Here in the United States, potential mutual fund investors have close to 10,000 options to choose from -- everything from large-cap to small-cap to international varieties. Of all the choices on the spectrum, there's one class of fund I avoid: the so-called "go-anywhere" mutual fund, which Morningstar defines as having "the latitude to invest in a broad range of strategies and styles."
Funds in this category can buy large-cap and small-cap stocks, emerging-market stocks, value and growth stocks, all types of bonds, and sometimes futures and currencies. Basically, this fund has permission to go anywhere the manager sees opportunity, which sounds better than it actually is. Here's how the "go-anywhere" mission plays out in the markets, and why I avoid go-anywhere funds.
Go-anywhere mutual funds typically go nowhere. Source: Getty Images.
1. Average performance
The performance of go-anywhere funds varies widely. This is because each manager's portfolio contains a different mix of investments, all allocated toward that manager's worldview. Over time, though, these funds' performance usually averages out about ... average, and it turns out most investors would have been better off in a balanced fund. This table shows the returns of three common go-anywhere funds over various time periods versus the American Funds American Balanced Fund, a highly-rated traditional mutual fund.
| Fund | 1 Year (loss) | 3 Years | 5 Years | 10 Years |
|---|---|---|---|---|
| BlackRock Global Allocation (MDLOX 0.64%) |
(2.16%) |
6.73% | 2.99% | 7.33% |
| PIMCO All Asset All Authority (PAUAX -0.16%) | (2.71%) | 7.8% | 0.71% | 5.10% |
| FPA Crescent (FPACX 0.49%) | 0.78% | 9.94% | 5.23% | 10.33% |
| American Funds American Balanced Fund (ABALX 0.46%) | 3.63% | 10.34% | 7.66% | 12.19% |
Source: Morningstar.com as of Feb. 21, 2019
The table clearly shows go-anywhere funds underperformed a traditional stock-and-bond balanced fund over every time frame. Some might say this is not an apples-to-apples comparison since go-anywhere funds may hold different securities and be overweighted or underweighted in stocks, but the proof is in the returns.
2. Higher fees
One contributing reason for the underwhelming performance is that go-anywhere funds typically charge higher fees. The Morningstar category-average fee for go-anywhere funds varies from 1.03% to 1.06%. The PIMCO All Asset All Authority A share class, has an expense ratio of 1.57%. This is higher than the Morningstar category average of 0.88% for actively traded balanced funds. It may not seem like much of a difference, but the higher fees are an additional hurdle for the go-anywhere fund's management to overcome.
3. No reward for risk
In the investment world, there is something called alpha which is the degree to which the fund outperforms a benchmark index. This measurement demonstrates whether an investor is being rewarded for the risk the manager is taking on in the fund. A positive alpha is generally a good thing; a negative alpha can signal the manager is not adding enough value to justify their fees. A portfolio with low alpha might indicate the investor would be better off investing their money in an index fund that mimics the broader market.
Relative to the Morningstar moderate risk category, all three go-anywhere funds in the table above as of the end of January had negative alphas over the five-year time horizon. Only the PIMCO fund had a positive alpha over the past three years, and the FPA Crescent fund was the only one of the three with a positive alpha over 10 years. This shows the inconsistency of the category. The American Balanced Fund had positive alphas over one, three, and five years.
These are the reasons I shy away from go-anywhere funds. The fees don't justify the subpar performance to me. I may be wrong this year, as the past is no guarantee of future returns, but if history is any guide, I prefer to take my chances with a balanced fund.
