Thinking Out of the Box, Literally: What About the Style Boxes?

In our last post, we met the Style Boxes. If you missed it, please read that and then come back here.

2008 was an unfortunate but inevitable example of how sticking with strategic allocation to a variety of style boxes can sometimes be of little help in avoiding portfolio declines during a "crash". And 2009 similarly showed us how sticking with our selected style boxes can keep us out of the best performing areas of the market in an big "up" year.

Portfolios that utilize a global/flexible approach, though, can offer much better returns. Or much bigger losses. It really depends on whether the manager of a global/flexible fund, the advisor running a client's portfolio, or an individual investor picks the "right" style boxes to emphasize and avoid.

This tactical allocation is more art than science, whereas the strategic allocation is more science than art. It is clear, though, that managers with long-term track records of "success" using global/flexible or tactical methods have significantly out-performed "the market" and portfolios using just strategic asset allocation.

Some examples:

A global/flexible mutual fund we love uses both strategic and tactical methods at the same time. It is usually about 60-40 stocks-bonds, and 60-40 domestic-foreign. Within the stock allocation, though, it can go anywhere it wants, and same within the bond allocation. For example, if 36% of the portfolio is to be in U.S. stocks, but the manager is wary of small-cap growth stocks and strongly favors large-cap value, he can direct the entire 36% to that style box. This fund was down only 21% in 2008 (the US market was down 37% and the foreign-developed stock market was down 43%), and it averaged over 7% per year over the past decade while the U.S. market has been at about -1% per year. This fund has a 21 year track record and has always delivered like this. Clearly, they know better than most where to be and when.

Another global/flexible mutual fund we love can go anywhere and invest in just about anything. At the worst of the 2008 crash, it was only 15% in stocks and had taken large positions in cash, gold and bonds. During the big run-up in 2009 it was around 80% in stocks. It was only down 26% in 2008, and it's 10-year track record is over 10% per year.

Still another fund we love was only down 8% in 2009, and it's averaging almost 9% per year for the last decade. This one doesn't move around the style boxes so much as it invests significantly in areas outside of the normal style boxes.

These global/flexible funds are the exception; most who try don't succeed at beating the market for very long. But they are out there, folks. You just need to know how to get 'em. Or you need an advisor to find them for you.