Are Investors Bailing on GTAA Funds Too Soon?

Global tactical asset allocationfunds have seen this movie before. In the late 1990s, with technology stocks on a seemingly endless rise, funds that were broadly diversified in a range of assets around the world and missing out on those returns could do no right. Investors abandoned the category in droves, only to miss out on the benefits of being diversified after the dot-com bubble burst in 2000.

Now, after some GTAA managers have turned in disappointing performances, investors may be doing it again. They pulled $18 billion from the category worldwide year-to-date through the third quarter of 2016, according to data provider eVestment.

That could be a mistake. GTAA funds are the ultimate actively managed portfolios: Their managers often switch between a variety of asset classes, using techniques such as derivatives and futures contracts to express their investment views. Some of the big players include Bridgewater Associates;Grantham, Mayo, Van Otterloo & Co.; Invesco; Pacific Investment Management Co.; Standard Life Investments; and William Blair.

Like other actively managed funds, some GTAA vehicles have suffered in the placid markets of the past few years that global central banks have engineered with their experiments in monetary policy. Active managers, at least in theory, do their best work in volatile conditions. Most observers believe markets could be in for a bumpy ride this year.

Last yearPIMCO’s All Asset and All Asset All Authority funds ranked in the top 7 percent and 6 percent of peers, respectively. (The All Asset All Authority version of the GTAA fund differs in that it can use leverage.) But that was after years of underperformance. Both vehicles struggled from 2012 to 2015 because the “U.S. equity market has been the best-performing asset class in the world,” says Christopher Brightman, chief investment officer of Research Affiliates, subadviser for the two funds. “When that’s the case, investors’ enthusiasm for diversification wanes.”

很难责怪他们,考虑到大的价格paid for diversification. The $18 billion All Asset Fund, which aims to deliver 5 percent above inflation, lost 8.7 percent in 2015 and gained less than 1 percent in 2013 and 2014. Over ten years the fund has beaten 96 percent of its peers, gaining 5.02 percent annually .

Many GTAA funds, including PIMCO’s and GMO’s, use a value style, a strategy that has been out of favor for years. “Most investors don’t have the patience to suffer through several years of underperformance,” Brightman says. “Many investors hire us for that reason alone: to make that uncomfortable contrarian positioning.”

GMO’s flagship Benchmark-Free Allocation Fund III has also suffered investor defections as returns trailed the market. The $13.6 billion fund has held very little in U.S. stocks and has a big position in emerging-markets equities. GMO, famous for taking contrarian views that often take years to pay off, has been suffering from investor withdrawals from many of its funds and cut 10 percent of its workforce last year. In February, Scott Hayward, former chairman and chief executive of Quantitative Management Associates, takes over from interim CEO Peg McGetrick.

Matthew Kadnar, who sits on the asset allocation team at GMO, founded by famed value investor Jeremy Grantham, says he worries investors will shun diversification and assume that asset classes like U.S. equities will keep outperforming. “We see this time and time again, and it’s a dangerous way to compound capital,” Kadnar warns.

GMO’s Benchmark-Free Allocation Fund III, which seeks to beat inflation, gained 3.4 percent in 2016. Over the past three years it has returned 0.06 percent annually, trailing inflation by 1.03 percent. The fund’s ten-year record is strong: It has gained 4.71 percent annualized, 2.9 percent above inflation.

The firm’s $4.1 billion Systematic Global Macro strategy has performed much better, gaining 7.26 percent last year, 4.46 percent annualized over three years, and 8.19 percent annualized over ten years.

Still, some investors are retreating. After GTAA funds gained $58 billion in 2012 and $61 billion in 2013, inflows tailed off, eVestment reports. In 2014 new money dropped to $7.8 billion. However, today the global industry holds $595 billion in assets, more than double the total of $257 billion in 2011.

Part of the problem may be how much GTAA funds can differ from one another, creating confusion for investors. Take the PIMCO funds, which have far lower exposure to mainstream stocks and bonds than many competitors’ offerings. They provide broad diversification through everything from emerging-markets debt and equities to Treasury Inflation-Protected Securities, real-estate investment trusts, and commodities.

Some of the early GTAA offerings were designed to solve pension funds’ return problems by giving investors a smooth ride. Pensions needed growth assets, but they couldn’t handle the volatility that came with them. Standard Life created its Global Absolute Return Strategies in 2006 for its parent life insurer’s pension and then started offering it to outside clients. Neil Richardson, a fund manager on the GARS product, says the strategy, which manages $70 billion in third-party assets, aims for steady returns with low volatility. It has gained 6.65 percent annualized since inception, even though results in 2016 were lackluster.

When GARS is being tactical, it invests over a two- to three-year period, Richardson says. As the creator of one of the first global tactical funds, Standard Life worked hard to crack open the market, he notes, educating pension trustees and others about the nuances of the strategies. Now that investors see the value of GTAA, though, they’re faced with a bewildering array of choices. “This was a genuinely groundbreaking product,” Richardson says. “But investors have to understand what they’re getting.” Then maybe they will stay put during tough times.