We’re Back!

…after a two day hiatus.

Dennis Stattman who runs the BlackRock Global Allocation Fund (MDLOX) was interviewed in Barron’s over the weekend and had a couple very interesting things to say. You may have seen Stattman on Consuelo Mack before and we was on CNBC recently.

On why asset allocation funds like his have risen in popularity he said;

It reflects the frankly dismal job that the most popular category, equity-only mutual funds, have done, as shown by the dismal results they have delivered to investors over long periods of time. They just haven’t provided a good risk-return trade-off. Furthermore, the idea that somebody can buy six different U.S. stock funds and somehow achieve useful diversification just isn’t an effective idea. It never was a good idea, and now it has been proved wrong. So having the ability to go anywhere is what, ideally, a fund manager should have. But there are very, very few individuals or teams who have the experience and who are equipped to do this.

He accomplishes several things in that quote aside from a not so subtle plug and overt shot at narrower or regular equity mutual funds.

To the extent mutual fund results have been dismal it is because the typical equity fund needs to be invested in equities. More funds now have broader mandates but if a fund you own needs to be invested then it will go down a lot when the market goes down a lot. It might go down less but it will participate in a large decline, or at least that needs to be the expectation. This is not a defense of product, it is a reminder to know what you own or more correctly understand how what you own actually works. If the market cuts in half and a fund that has to be invested drops 40% then realistically you can’t be upset at the fund. If that sort of scenario would be upsetting then it is more likely you had too much in fund.

The idea of being diversified with six different US stock funds was “true” back in the 1990s. I put true in quotations because in the 1990s the various dips and corrections were mild as compared to the last eleven years and we don’t need diversification during a ten year rally.

I obviously agree with Stattman that managers should be able to go anywhere but going anywhere has disadvantages too. A portfolio constructed in 2007 to own a broadly based actively managed fund, a broadly based actively managed international fund, a bond fund focused on high quality debt and a bond fund focused on low quality debt could have fared just as badly as the S&P 500 in 2008 (the idea being a mix of stocks and bonds should not go down as much as 100% equities) for getting caught in the wrong sectors (financials), wrong countries (Big Western Europe) and the wrong asset class (high yield debt).

With narrow funds you know with more precision what you own. An actively managed tech fund will always be a proxy for tech. It may or may not own Apple but it will own tech, you will always know that and so then the decision falls on you to figure out how much tech to own. The same applies to a tech ETF other than you will always know in real time what the fund owns.

Candidly I’m not sure what to do with Stattman’s assertion that most people aren’t equipped to manage an all asset, go anywhere portfolio. He is talking about both individuals and professionals. I certainly would agree that many do not but I don’t know about can not. For individuals managing their own the only realistic constraints are access and time available. A moderately intelligent individual can sift through at the country level and make decisions that are not ruinous. Additionally it does not take too long to realize that you should hire out these decisions one way or another, not everyone is an asset manager.

If you are inclined to spend the time then don’t load up on any one region, type of economy or currency–if you care enough about investing to read a blog like this one then not loading up can be obvious. I promise you there was not black box that lead me to the countries I’ve been writing about as liking all these years or that lead me to avoid or grossly underweight the ones I’ve been saying stink all these years.

The reason I say at the country level above is because obviously there are countless country ETFs that investors can buy. It is not rocket science that a surplus country with favorable demographics (or at least demographics that don’t stink) and something the world needs might have a stock market that would not look like the US very often.

It is not clear why professionals couldn’t do this with some proficiency. As an individual if you are so inclined to at least make country and sector decisions but not single stock decisions then obviously you can make very specific decisions, avoid some very obvious sinkholes and go anywhere with ETFs. If you are not inclined to do this sort of work then a well chosen go anywhere fund would be a better.

In past posts I’ve talked about ETFs being a democratizing product. They can be democratizing in both directions; very sophisticated or very simple ranging from a combo including Small Cap Taiwan (TWON), Fisheries (FISN) and the Swedish Krona (FXS) to some version of the permanent portfolio.

6 Comments

  1. If one owns a Taiwanese trawler that fishes near Norway, unloads the product for processing in Denmark and uses the Swedish Bikini Team within a Nordic-made suana for the pause the refreshes, I guess all the bases are covered.

    No need to use micro ETFs/// and the dividends…wow.

    T

    Reply
  2. “With narrow funds you know with more precision what you own. An actively managed tech fund will always be a proxy for tech. It may or may not own Apple but it will own tech, you will always know that and so then the decision falls on you to figure out how much tech to own. The same applies to a tech ETF other than you will always know in real time what the fund owns.”

    Roger, back in the 90’s I set up a diversified portfolio using mutual funds, with a Fidelity Utilities fund as a conservative holding. I believe this would qualify as a narrow fund. It was slaughtered. When I asked Fidelity what happened, they admitted that the manager had seeked higher returns from technology related stocks, thus the fund suffered from style drift in the tech collapse.
    That episode started me on the path of defining my own portfolio, and accepting the outcome, without the help of professional fund managers. I can tell you from personal experience that even narrow mutual fund products are not a proxy for their mission statement.
    You have mentioned this before, so I’m surprised that you changed your mind. Or maybe I missed your point.
    T, I think you are really more like Jimmy Buffett than Warren Buffett.
    Have a pleasant holiday, all. Has it stopped snowing yet?
    Sam

    Reply
  3. Sam the type of style drift you mention seems very extreme and hopefully does not happen that much anymore.

    I may have articulated my point poorly in not providing ongoing context. My preference continues to be individual stocks with some ETF exposure to build the portfolio but there are actively managed funds for some narrow spaces and there is nothing wrong with learning about that part of the market and deciding whether or not they make sense for you. A big drawback here and the reason I don’t use them is lack of transparency. Part of the equation in using any fund is periodically looking at the holdings. With ETFs you have current snapshot obviously and with mutual funds you obviously do not but you might get some sense of what is going in a mutual fund even with the lag.

    sorry for the confusion.

    Reply
  4. Good Post

    But my take on this is that when everyone you know owns go anywhere funds in a few years this secular bear market will finally be over and it will be time to load up on 100% equity funds again.

    Reply
  5. or you’re betting that the manager of a go anywhere fund would realize when it is time to go heavy in equities

    Reply
  6. “or you’re betting that the manager of a go anywhere fund would realize when it is time to go heavy in equities”

    Good counter

    But, most of these people will be me too IMO and not insightful.

    SEG

    Reply

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We’re Back!

…after a two day hiatus.

Dennis Stattman who runs the BlackRock Global Allocation Fund (MDLOX) was interviewed in Barron’s over the weekend and had a couple very interesting things to say. You may have seen Stattman on Consuelo Mack before and we was on CNBC recently.

On why asset allocation funds like his have risen in popularity he said;

It reflects the frankly dismal job that the most popular category, equity-only mutual funds, have done, as shown by the dismal results they have delivered to investors over long periods of time. They just haven’t provided a good risk-return trade-off. Furthermore, the idea that somebody can buy six different U.S. stock funds and somehow achieve useful diversification just isn’t an effective idea. It never was a good idea, and now it has been proved wrong. So having the ability to go anywhere is what, ideally, a fund manager should have. But there are very, very few individuals or teams who have the experience and who are equipped to do this.

He accomplishes several things in that quote aside from a not so subtle plug and overt shot at narrower or regular equity mutual funds.

To the extent mutual fund results have been dismal it is because the typical equity fund needs to be invested in equities. More funds now have broader mandates but if a fund you own needs to be invested then it will go down a lot when the market goes down a lot. It might go down less but it will participate in a large decline, or at least that needs to be the expectation. This is not a defense of product, it is a reminder to know what you own or more correctly understand how what you own actually works. If the market cuts in half and a fund that has to be invested drops 40% then realistically you can’t be upset at the fund. If that sort of scenario would be upsetting then it is more likely you had too much in fund.

The idea of being diversified with six different US stock funds was “true” back in the 1990s. I put true in quotations because in the 1990s the various dips and corrections were mild as compared to the last eleven years and we don’t need diversification during a ten year rally.

I obviously agree with Stattman that managers should be able to go anywhere but going anywhere has disadvantages too. A portfolio constructed in 2007 to own a broadly based actively managed fund, a broadly based actively managed international fund, a bond fund focused on high quality debt and a bond fund focused on low quality debt could have fared just as badly as the S&P 500 in 2008 (the idea being a mix of stocks and bonds should not go down as much as 100% equities) for getting caught in the wrong sectors (financials), wrong countries (Big Western Europe) and the wrong asset class (high yield debt).

With narrow funds you know with more precision what you own. An actively managed tech fund will always be a proxy for tech. It may or may not own Apple but it will own tech, you will always know that and so then the decision falls on you to figure out how much tech to own. The same applies to a tech ETF other than you will always know in real time what the fund owns.

Candidly I’m not sure what to do with Stattman’s assertion that most people aren’t equipped to manage an all asset, go anywhere portfolio. He is talking about both individuals and professionals. I certainly would agree that many do not but I don’t know about can not. For individuals managing their own the only realistic constraints are access and time available. A moderately intelligent individual can sift through at the country level and make decisions that are not ruinous. Additionally it does not take too long to realize that you should hire out these decisions one way or another, not everyone is an asset manager.

If you are inclined to spend the time then don’t load up on any one region, type of economy or currency–if you care enough about investing to read a blog like this one then not loading up can be obvious. I promise you there was not black box that lead me to the countries I’ve been writing about as liking all these years or that lead me to avoid or grossly underweight the ones I’ve been saying stink all these years.

The reason I say at the country level above is because obviously there are countless country ETFs that investors can buy. It is not rocket science that a surplus country with favorable demographics (or at least demographics that don’t stink) and something the world needs might have a stock market that would not look like the US very often.

It is not clear why professionals couldn’t do this with some proficiency. As an individual if you are so inclined to at least make country and sector decisions but not single stock decisions then obviously you can make very specific decisions, avoid some very obvious sinkholes and go anywhere with ETFs. If you are not inclined to do this sort of work then a well chosen go anywhere fund would be a better.

In past posts I’ve talked about ETFs being a democratizing product. They can be democratizing in both directions; very sophisticated or very simple ranging from a combo including Small Cap Taiwan (TWON), Fisheries (FISN) and the Swedish Krona (FXS) to some version of the permanent portfolio.

Submit a Comment

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