GMO Benchmark-Free Allocation Fund Is Light On Stocks

by: MyPlanIQ

GMO's benchmark-free allocation fund (GBMFX) is an absolute return fund that invests primarily in shares of other GMO funds. As the name suggests, 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%. In 2011, the fund returns over 3%, not a bad performance, considering how difficult the investing environment was in last year.

The fund returned annually 5.6% and 10% in last 5 years and 3 years, respectively. The following table illustrates the asset correlation percentages for GBMFX in the last four weeks:

MyPlanIQ SmartMoneyIQ Managers GBMFX

Date Int'l Bond Cash US Bond Int'l Stock US Stock
2011-12-23 -0 67.45 0 32.55 0
2011-12-30 0 69.03 -0 30.97 0
2012-01-06 0 77.32 -0 16.51 6.16
2012-01-13 0 84.76 -0 11.92 3.33

Table derived using MyPlanIQ's SmartMoneyIQ Manager tool. See MyPlanIQ SmartMoneyIQ for more details.

From the above table, one can see that GMO Benchmark-free allocation fund has been reducing its stock exposure. Right now, it has very nominal correlation with both international (NYSEARCA:VEU), (NYSEARCA:VEA) and US stocks (NYSEARCA:SPY), (NYSEARCA:VTI). It has almost none in US Bonds (NYSEARCA:AGG), (NYSEARCA:BND) and International Bonds (NYSEARCA:BWX), (NYSEARCA:EMB), (NYSEARCA:PCY). This usually indicates that the fund is mostly in short term bonds (NYSEARCA:BSV) or cash.

The following compares the GBMFX with two diversified ETF portfolios:

Portfolio Performance Comparison

Portfolio/Fund Name 1-Year AR 1-Year Sharpe 3-Year AR 3-Year Sharpe 5-Year Sharpe
Retirement Income ETFs Strategic Asset Allocation Risk Profile 0 -3% -11% 19% 73% 1% 0%
GBMFX 3% 51% 10% 117% 5% 53%
Retirement Income ETFs Tactical Asset Allocation Risk Profile 0 -3% -19% 13% 63% 10% 46%

Portfolio Comparison

Three-Year Chart

To summarize, from GMO's allocations, one can see that they are adopting very cautious stance in current market environment. Concerned investors should position their portfolios accordingly.

Disclosure: I am long SPY.