Global allocation funds can go anywhere

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Managers who run go-anywhere funds have flexibility, but they may lack deep knowledge and expertise.

"In the credit crisis, what we saw was that some of the folks overseeing the fixed-income parts of these funds really got stung by some things that were going on. These might be funds that look appealing, but if you dig a little bit deeper, you might find that their fixed-income capabilities aren't as strong as their equity capabilities," says Herbst.

While all actively managed funds are dependent on the skill and expertise of the manager or management team, the risks are heightened in a fund that can stray anywhere.

"The biggest thing I would look for is first how long the manager has been running the particular fund and similar go-anywhere funds, so you're looking at manager tenure," says Chad Nehring, CFP, vice president of Conceptual Financial Planning in Appleton, Wis.

Manager tenure for these funds spans from less than a year to nearly 20 years, with the average tenure at 3.6 years. Information about the fund's management team can be found in the fund's prospectus.

There are a few other caveats to be aware of when considering world allocation funds.


The average turnover ratio for funds in the world allocation category is 125 percent, according to Morningstar. That compares to an average 34 percent for index funds and 89 percent for actively managed funds.

The turnover ratio is a measure of how much trading goes on within the fund, and the ratio represents the percentage of the portfolio that has shifted within the past year. An average turnover ratio of 100 percent, for example, means all the holdings in a portfolio change over the course of a year. Mutual funds that engage in a lot of trading can incur taxes for shareholders.

"If tax efficiency is important, consider using ( global allocation funds) in sheltered accounts because they may have a greater level of taxable distributions," says Evan Shorten, CFP, president of Paragon Financial Partners in Los Angeles. "Over the last year or so, the funds may have been able to manage those distributions based on other losses. But if part of the strategy is to be trading fair amounts, they very well may have a higher level of turnover, which may create greater distributions" on an ongoing basis.

They can move fast

All mutual funds must send shareholders updated financial information twice a year. This gives shareholders two opportunities to review the holdings in their funds. Mutual funds must also file form N-Q with the Securities and Exchange Commission at the end of the first and third quarters. Form N-Q is not sent to shareholders, but it also discloses portfolio holdings and is available on the SEC's EDGAR database.

In between those reports, a go-anywhere fund's holdings could change substantially.

"They may be holding something completely different than what is currently published, and it may not fit within a client's overall portfolio allocation and goals," Shorten says.

Some funds may become very concentrated

Global allocation funds may have the ability to narrow their focus to one sector or asset class.

"Prospectuses of some of the tactical funds may say the fund can invest up to 100 percent of assets in a single asset class. Unfortunately, we can't draw hard and fast conclusions from the prospectus language, since many funds may detail that much flexibility in the prospectus but in practice maintain more diversified, fairly steady asset allocations," Herbst says.

Global allocation funds can be a bit more sophisticated than traditional mutual funds, so paying close attention to details is important. Also, keep the impact of fees in mind. According to Morningstar, the average expense ratio for the category is 1.23 percent, on par with other funds. Also, many global allocation funds do come with a sales charge. The average front load, according to Morningstar, is 5.35 percent. For funds that carry a deferred sales charge, the average is 2.13 percent.

The right global allocation fund may add diversity and some downside protection to your portfolio. At the same time, adding one or more of these mutual fund investments to your lineup could introduce new risks.


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