e-fundresearch: Which benchmark do you adhere to?
Stattman: Since the BGF Global Allocation Fund has the flexibility to own equity, fixed income, and cash equivalents across the world, the investment team has developed a reference benchmark consisting of 36% S&P 500 Index, 24% FTSE World ex US Index, 24% ML US Treasury 5-Year Notes, and 16% Citigroup Non-USD World Government Bond Index. The resulting allocation is 60% equity, 40% fixed income as well as 60% U.S., 40% Non-U.S. This benchmark is a broad representation of the four major asset classes that the Fund may invest in, but does not necessarily reflect the allocation the Fund will adhere to at all times. In terms of asset allocation, the Fund can and will often deviate significantly from this reference benchmark and may also invest in asset classes that fall outside of this investment universe. The ultimate objective of the Fund is to try to generate a competitive rate of return with a lower level of risk than a typical all-equity portfolio.
e-fundresearch: Are you also responsible for other funds at the moment?
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Stattman: In addition to the multi-asset class BGF Global Allocation Fund, which we feel can function as a core investment holding for a broad spectrum of clients, our investment team also manages the BGF Global Dynamic Equity Fund. The BGF Global Dynamic Equity Fund is constructed to provide clients with exposure to the equity portion of the BGF Global Allocation Fund and will therefore tend to exhibit higher levels of volatility than the BGF Global Allocation Fund. The inception date of our BGF Global Dynamic Equity Fund was February 2006.
e-fundresearch: What is the total volume that you manage in all your funds?
Stattman: As of 31 May 2009 the Global Allocation team manages approximately $44 billion across all of its portfolios.
e-fundresearch: Regarding the performance: which performance did you achieve since the beginning of the year and in the years 2003-2008? Absolutely and relatively to the relevant benchmark?
Stattman: YTD as of May 31, 2009, the BGF Global Allocation Fund has returned +6.8% compared with +4.2% for the reference benchmark and +4.1% for the Morningstar AA Global Flexible peer group.
From 2003 – 2008, the cumulative return for the BGF Global Allocation Fund has been +62.8% compared with +40.4% for the reference benchmark, +35.2% for the Morningstar AA Global Flexible peer group, and +30.0% for the MSCI World Index. We feel this illustrates the Fund’s unique ability to provide competitive returns through various market cycles.
e-fundresearch: How content are you with your own performance in the last years and this year?
Stattman: Although 2008 proved a difficult year in terms of the absolute returns for the Fund, it was also the most difficult year in the performance history for many managers and their respective strategies. Therefore, we are reasonably content that we were able to provide a better level of downside protection than most equity mandates so as to put investors in a more recoverable position as securities markets begin to stabilize and eventually trend upward over the longer-term.
Since the inception of the Fund in January 1997, the Fund continues to provide attractive returns when compared to most passive indices with a volatility that is historically 1/3rd less than that of an all equity index such as the MSCI World or FTSE World Index. In addition, many global investors have noted that the most recent decade has represented a “lost decade” for investing given the significant underperformance of the global equity markets. However, for investors in the BGF Global Allocation Fund, this decade has proven to be a very rewarding experience. More specifically, since January 1, 2000 through May 31, 2009, the cumulative return for the BGF Global Allocation Fund is +70.1% compared with +21.5% for the portfolio’s reference benchmark and -19.8% for the MSCI World Index.
e-fundresearch: How are you able to deliver added value for your investors with your performance?
Stattman: Over time, our investment approach has been to construct a broadly diversified portfolio (+700 securities, +40 countries) that can take advantage of global investment opportunities across various asset classes, countries, and securities. From an investment perspective, we are value oriented investors and therefore attempt to structurally bias our portfolio towards securities that we feel are undervalued relative to the overall markets or relative to their own history without investing a significant amount of capital in any one single security. We feel that our philosophy of balancing upside returns with downside protection is unique and allows us to provide consistent returns in a rapidly changing investment environment.
Historically, the majority of the alpha of the BGF Global Allocation Fund has come from individual security selection. For us, this is confirmation that the fundamental research conducted by our investment team is yielding positive results for our shareholders. Our team aims to achieve small amounts of alpha over a wide range of securities so as to prevent any single security from being the sole reason for the Fund’s performance.
e-fundresearch: How long have you been a fund manager already?
Stattman: The first BlackRock Global Allocation Fund was originally launched in the U.S. in February 1989 and recently celebrated its 20-year anniversary. I am one of the co-founders of the strategy, and I remain the Senior Portfolio Manager today and I am supported by a team of over 20 investment professionals.
e-fundesearch: What were your biggest successes and your biggest disappointments in your career as fund manager?
Stattman: The benefit of our management technique is the ability to offer clients competitive rates of return through a flexible, research-intensive, value-oriented approach that seeks the best investment opportunities worldwide, broadly diversified across asset classes, countries, and securities. We believe that a “total return” investment approach coupled with a broad investment mandate allows for capital appreciation opportunities in many market conditions with less risk than typical equity-only investments.
Given the large number of securities we have followed over the past 20 years, it is difficult to identify one single security that has represented the biggest success to investment performance. If we had to isolate a period of time where we made contrarian decisions to the benefit of our shareholders, we would point out the decision to add to equities in 2001 and 2002, which helped lay the groundwork for the Fund’s best annual return in 2003 when the portfolio returned +32%.
In terms of decisions that detracted from our performance, our preference for high yield, convertible, and emerging market debt in the mid-1990’s proved costly in 1998 as investors flocked to the safety of government paper after the Russia default and LTCM crisis. These positions ultimately recovered in 1999, vindicating our decision to hold these investments during levels of market stress, and helping to deliver a return of +27% in 1999.
e-fundresearch: What kind of capital market situation do we have at the moment? How do you act in this environment?
Stattman: The economic and financial downturn we’re experiencing in the current cycle is so broad and systemic that there is really no precedent for it since the Great Depression. It is broadly recognized that the amount of leverage in the economy was unsustainable. We are now experiencing a phenomenal system-wide deleveraging. In our view, this situation is different from anything else we’ve seen in our lifetimes, and certainly in the 20-year history of the Global Allocation strategy.
We believe diversification is very important and very effective. That said, the lesson learned from sharp market sell-offs in the past decade is that correlations go up as markets go down. High correlation means most stocks are moving in harmony, and we’ve seen that difficult market conditions tend to affect all styles, market caps, and sectors. To some degree, that will limit some of the short-term benefits of diversification. In today’s increasingly global marketplace, there are few, if any, equity assets that are uncorrelated with one another. On the other hand, the sort of broad diversification that we do across asset classes, geographies, and the full risk spectrum is still very beneficial. A diversified asset mix not only provides some cushion on the downside, but also offers investors greater benefits than does limited diversification within an asset class.
e-fundresearch: What are the special challenges in this environment?
Stattman: One of the challenges in managing the Fund over the past 12 months has been the magnitude of the decline in prices we have witnessed across such a multitude of asset classes. This was especially the case in Q4’08, shortly after the uncontrolled bankruptcy of Lehman Brothers caused correlations to converge.
Moving forward, there are still risks to the global economic recovery, particularly as it pertains to the U.S. economy. The consumer in the U.S. remains constrained by high levels of household debt, weak income growth, and rising levels of unemployment. We think this is likely to lead to a period of sub-par growth for the world’s largest economy. In Asia, however, we feel that the recovery in manufacturing and production as well as the signs of recovery in consumer spending should lead to stronger and more sustainable economic growth. This new paradigm where the center of world economic growth is located outside the U.S. requires the flexibility to explore investment opportunities in new regions and asset classes. Fortunately, our investment mandate offers us the flexibility to find the best investment ideas for our shareholders irrespective of geographical location. We feel this will be an important advantage as the global economy undergoes this transition.
e-fundresearch: What objectives do you have till the end of the year and in the mid term for the upcoming 3 to 5 years?
Stattman: Our objective, irrespective of time frame, is to provide our clients with the opportunity to achieve a competitive rate of return with a more moderate level of risk.
Looking at the longer-term, there are some very significant changes taking place in the global economy. The U.S. and Western Europe are no longer the primary drivers of global economic growth. This is a role that is now being assumed by the developing economies. Our objective will be to monitor these economic trends and find the most attractive investment opportunities for our clients. This will require flexibility and the conviction to construct a portfolio that deviates from most traditional benchmarks.