Asset Allocations for a Global Go-Anywhere Portfolio

Christine Benz: Hi I’m Christine Benz for Morningstar.com. It’s international week
on Morningstar.com so we thought it would be helpful to sit down and talk
about how Morningstar’s investments services team puts together it’s
global allocation portfolio. Here to discuss that is Marta Norton. She’s an
investment manager with Morning star investment services. Marta thanks
so much for being here.

Marta Norton: My pleasure.

Christine: So you run this, you help run this global allocation portfolio I want to talk
first about what is the case for putting together a go anywhere global
allocation portfolio like this one.

Marta: Sure well the reason’s most often sited in the market place and the reasons
that make a lot of sense is really the diversification that you get when you
have another country and a portfolio and the fact that you’re really
widening your opportunities you know you have great companies that
aren’t listed necessarily in the US and maybe in Europe or other places
people traditionally seek so this portfolio allows you to access those
companies but going beyond that when we were putting together this
portfolio we really thinking how we individually think about managing
money and it really isn’t target specific corner of style backs or managed
to a bench mark that’s much more absolute.

You know we want to compound wealth and we thought having a
portfolio where we could really go anywhere would help do that because it
wouldn’t’ be tied to maybe stay large cap equity when large cap equity is
out of favor.

Christine: So the baseline asset allocation is 64/40 stock bond but you really do have
a lot of leeway, you can take you stock position anywhere from 20 to 80%
and do the same with the fixed income allocation. So it does have a
technical element let’s talk about hw you adjust tactically and also I’m
curious to get your take on the evidence about tactical investing and why
you think that tactical is the way to go with at least a portion of this
portfolio?

Marta: Sure well we certainly structure the portfolio for maximum flexibility and
we want that flexibility on two ends. We want to be able to make nay
adjustments we see necessary and we also want to managers to go where
they see the best opportunities right because that was really the driving
thrust of the portfolio so when we think about tactical we’re not thinking
you know going 100% to cash or being a new top performing asset class
every year. We think of it more as finding the right fundamentals and
finding the right evaluations. So when we’re evaluating asset classes we’re
thinking of those two criteria and then largely speaking that’s what are our
mangers are thinking about too.

I think it comes down to how you define tactical if you think tactical is
going all to cash and being in that half performing asset class this isn’t
really bad but it is something we’re taking advantage of different
opportunities in the market place.

Christine: So if you for example have a manager who you really like who isn’t
finding anything to buy and here she takes the portfolio to 30% cash as
residual that bottom up approach you don’t worry about it too much.

Marta: Right we certainly have managers who had that kind of flexibility and
actually you cash in it of itself as an asset class and so they would move to
cash if they thought it was more attractive than other areas.

Christine: Okay so I want to focus on the international piece of this portfolio a little
bit. Emerging markets in particular is you know there’s been this stampede
of investor assets into emerging markets. But when I look across this
portfolio it looks like you’re actually a little bit light there but you do have
a lot of non-dollar exposure elsewhere. Let’s talk about how your position
from that standpoint?

Marta: Sure well we would be the first to agree that emerging markets have a
fantastic secular story behind them and a lot of people are pointing out and
we agreed that they are far healthier than a lot of the developed nations so
if that were the only criteria we would be you know all emerging market
but it really comes down to evaluation. There’s a lot of great research out
there that shows attractive economies you know fast growing economies
don’t necessarily translate into a attractive asset class or security price
performance.

So we want to make sure we’re getting in on the right price and on
emerging equity side we don’t think it’s flashing red but we certainly
don’t think it’s a buying opportunity or at least you know very cheap so
we’re lighter there and we’re getting a lot of our emerging exposure on the
equity side actually through companies that are either domicile and US or
in Europe that sell to emerging markets and we think that’s a way to
participate in the growth there without paying high prices but then on the
fixed income side evaluations are more attractive for one particularly on a
relative basis if you think I were treasuries are were a lot of healthy
corporate US funds are a lot of what we see in emerging market sis
offering us a better bank for a buck and their health and their economy is
not so appealing too.

And we also want to diversify a little bit more away from the dollar and
we don’t’ want to be so tied to the dollar when we see some really fears
secular head winds heading you know in that direction so we want to kind
of get exposure to countries that are a little bit healthier.

So that would be emerging markets, bonds and some developed markets
bonds as well. That’s more on the emerging market side actually there are
global bond manager who can go anywhere in the world has some
exposure to Norway, to Sweden but also has a lot of exposure in the
emerging markets and is avoiding some of the big name countries that
everybody thinks are necessary in a global bond portfolio.

Christine: Okay so also in the realm of go anywhere investing. You’ve got this
alternative and I know for a lot of investors they grapple with but with but
what goes into an alternatives component of a portfolio. Let’s talk about
your thinking there?

Marta: So as you pointed out earlier it’s a generic split for this portfolio, 60/40
stock bonds but really we structured it that way so that we wouldn’t have
to own nayother asset class. We didn’t think they were attractive but if
they were we could add them to the portfolio and that’s the case with
alternatives. Really we see them as a volatility dampener similar to bonds
but without all the interest rate risk and of course you’re going to have to
relieve that alternative so you’re not going to one sell and yield long
shorter alternative. Fund into the portfolio.

Christine: Already made off.

Marta: Right.

Christine: Investment, no?

Marta: You certainly had to do your due diligence but the funds that we have we
think they’re pretty good at what they do they’ve been doing it for a long
time. They’re cheaper than others and we think they provide that you
know smoother ride that we’re looking for.

Christine: Can you provide some examples of the types of alternatives that you use
to think you can provide that attractive diverse reward propfile?

Marta: Well first it really comes down to manager expertise. It doesn’t matter
what alternative you are if you can’t execute that’s going to be a big red
flag to begin with but in terms of what types of alternatives we use in this
portfolio it’s a fun to fund so it has a lot of different types of strategies
within its own portfolio and that provides a lot of diversification benefits
but we also like you know convertible arbitrage strategies. We like long
short strategies although often times investors forget that these still have a
great deal of equity exposures so they’re not a complete hedge against the
market and we have a host of others. Even a credit arbitrage fund on the
fixed income side and so were pretty minded as long as we think that
there’s a rational behind the mandate and a manager who is responsible
and knows what he’s doing.

Christine: Okay well thank you Marta thanks for sharing your insights into this
whole area of global allocation very helpful.

Marta: Sure thanks for having me.

Christine: Thanks for watching I’m Christine Benz for Morningstar.com