello to “go-anywhere” funds, arguably this market cycle’s product du jour. Following quickly on the heels of strong asset flows into these offerings in 2010, fund managers and manufacturers have been busy launching new products throughout 2011. How busy? Of the 126 funds in the space, most of which reside in Morningstar’s World Allocation category, nearly half were launched in the last two years. And with good success—through the end of August, according to Morningstar, investors had added some $33 billion of net assets to the collective go-anywhere fund lineup in just the previous 12 months ended Aug. 31, 2011.

Given the recent macro-dominated market environment, the rising interest in the self-described go-anywhere strategy is not at all surprising. It’s easy to see how investors, increasingly disillusioned with “constrained” active management mandates missing opportunities, find the notion of an unrestricted approach altogether appealing. In tough markets, investors tend to want to give their managers more latitude.  

Beyond that, but just as important, the simultaneous trends toward increased outsourcing and relaxing constraints are adding traction to the go-anywhere space. We believe investors have gained a new appreciation for how accurate they need to be in their forecasts as the building blocks of a portfolio become more granular. In other words, additional layers of complexity have increased the potential for estimation errors and investors and advisors would rather outsource that effort.

How Do You Compare the Incomparable?
While one strategy can vary greatly from the next, go-anywhere funds basically come in two forms: Those that have the latitude to freely move within an asset class, an all-cap equity fund for example, and those that can move freely within asset classes, like a global tactical strategy. Either way, the funds are characterized by managers with broad discretionary powers—and usually a short track record. All of that puts extra onus on wealth managers to thoroughly vet a strategy and properly set expectations for its role in a client’s portfolio. 

Particular attributes to look for in a go-anywhere strategy include top-down skills, past successes in navigating various markets, and overall firm resources. A global organization that can feed the key decision maker with pinpoint intelligence in a timely fashion is important, especially for a multi-asset class strategy. Even with the resources of a global network, it’s difficult for a professional investor to expand an area of expertise to so many markets and regions. Look for proof of past execution and indication of nimbleness going forward.

A key aspect, maybe the key aspect, of the evaluation is to understand a fund’s risk exposures. Almost by definition, managers in the go-anywhere space have the leeway to

make big bets, which, again by definition, can go bust. Case in point, Fairholm Fund (FAIRX), managed by Bruce Berkowitz. Last year’s Morningstar “Manager of the Decade” is down 22% so far this year and trailing 99% of his large-cap value peers (through Sept. 20, 2011) due to the fund’s 75% position, a.k.a. big bet, in financial stocks.

So how should you proceed?

  • Know and consider how much latitude a portfolio manager has with a go-anywhere strategy.
  • Know how concentrated the portfolio can be in a security, sector, and asset class. 
  • Know the portfolio manager’s ultimate objective.

In this space, the importance of qualitative due diligence next to historical portfolio- and returns-based statistical analysis cannot be overstated.

How Do You Fit the Unfittable? Maintaining certain risk exposures in a client’s portfolio can be a frustrating exercise even if you use asset-class-specific funds. To be fair, go-anywhere offerings, particularly those of the multi-asset class variety, add to that challenge. For example, PIMCO’s Credit Absolute Return Bond fund (PCARX)—a new go-anywhere strategy specific to the fixed income space—can go long or short in any credit worldwide. As a result, important characteristics like credit risk, duration/maturity risk and currency risk are no longer within your control from a total portfolio perspective.   

That said, go-anywhere offerings as a group can provide interesting return profiles and fit nicely alongside global macro, managed futures, and commodities strategies from a diversification perspective. In our considered view, the funds work best as alpha satellites that orbit the passive core.

Where, and for Whom, Do These Funds Fit? We understand why go-anywhere funds have gained so much popularity in the current macro- dominated investment cycle. There’s much to be said for a strategy that reserves the right to ‘zig’ with great conviction when others ‘zag’ with less.  That flexibility, however, no matter how thorough the due diligence, creates real challenges from portfolio construction standpoint. To that end, the go-anywhere offerings are probably not for advisors who prefer to strictly control their clients’ asset allocation and risk exposures. We believe they make the most sense in a core-satellite framework.

Author’s disclaimer: The views and opinions expressed are provided for general information only and do not constitute specific investment advice or recommendations from the author.

 

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