It should go without saying that a mutual fund represents management's "best ideas." Its thinking may be flawed, or flat-out wrong, but people would never invest in a fund if they didn't feel as though management was providing its best investment concepts.
That was proved in the late 1990s, when the Morgan Stanley Dean Witter Competitive Edge "Best Ideas" Portfolio was a laughingstock of the industry, drawing limited interest, providing mediocre results (at best), eliciting snickers and jeers from analysts before being quietly liquidated and mostly forgotten.
So when the Northern Trust funds recently sent out a notice touting their Global Tactical Asset Allocation fund as representing the firm's "best investment thinking," it was hard to read without laughing. That would be true about any fund company that runs multiple funds and is foolish enough to single out one issue as having its best ideas, but since Northern Trust stepped into the fray, they're at the center of this lesson in the difference between what funds are selling and what investors need and actually get.
The basic pitch was that Northern Global Tactical Asset Allocation in August went from being a fund for institutional investors (with a $5 million minimum initial investment) to one that ordinary consumers can buy into for as little as $250, giving Joe Average access to the firm's "Investment Policy Committee."
The committee -- including the chief investment officer, chief investment strategist, head of active equity, head of fixed income, among others -- considers everything from inflation and gross domestic product numbers to credit spreads and currency trends, then mixes in earnings growth and valuations to come up with a tactical asset allocation plan, spreading the money across stocks, bonds cash and alternative investments.
It accomplishes this by investing in other Northern Trust funds and some ETFs.
When Northern Trust contacted me about the fund in late October, Global Tactical Asset Allocation carried a four-star rating from Morningstar Inc.; that has since been cut to three stars, but the fund still has a below-average expense ratio and a track record that puts it ahead of the average "moderate allocation fund" year-to-date, and in the one- and five-year time horizons.
Certainly, investors could do worse.
But is it really the firm's "best investment thinking?"
The minute a fund firm uses that language, it starts raising red flags, because it comes close to invalidating the rest of its own efforts (which, in this case, include the funds that Global Tactical Asset Allocation invest in). Why would anyone ever buy any fund except for the one that is management's "best ideas" or "best thinking"?
Moreover, as the Morgan Stanley Dean Witter folks found out with their Best Ideas portfolio, when your best thoughts don't produce great results, it brings absolutely everything into question.
For example, in seven of the last 10 full calendar years, Global Tactical Asset Allocation has been in the bottom half of its peer group. Most people would believe if that is happening with your best thinking, they don't want to see your worst.
Sift through the numbers and ultimately, you can make the argument that the fund might work for investors who want to let someone else -- in this case Northern's investment policy committee -- make all of their decisions.
"For the average investor, there are some one-fund, long-term portfolios that make a lot more sense than coming up with your own asset allocation, finding funds, and then neither rebalancing nor making tactical allocation shifts," said David Snowball of MutualFundObserver.com.
Chuck Jaffe can be reached at cjaffe@marketwatch.com.
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