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GTAA often deals in a mix of assets

Many financial advisers would argue that US investors are actually global. Just witness the US stock market hiccups sparked by the banking crisis in Cyprus. It is no wonder that one of the fastest-spreading investing strategies is global tactical asset allocation – investing in a range of securities around the world and altering the mix as markets change.

These go-anywhere strategies have long served as an institutional investor niche. In recent years, it is financial advisers who have been ploughing assets into global tactical asset allocation (GTAA) mutual funds and separately managed accounts. While clients scarred by the 2008 crash drove much of the growth, GTAA products may have staying power in portfolios, says Todd Sanford, an adviser based in Portage, Michigan, who oversees $450m and is affiliated with Raymond James Financial Services. “It’s a longer-term trend,” he says. “Products like this are a happy medium between full exposure to the markets and low-yielding fixed income.”

GTAA products come in various shapes but the core traits include having a broader range of holdings than the typical “style box” categories and the use of tactical portfolio moves to adjust for changes in markets, economic conditions or geopolitical trends. The category ranges from plain stock-and-bond funds to strategies that can hop across country exposures or asset classes, including commodities and derivatives.

Separately managed accounts built with exchange traded funds (ETFs) are among the fastest-growing products in the category, jumping 65 per cent last year to reach $4.3bn in assets, according to Morningstar.

Mutual funds have the lion’s share of new assets. The BlackRock Global Allocation Fund, which typically invests in more than 700 securities in 40 countries and 30 currencies, has $53bn in assets. Pimco and Ivy Funds both have funds in the category of more than $25bn. Old Westbury Funds, Invesco, GMO and Virtus Investment Partners have large GTAA mutual funds.

Assets in go-anywhere mutual funds overall rose from $33.9bn in March 2007 to $113.2bn in March 2012, according to Morningstar. The number of funds jumped from 38 in 2007 to 126 in 2012.

“It’s growing by leaps and bounds,” says Tim Clift, chief investment strategist at Envestnet. “New products are coming to us every week.”

Adviser demand primes the growth. One reason is the desire to “take the handcuffs off [managers]”, says Mr Sanford. “There has been an explosion of dollars to Ivy Funds and BlackRock’s Global Allocation because of that,” he adds.

Indeed, when advisers in the FT 400 were surveyed, roughly 30 per cent said they planned to increase their use of GTAA or global macro funds.

Advisers favour tactical investing because markets are more volatile than in the past and because investment information travels much faster today, says Joseph Montgomery of Wells Fargo Advisors in Williamsburg, Virginia. “Clients want managers who have the ability to make smart decisions on rapidly changing information,” he says.

Advisers want help managing downside risk, says Vassilis Dagioglu, head of asset allocation portfolio management at Mellon Capital and portfolio manager for the Dreyfus Global Alpha Fund.

Institutional GTAA strategies are often a mix of stocks, bonds, commodities, currency hedges, futures and other investments. While some mutual funds have similar ingredients, retail products are gravitating to ETFs, because of their lower cost, transparency and tradability in less-accessible sectors, such as emerging markets debt and commodities, Mr Dagioglu says.

Some GTAA products use hedge fund-style strategies, although it is not “a defining characteristic” of the overall group, Envestnet’s Mr Clift says.

Some of these funds have faltered, prompting some advisers to predict the herd of products will be thinned. In most cases, that may mean few portfolio changes, because advisers typically use one or two GTAA strategies, Mr Clift says.

“I have seen a few that completely allocate their portfolios to GTAA, but not many,” he adds.

Advisers take varying approaches to deploying go-anywhere funds, says Jeff Chapracki, senior research analyst at Milwaukee-based Capital Market Consultants. “Some are making the top-down calls themselves, others want to use mutual fund and [separately managed account] mandates that allow for higher cash balances, and others are using some TAA exposures within a core-satellite context,” Mr Chapracki says.

For advisers, one of the main challenges is that many go-anywhere managers are relatively new, often lacking the infrastructure and depth of traditional shops, Mr Clift says. That leads to worries about what would happen if one of these organisations lost their primary GTAA portfolio manager.

Another hurdle is benchmarking. Mr Clift says Envestnet has developed a 20-product custom GTAA benchmark and has seen some hedge fund indices show promise as well.

A more difficult aspect of go-anywhere funds is educating clients that the diversified holdings are designed to zig when most markets zag.

Advisers need to be sure investors know products are not built to match today’s frothy equities market, says Raymond James’ Mr Sanford, but rather to avoid the brunt of a big downturn.

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