There’s no doubt that economic downturns warrant a shift in strategy. High-risk growth stocks that succeeded during a boom are often traded in for safer fixed income or hard assets during a recession. But if you're a newer investor, or simply not well-versed in how to trade when times are tough, it can be hard to know how to make these trades at the right time. So-called “global allocation funds” were created to help solve this problem.
Global allocation funds, also known as “go anywhere funds,” can make rapid switches between asset classes and geographic regions. Unlike standard balanced funds, these mutual funds can invest in commodities, futures contracts, and swap agreements, as well as your standard stocks and bonds. The goal behind these traits is to help these funds pursue greater opportunity and avoid painful downturns.
Pros and Cons of Global Allocation Funds
Global allocation funds have a number of pros and cons that you should weigh carefully before you invest in them. These funds provide you with a higher reward opportunity than standard balanced funds. But with higher reward comes higher risk. Also, due to their subjective nature, it’s important to do your homework to learn the details of each fund, its assets, and research the team behind its choices.
Chance for greater returns
Tools for hedging strategies
Trades may carry more risk
Turnover is higher
Quick pace can lead to instability
May lack diversity
The pros of investing in global allocation funds include:
Greater Potential Returns
Global allocation funds are designed to pursue specific opportunities around the world without being tied to a single asset class or region. As a result, investment managers who know what to look for can produce returns that far exceed those of index funds that try to match benchmark indexes.
Global allocation funds can be engaged in hedging strategies, such as holding gold or cash at the right times. As a result, savvy investment managers can reduce risk during a market downturn and help protect your assets. These traits make these funds a great hedge for a well-rounded portfolio.
The cons of investing in global allocation funds include:
Global allocation funds can purchase assets from a broad range of classes, many of which are not common in other funds. They may range from commodities to swap contracts. As a result, these funds may entail more risk than standard mutual funds that only buy and sell stocks and bonds.
Global allocation funds tend to have a lot more turnover than standard mutual funds. This means that they may be less tax efficient. As a result, if you invest in these funds you may see the types of distributions that incur higher taxes being sent your way.
Global allocation funds can move in and out of asset classes and regions on a dime, which means their track record may be unstable. If you invest in one of these funds make sure to look closely at the team or investment manager behind the fund.
Global allocation funds seek to exploit markets around the world, which means if they catch word of a new market or asset that has promise, they may invest a great deal into this single opportunity. Often their holdings may be very focused in certain areas. As a result, you should be aware that these funds may not be very well diversified, if at all.
Best Performing Global Allocation Funds
Global allocation funds differ greatly, and the way each fund is composed and handled depends on its investment manager. While there may be times when these funds perform better than funds that mirror benchmark indexes, their long-term track record as a whole remains up for debate. Individual funds within the category may perform better than others though.
In order to assess a global allocation fund you'll need to read the prospectus or research the fund online. You should pay extra attention to the management team and its tenure, as well as the asset allocation of the fund at the current time.
There are many websites that provide data you can use to assess and compare funds. Morningstar is a common standard. If you subscribe, you can access metrics like category vs. risk or return to help weigh your options.
Lastly, Morningstar maintains a record of the best performing global allocation funds over many time periods. As of September 2019, these funds were:
- Sextant Global High Income (SGHIX)
- American Funds Global Balanced A (GBLAX)
- Appleseed Institutional (APPIX) and Investor (APPLX)
- T. Rowe Price Global Allocation (RPGAX)
- J.P. Morgan Global Allocation I (GAOSX)
- Invesco Global Allocation A (QVGIX)
- BlackRock Global Allocation (MALOX)
- Global allocation funds are mutual funds that can rapidly switch between asset classes and geographic regions, to produce higher returns at a lower risk.
- Global allocation fund returns depend largely on the funds’ investment manager, so investors should carefully research their history and strategy.
- Morningstar.com provides a list of global allocation funds and can be used to research and compare funds when choosing how to invest.