Close Close

Portfolio > Mutual Funds > Bond Funds

Unconventional, and the rise of flexible funds

Your article was successfully shared with the contacts you provided.

It must be de rigueur in many schools of finance to teach certain rules. Many of the graduates seem to hold the instructions sacred. They are hammered into student brains, where they quickly harden and become indestructible, diamond-hard.

These rubrics encompass tired ideas like this one: 5 percent into small-cap, 5 percent into mid-cap, 20 percent into large-cap and, by the way, make sure to be 60/40 equities to bonds and a ratio of X value to Y growth.

Why else, for example, would an investment annuity company, when a living benefit is selected by the customer, limit his or her choices to unimaginative diversified sub-accounts instead of, say, Ivy Asset Strategy, Templeton Global Bond or BlackRock Global Allocation? All three are flexible in ways that academic diversification is not, and all three hammered most traditional diversification plays over the last 10–15 years.

Yet, if the customer had purchased the annuity without the living benefit, thus having no investment restrictions, and used one, two or all three of the flexible funds, he or she would have historically cleaned the clocks of the diversified choices, even if, to make the game fair, you deducted 3 percent yearly for living benefit add-on expenses.

See also: 13 ways an annuity can benefit an estate plan

Forget annuities. Why else, other than hard-wired finance brains, would giant fund companies, acting like dinosaurs, reject the idea of flexibility and the thought that there may be new ideas on the horizon?

If school-learned diversification is all that great, why did one company lose some $240 billion of investor money in the 2008 debacle? Why are people afraid of equities, the funds that specialize in them and stocks?

Investment professionals know the truth, of course, and the truth is simple and axiomatic. It’s one simple mantra echoed by customers far and wide: We don’t want to lose money!

Managed what?

Things work until they don’t. An example: Hard-wired financial brains gamed for years the system with managed futures. Lots of smart math whizzes trading 24/7 (maybe not 24/7, but globally close to seven days weekly), trying to make a penny here and a penny there on commodity and other bets.

In the beginning, lots of pennies added up to something. But, as more and more people learned and joined the game, it became harder, and earnings might be measured in mills and not pennies, and then parts of mills, and so forth. Ever-faster computer systems and software — to say nothing of algorithms — make it harder and harder to find a trading advantage. Hundredths of mills don’t add up to much. And more and more people joined the game.

Size matters

As to certain types of trading, a company can do very nicely right up until it hits a wall of reality. An SMA, for example, may get big enough so that it can’t effectively trade. We could argue at length about free markets, but the truth is that mutual fund managers get angry if a customer, like an SMA, with several billion invested, withdraws in one fell swoop, say, $2 billion. And most SMAs use funds.

To counter the idea of big all-at-once withdrawals, the fund managers levy extra charges if one gets out early, which limits the flexibility to trade advantageously, e.g., if a signal says to an SMA manager “exit now,” and there’s a 2 percent penalty for the resulting liquidation, the manager may think twice. Once an SMA can’t follow its signals or hesitates to follow its rules-based system, performance may die — it does not matter so much the reason. A 2 percent hickey if the signal is taken may be as bad as the downtick if it is not.

The rise of flexible funds

There is flexibility and then there is flexibility. Flexibility can be found in the Templeton Global Bond fund, a place where the managers, led by Michael Hasenstab, play worldwide bonds like currency fiddles, matching bow strokes to country risk. Or in Ivy Asset Strategy, where co-managers Mike Avery and Ryan Caldwell are able to go where they need to be. When things look dicey in one investment or one country, they can move pretty much on a dime and have no mandate to be in love with any one particular sector, stock, commodity or whatever.

Another kind of flexibility has come to the fore recently. This new kind of investment elasticity is fascinating in that, so far, no two of the new flexible funds are alike. Not all of the funds get investments out of the way in a crisis. Some are designed to continually make great choices so that, overall, performance does not suffer as much in crisis.

If you are looking for sector rotation, consider Virtus Premium Alpha Sector. Its fund managers check things daily. In more traditional investments, Pioneer Multi-Asset Real Return goes anywhere and also looks at things pretty much on a daily basis, too. Invesco Balanced-Risk Allocation is built around three investment groups — commodities, stocks and bonds — and amounts of each are adjusted based on risk. So any of the three “sleeves” may be reduced to as little as 16 percent of the portfolio or could be as much as 60 percent, depending on conditions.

Mainstay Marketfield goes anywhere too, and it seems to have a knack for winning with out-of-favor bets.

RBS offers a collection of ETNs. One is flexible enough to get out of gold when it sinks. Another moves to cash from mid-cap. And the RBS Alternator works hard to pick winning bets rationally.

First Eagle Global and First Eagle Overseas like a gold backstop, but the amount can be minimal. The two funds have wonderful long-term track records.

My favorite fund, James Balanced: Golden Rainbow, is flexible as to the amount of equities and fixed income, using statistics to measure conditions. It was only down about 5.6 percent in 2008, that ugly, ugly year. (James Advantage funds don’t just seek alpha. The firm is actually located in Alpha — Alpha, Ohio. The firm’s other funds are well worth a look, too.)

And now there’s Transparent Value, indices and funds from Guggenheim Partners that revolve around something Guggenheim calls Required Business Performance. The question is this: Will a stock be able to meet expectations? RBP seeks to answer the question about each stock and unleashes one of the cooler websites in the industry. Unlike other managers who have a secret sauce, the Transparent Value funds have a visible and easy-to-understand methodology, and Guggenheim shares it with financial professionals. You gotta check out the inner workings of the secret sauce, which I promise you will love. (It ain’t called “transparent” for nothing.) You may check the basic website at to find your wholesaling team. Then, request a password to get the RBP link. While Transparent Value is flexible, it’s a different kind of flexibility, one designed to offer better choices.

There are more flexible funds than covered here. This is simply a soupçon of what’s available.

The idea is that flexibility may be able to protect you and your customers from the next great securities or economic debacle, or, if not protect, at least moderate the shock. A 50/50 combo of James Balanced: Golden Rainbow and Templeton Global Bond C would have been up ever so slightly in 2008 and would have kept customers where they belong: Invested!

When an oncoming train is speeding towards you, flexibility may get you out of the way, either by a few feet or even a mile.

For more from Richard Hoe, see:


© 2023 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.