Often, investors will look at the allocation strategies I deploy and quickly realize that they cannot do the same. The reason is they do not have enough investment dollars to cover all of the necessary asset classes that I have declared essential. This frustrates me because I believe it encourages improper investing, and discourages many younger investors right out of the markets.
There are still ways to have your dollars managed in a manner that focuses on strategic allocation at an affordable cost. Notice I said “strategic” allocation. Heck the reason I am blogging about this topic is that most asset allocation mutual funds (also called balanced funds) are crap.
The majority of the balanced funds I have researched seem to have no interest in the Sharpe ratio. They seem to be focused on driving down beta (volatility) with what seems no ability to squeeze out alpha. At some point you need to produce some upside. Take a look at the Vanguard Balanced Index Fund (VBINX) as an example. Since the beginning of 2000 and as of the close on December 16, 2011 the fund is up +50.02%. Now compare that to a strategic asset allocation strategy like my 50/50 model. That model is up 182% is the same period of time and achieved this return with a much lower beta than the Vanguard fund. So in my research that is what we needed to focus on. Not just mutual funds that will allow smaller investment dollars but funds that deploy tactical asset allocation and that seem to truly understand the Sharpe ratio.
My research yielded two very impressive choices for smaller investment dollars. The first mutual fund I came across is the Permanent Portfolio Fund (PRPFX). This is an excellent example of tactical asset allocation. The manager, Michael Cuggino, simply gets it and has been able to squeeze out tremendous returns while reducing volatility. The fund is extremely affordable with no sales charges or 12-b-1 fee’s, and boasts a very low expense ratio vs. its peers. The minimum investment is either $2500 or $1000 depending upon the type of account you are opening.
The second mutual fund, I have been familiar with for years and it is the BlackRock Global Allocation Fund A (MDLOX). Again, this manager understands his job. The returns, though lagging my models, have been supherb. This mutual fund is a perfect example of knowing what you get when you buy it. The fund manager, Dennis Stattman, has been managing the fund since 1989. That is important to know because it tells us that the historical returns we are viewing were achieved by the manager still managing the mutual fund. (Make a mental note: Make sure the historical returns that impress you were achieved by the current manager of the fund. The returns are meaningless if the manager who achieved them is no longer managing the fund.)
The one downside with this mutual fund for smaller investors is the fact that there is a sales charge and 12-b-1 fees, and these are not avoidable.
These are 2 very rare examples of strategic allocation within one mutual fund at its finest. Again, I feel most of the “balanced” mutual funds are garbage. Any idiot can throw a mix of assets together and call themselves balanced. The real trick is to figure out how to capture much of the markets upside with little of the markets downside. Sadly, most of these overpaid professional “balanced” fund managers just do not understand how this is achieved.
Jon R. Orcutt, founder of Allocation For Life, is an asset allocation strategist and author of “Master the Markets with Mutual Funds: A Common Sense Guide To Investing Success”
