Dennis Stattman on Asset Allocation

The always-terrific Barron’s has a nice interview with Dennis Stattman, head of the Blackrock Global Allocation Fund, one of our value-oriented competitors in the global asset allocation arena.  He’s done a terrific job for many years, and his value-oriented approach turns out to be a very good complement to our relative strength approach.  (For full articles on this topic, see Global is the New Core and The “All-in-One Fund” With a Twist.)  For me, the highlight of the interview was this exchange about the role of global go-anywhere funds:

Barron’s: There’s been a lot more money flowing into asset-allocation funds that can invest in many different styles, including the fund you run. What’s your take on this trend?

It isn’t surprising that the category is growing in popularity. It reflects the frankly dismal job that the most popular category, equity-only mutual funds, have done, as shown by the dismal results they have delivered to investors over long periods of time. They just haven’t provided a good risk-return trade-off. Furthermore, the idea that somebody can buy six different U.S. stock funds and somehow achieve useful diversification just isn’t an effective idea. It never was a good idea, and now it has been proved wrong. So having the ability to go anywhere is what, ideally, a fund manager should have. But there are very, very few individuals or teams who have the experience and who are equipped to do this.

I wholeheartedly concur with his remark on style-box diversification being completely inadequate, but I think the problem is not with equity-only mutual funds, but rather reflects the issue of poor portfolio construction.  Too often portfolio construction has focused on assets (as in asset allocation) on not on diversification by strategy.  Value and relative strength work well together because they are essentially strategic opposites: relative strength is trend following, and value is mean-reverting.  It’s not too surprising that their excess returns are uncorrelated, but that makes them a wonderful blend for a client portfolio.

Lots of clients own Blackrock Global Allocation, but how many of them know how much their portfolio can potentially be improved with the addition of our Global Macro strategy?

To obtain a fact sheet and prospectus for the Arrow DWA Tactical Fund (DWTFX) or the Arrow DWA Balanced Fund (DWAFX), click here.

Click here for disclosures.  Past performance is no guarantee of future results.

3 Responses to Dennis Stattman on Asset Allocation

  1. Russ says:

    Mike,
    I enjoy your blog and your approach to investing. I have been quite intriqued by this idea that value and momentum are the true complimentary investing styles or strategies.
    After this post, I downloaded price histories for Stattman’s fund and DWAFX from yahoo finance. Over the time both funds were open (8/9/2006), I calculated a correlation of 0.927. Not quite the strategic balance I was hoping for.
    Of course, this doesn’t disprove the idea, but it leaves me searching for examples this value/momentum pairing would improve diversification.

  2. Mike Moody says:

    You should remain intrigued! You have to check the correlation between the excess returns, not the raw returns. (I specify excess returns in my post, but it’s an easy distinction to miss.) If you look only at raw returns, most equity funds will be highly correlated because they are, well, equities!

    However, if you look at the periods of over- and under-performance, you will see that when RS does well, value will often lag, and vice versa. In fact, for many products, RS and value excess returns are negatively correlated.

    If you run your correlation differently, I’m betting you will get much different results.

  3. nick sadowsky says:

    Mike,

    I think it is worth re-posting the RS based Global Allocation + Value based Global Allocation ROR and St. Dev Chart on the blog. Different percentage weights of Global Macro and MDLOX from ’99-’10 to illustrate these points. It was in John’s Market Tech. Ass. presentation if I recall correctly. Nick

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