Lets take quick look at this Global Allocation Fund to see what it is doing as it can give some ideas to consider. We don’t need to copy it and we certainly have the very significant advantage of being more nimble than it – so let’s just try to learn something from a product that has proven itself (Sharpe Ratio > 0.50 over past 7 years).
First, let’s go back to 2006-2008 and look at Blackrock Global Allocation vs the Generic Balanced Index from Vanguard (VBINX) using the Free Portfolio Backtest App:
Blackrock Global Allocation Fund strategy is highlighted by these characteristics:
• Global focus – obvious but important. It can go outside the U.S. or stay within it. Sometimes the United States will be the most attractive market – but more often than not, it isn’t. It is certainly a major performance enhancer if you have the ability to both within and outside the U.S.
• De-emphasize individual security selection. The Global Allocation managers believe in making larger asset class calls and also want to avoid individual company problems. So they diversify greatly across individual securities while still making substantial active calls. Hey, sounds exactly like a strategy based on ETFs doesn’t it? Except in our case, we can make tactical moves as soon as we feel its necessary – no need to ‘work orders’ for millions of shares of AIG (a security which this fund had a 1% position in when it got nationalized in 2008 at a 90% haircut). ETFs can be traded for almost nothing --- extremely low expenses/trading-costs with very often a one-penny bid/ask spread.
Below shows one basic idea here. While Global Allocation has done well over longer-term, it can and will underperform even a generic benchmark like the Vanguard 60-40 Balanced index when the U.S. market leads.
Despite large long-term outperformance, investors that chased this performance have now lagged for the past 2 years:
Below shows 2 basic ETF performances for the same period.
This fund is a good example of how investors/advisors can use ETFs. There can be significant differences in portfolio performance without large efforts made in security-selection. The bigger issue is which MARKET do you want exposure to? Stocks vs bonds? --- If stocks, U.S. vs International vs Emerging? If bonds, intermediate treasuries or corporates -- or both? Then of course you can look to add significant value dropping down to the next level --- country funds, sector funds, small cap funds, precious metals, preferred stocks etc etc…. This is how modern portfolios should be viewed --- not just on stock ABC vs stock XYZ.
ETFreplay.com has applications that are designed to show shifts in these large forces. We have shown examples using both moving averages and relative strength. In May, we blogged a fair bit about strongly overweighting bonds. While many high-profile managers were publicly saying bonds were no good, they were not going with the obvious flows of the market --- they were just talking their book. The research process is ongoing and never-ending --- stocks may go down a little or a lot from here --- the point is to build good models and get the big picture right --- and watch your back. In the end, you are the risk manager responsible -- not some talking head on TV.
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