Many active fund managers get paid to predict where the market is headed — and to get there a step or two ahead of their rivals.
But the management of Allianz Global Investors' Global Investment Solutions Conservative Allocation mutual fund has shunned that approach, and in doing so achieved remarkable success.
"We take a humble view," said Stephen Sexauer, manager of the fund and chief investment officer at Allianz Global Investors Solutions.
"No matter how hard we work or how smart we are, the global economy is just too complex and dynamic — and the valuation of assets around that is extraordinarily complex," he said.
From 1999 through 2009, the conservative allocation portfolio beat its category averages, according to the fund research company Morningstar Inc. In some of those years, the fund beat the average by just a hair. But in 2009 it reported a return of 27.8%, topping its category average by nearly four percentage points. And through early November 2010, it had a comfortable lead again, 3.44 percentage points.
The fund, which has $227 million of assets, invests in markets globally, and it can hold equities, fixed-income investments, commodities and real estate. A fund of funds, it invests in those asset classes through portfolios managed by Allianz affiliates such as Pacific Investment Management Co. and RCM Capital Management LLC. These companies offer funds managed in distinct ways.
Allianz, Pimco and the other fund companies under the Allianz boutique model — Nicholas-Applegate Capital Management, Oppenheimer Capital and NFJ — enjoy substantial independence. Allianz is known for contributing technical resources to its fund companies, while allowing them to keep their investment approaches.
"Allianz does really let their subadvisers have room," said Katie Rushkewicz, a senior analyst at Morningstar. "They don't try to meddle too much with the investment process, and that's what makes their kind of business model successful."
The fund has about 40 portfolios available to invest in but tends to use a core group of 20 funds, said Sexauer. Its management team of five people measures risk carefully, operating with an eye on two benchmark indexes: the Barclays Aggregate Bond Index and, for global equities, the Morgan Stanley Capital International All Country World Index.
"Anyone who is in this fund knows that its volatility and asset exposure are going to be within seeing distance of a blend of" those benchmark indexes, Sexauer said. "You know what you're getting."
The fund's team sees its role as that of liquidity provider, he said. It is an approach that works with the market rather than trying to outsmart it, he explained.
With their liquidity supplier mind-set, the fund's management steps up in stressed markets and looks for exposure to assets at favorable prices, Sexauer said. When markets are less stressed, as evidenced by factors such as tight bond spreads, the managers have no problem "sitting next to our benchmarks," he said.
During the turbulence of 2009, the fund overweighted in fixed-income investments. "The logic was that, if the economy was going to stall, we wanted to be in fixed-income, not equity," said Sexauer. "If it recovers, then bond spreads will come in, and equities will follow that." The fund benefited dramatically from that positioning and then, at the end of 2009, began to trim its fixed-income exposure.
These days, Sexauer has an upbeat take on the economy. Though unemployment remains high, the U.S. economy as a whole has remained fairly steady, he noted. Corporate profits are at an all-time high as a percentage of gross domestic product. And companies such as Caterpillar "that sell real things to real people" have the highest orders in their history, he said.
Sexauer credits much of the fund's success to Allianz's physical presence throughout the world. The fund has the ability to do better than its peers in part because of robust feedback from Allianz professionals in numerous countries, he said.
"It's a global portfolio, and Allianz Global Investors is literally and truly a global firm," he said. "All of our underlying portfolios — where we get exposure to equities, fixed-income, real estate and commodities — are managed by our portfolio colleagues literally around the world."