Since the fund’s inception, it has recorded an annualized return of 10.63% through the end of last year, beating the benchmark portfolio of 60% global stocks and 40% global bonds by more than 250 basis points a year. A $100,000 investment in the fund at inception would have grown to just over $1.1 million today, $500,000 more than the benchmark portfolio. That outperformance has come with about one-third of the downside.
While this record under the guidance of a long-term main manager is certainly impressive, as usual it is worth taking a look at the most recent performance of the fund.
First, the fund has multiple share classes; for the purpose of this analysis, Investor A class shares (MDLOX) with a maximum sales charge of 5.25% and net expense ratio of 1.07% will be used.
Second, the fund has grown to $57.3 billion in AUM. This will make it more difficult for the fund to provide a 100% return over each future ten-year period, as its institutional share class did in the past.
Third, because the fund invests in both domestic and foreign stocks and bonds, it uses a custom reference benchmark that is a blend of four indices:
The reference benchmark consists of 36% S&P 500 Index, 24% FTSE World (ex. US), 24% BofA ML 5-year US Treasury Bond Index and 16% Citigroup Non-US Dollar World Govt. Bond Index.
With the sales charge, the fund failed to beat this benchmark in the one-, three- and five-year periods through 2013. Without the sales charge, the fund outperformed the benchmark last year, but not over three or five years. However, in both cases the fund returned more than the benchmark in the ten-year period. The fund issuer claims that
Since the Fund’s launch in 1989, investors have doubled their money every 10 years, no matter when they bought the fund… The fund has outperformed global equities with 1/3 less risk [based on annualized standard deviation of monthly returns for Institutional shares from 2/28/89 to 12/31/13, compared to the FTSE World Index].
Let’s take a look at the fund’s performance from Alpholio™’s perspective. Here is the cumulative RealAlpha™ chart for the fund (disregarding the sales charge):
From early 2005 to mid-2008, the fund generated a fair amount of RealAlpha™ but lost most of it in the second half of 2008. After a two-year recovery to the previous peak level, the cumulative RealAlpha™ for the fund stayed largely flat until it rebounded in 2013. Even though the fund suffered a smaller decline in 2008 than its peer world allocation funds did (-20.6 vs. -29% per Morningstar), it significantly declined against its reference portfolio of ETFs. In addition, the ETF reference portfolio had a much smaller volatility than that of the fund.
The following chart shows the weights of ETFs in the reference portfolio in the same analysis period:
The fund’s equivalent position in cash and short-term investments was in the iShares 1-3 Year Treasury Bond ETF (SHY; average weight of 35.4%). Domestic large-cap stocks were represented by the iShares S&P 100 ETF (OEF; 16%). The fund’s foreign stock holdings were covered by the iShares MSCI Japan ETF (EWJ; 9.6%) and iShares MSCI EMU ETF (EZU; 6.5%). Finally, the fund’s domestic bond holdings were embodied by the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD; 5%) and iShares TIPS Bond ETF (TIP; 5%).
While the BlackRock Global Allocation Fund has added value for investors over its long history, its performance in 2008 shows that it may quickly lose a lot of that value in a market downturn. Despite a large number of holdings (about 700 global securities), the fund may find it hard to outperform in the future due to its size. Finally, in good past years the fund had significant distributions, which makes it more suitable for tax-exempt accounts.
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