GMO Benchmark-Free Allocation Fund: Cash at Hand and a Balanced Bet on Stocks

Includes: AGG, BWX, EFA, SHV, SPY
by: MyPlanIQ

GMO's benchmark-free allocation fund (GBMFX) is a fund of funds and invests primarily in shares of other GMO funds. As the name suggests, the fund does not have a particular securities market index as a benchmark and does not seek to outperform a particular index or blend of indices. Actually, the fund is seeking a positive total return rather than relative return. In a word, it is an absolute return fund.

The portfolio manager of GBMFX is Ben Inker. Mr. Inker is the director of asset allocation and joined GMO in 1992 following the completion of his B.A. in Economics from Yale University. He has worked as a manager of GBMFX since the fund was established in 2003. Based on its prospectus, one characteristic of the fund is that it may not diversify its asset allocation. The Fund is not restricted in its exposure to any particular asset class, and may be substantially invested in underlying funds that primarily invest in a single asset class (e.g., Fixed Income Funds). In addition, the Fund is not restricted in its exposure to any particular market. Although the Fund generally will have exposure to both emerging countries and developed countries, including the U.S., at times, it may also have substantial exposure to a particular country or type of country (e.g., emerging countries). Non-diversified asset allocation implies the investors should bear more individual market risks.

From 2004 to 2007, the fund had over 10% annualized returns for 4 consecutive years. The fund navigated through the financial crisis smartly. It only lost 11.23% in 2008 and recovered 20.65% in 2009. However, its performance in 2010 was a bit disappointing, only gaining 4.91%. The fund's long term performance is excellent. Its 3-year and 5-year annualized return are 5.81% and 6.67%, ranked 9 and 28 in Morningstar's world allocation category respectively.

Let's take a look at the fund's asset allocation. As of 11/30/2010, the fund allocated 30.25% asset on U.S. stock market, 23.19% on foreign stock market, 10.01% on bond market, 30.68% cash holding and 5.87% on other asset.

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We further applied MyPlanIQ's SmartMoneyIQ tool to analyze its recent portfolio correlations with various asset benchmarks. The following table illustrates the asset correlation percentages for GBMFX in the last four weeks:







2011-04-15 0 38.26 22.43 26.29 13.02
2011-04-29 0 29.67 32.45 22.7 15.18
2011-05-06 2.62 24.62 39.53 24.42 8.8
2011-05-13 8.57 31.69 28.22 14.84 16.68
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The above table is derived by MyPlanIQ SmartMoneyIQ tool. The percentage on each column reflects the portfolio's correlation coefficient with the asset class benchmark for that column. (Assuming all correlation coefficients are summed to 1). They do not necessarily reflect the actual asset allocation of the fund.

From the table above, one can see that the fund has a balanced bet on international stocks (NYSEARCA:EFA) and U.S. stocks (NYSEARCA:SPY). On the other hand, the fund has a fair amount of cash (or short term investments (NYSEARCA:SHV)) correlation. It is also very steady in U.S. bonds (NYSEARCA:AGG) exposure, the correlation is about 28%. It has also slight international bond exposure (NYSEARCA:BWX).

GMO's latest quarter report (1Q 2011) stated that "The back-up in yields this quarter continued to pull bond pricing closer to fair value, but hardly enough to change our opinion that bonds are still priced to deliver sub-par returns.... Today, one has to look long and hard to find anything reasonably priced within the fixed income markets, we continue to keep duration on the low end and try to keep our powder dry for the return of better pricing....Holding cash at low valuations has the nice property that, should valuations correct, capital can be rapidly redeployed into riskier assets with higher expected returns."

In light of recent market volatility, it is a smart way to keep cash at hand while being steady on stock and other risky asset exposure.

Disclosure: I am long SPY.