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Dennis Stattman, BlackRock Global Allocation

In running his one-of-a-kind global strategy, Dennis Stattman encourages his team members to follow their own paths.

Michael Herbst, 02/22/2010

What a difference two decades make.

The team behind BlackRock Global Allocation MDLOX recently celebrated the fund's 20th birthday, and lead manager Dennis Stattman remarked on its humble origins. "When we started the fund, there were three of us on the team, two of us part time. I brought my own PC to work so I could have a computer, and if you wanted a company's 10-K, you wrote away for it."

Flash-forward to 2010. Stattman, who was a finalist for Morningstar Manager of the Decade, is now the longest-tenured manager in Morningstar's world-allocation category, and the fund has come a long, long way on his watch. Since it launched in February 1989 with $140 million in assets, Stattman and his team have skillfully navigated the rocky road of global investing. The fund has established a remarkably consistent track record, despite seismic shifts in global markets and chronic underappreciation from the team's former employer.

Neither the team nor the fund's success has gone unnoticed--its asset base clocked in lately at a hefty $35.3 billion. Overall, the team is overseeing roughly $55 billion in total assets. That success, the growing interconnectedness of global markets, and the team's new lease on life under BlackRock's wing provide a rich moment for a look back, a look around, and a look forward.

Pigeonholed at Merrill Lynch
The merits of asset allocation and a global perspective have become more widely accepted in recent years, but that wasn't the case when the fund opened its doors. Initially, Stattman says, "U.S. stock-picking was really, really important to us, and we did a good job of U.S. stock-picking."

Stattman ran the fund's stock sleeve, while former comanager Brian Ison, who worked alongside Stattman since the fund's inception through 2002, managed the fund's fixed-income allocation. Early on, additional teams within the fund's then-advisor, Merrill Lynch Asset Management (which later morphed into Merrill Lynch Investment Managers), oversaw security selection in European and Asian equities.

Back then, Stattman says, "international investing was not quite an oddity, but it certainly was a specialty. It was thought of as alien or risky, or at least detached from the mainstream."

Yet over time, Stattman and Ison honed their craft and expanded their operation. Dan Chamby joined the team in 1993 as an analyst, playing a big role in fixed income and currencies, and later stepped into the comanager role in 2004. Several senior analysts who also came on board in the early 1990s remain with the fund to this day. Over that stretch, management developed key relationships with people working in other capacities within Merrill Lynch, including Aldo Roldan, who would later officially join the team and become comanager.

Stattman and Ison quickly established reputations as talented global managers, which drew investors to the fund, including Henry Goodwin, a senior financial advisor and first vice president with Merrill Lynch based out of Houston. "I attended a meeting in 1989 where Merrill Lynch introduced the fund," Goodwin says, "and Ison said that we'd probably hear more exciting stories elsewhere. Then the next presenter, who was a manager who had garnered lots of publicity, got up with a disgusted look on his face and said, 'I want to tell you something about Ison and Stattman--every dime of my retirement money is in their fund.' "

Goodwin began allocating clients into the fund from its inception throughout the 1990s and developed a profound appreciation as the fund eked out a small profit during the 2000-2002 downturn. "I've been through two secular bear markets since the late 1960s, and if you take 2000 through 2002 as a major market decline and consider the fund came through that without a loss, I thought at that point it can be a core investment for many clients."

The fund itself was treated as an oddity at Merrill Lynch, says Judy Rice, who has worked with the team for more than a decade. "Merrill Lynch Investment Managers had us pigeonholed, trying to put us into a style box. Operationally, marketingwise, and investmentwise, it was very challengingfor us."

That changed in 2006, when BlackRock took over Merrill Lynch Investment Managers.

Follow the Trail
Stattman has long thought more in absolute terms, rather than trying to keep the fund aligned with a set of benchmarks or peers. Typically, the team starts its work by homing in on geographic regions, sectors, or currencies where it sees signs of big improvement or deterioration.PAGEBREAK

The approach can lead to quite-bold positioning. For several years before the markets' turmoil in 2007 and 2008, the team became more skeptical of excessive borrowing in the United States. That skepticism led to relatively light stakes in companies dependent on the U.S. consumer in favor of those reliant on consumers in burgeoning Asia. The fund also treaded lightly in the financial sector and largely steered clear of corporate bonds, which it believed offered little compensation for their risks. Those long-standing views helped shield the portfolio when the subprime-mortgage and credit crises eventually erupted. There's more to management's strategy than savvy top-down calls, however. Within the team, Stattman cultivates an atmosphere that challenges conventional wisdom and rewards curiosity. "There's a tremendous amount of space in order to develop your own views," comanager Roldan says. "It's more like finding a trail and following it to the fullest extent."

Chamby cites flexibility as one of the team's strengths. "There's more than one way to look at an investment, and different environments will drive different ways of looking at an investment," the comanager says.

That line of thinking may strike some as unorthodox, but it's calculated. Senior analyst Patrick Edelmann recalls, "I started out as an equity guy, and on my first day, Dan [Chamby] calls me into his office and asks me to look at a distressed credit in Asia."

Chamby responds: "This was no accident. If you're intellectually curious, and you're willing to break out of your comfort zone, you're going to learn something from it and bring back your perspective to the investment."

Stattman and the team usually shift the portfolio's allocations gradually, but allowing managers and analysts to follow multiple trails has helped the team move quickly when necessary, as two recent examples illustrate.

In mid-2007, Roldan began to see irregularities in the trading of securities related to subprime mortgages. The lack of trading in those securities led him into the fund's cash stake. The deeper he and the team dug, the more concerned they became, and as the credit crisis worsened during the second half of 2008, the team shifted billions of dollars into Treasury bills and took the portfolio's cash stake up to 20% of assets. Those steps helped the fund sustain a lighter loss in 2008 than 80% of its peers. Heading into 2009, Chamby drew upon the team's past experience investing in convertible bonds, and the fund reallocated 12% of assets into those securities as the markets began to thaw.

Risk Awareness
Despite their conviction, Stattman and the team take a deliberate, thoughtful approach to risk. For one, they spread their bets out across hundreds of securities. Few of its individual stock positions have soaked up more than 1% of assets. The team has taken a similar approach to its fixed-income positions, too. That diversification can help take the edge off its sometimes-pronounced sector or regional weightings and helps minimize the impact of individual missteps.

Yet the team's risk awareness links back to its flexible mandate. Regarding the idea that emerging markets were once perceived as risky, Chamby says: "Well, wait a second. Where are the better balance sheets? Where are the better sovereign balance sheets? Where are all the savings in the world? Goodness, where is all the leverage?"

Having the ability to invest across regions, sectors, currencies, and across a company's capital structure has given the fund the leeway to sidestep some of the market's potholes.

Given the fund's flexibility, Jeff Erdmann, a private banker and senior vice president with Merrill Lynch Private Bank in Greenwich, Conn., finds it a potent antidote to what he calls "deworse-ification." "If you're starting out with a $30,000 IRA, trying to hire separate funds--a large-cap value fund, a large-cap growth fund, a small-cap fund, and so on--it's not practical," he says. "The Global Allocation fund has done a much better job than trying to combine all those funds if you're going for diversity."

That diversity, and the team's defensive bent, is why Erdmann now views it as an attractive core investment for his clients. "We've come to use it for our largest families," he says. "Management has done an extraordinary job protecting us on the downside, while allowing investors to capture the market on the upside."

The flexibility of a global mandate also offers portfolio managers more ways to mess up. Yet the fund's performance on management's watch suggests that the team's calls have paid off much more often than not. The fund's returns have landed in the world-allocation category's top quartile in 57 out of 62 rolling five-year periods over the trailing decade through November, or 92% of the time. Its volatility has also landed in the category's bottom third over the trailing three-, five-, and 10-year periods. And the fund's 8.7% annualized gain over the trailing decade through November suggests that Stattman and crew have delivered on their goal of delivering equitylike returns with less volatility.PAGEBREAK

Part of the team's success stems from its single-minded focus. "We've been very, very reluctant to take on any new product that doesn't fit our mold," Stattman says. As a result, the team oversees only BlackRock Global Dynamic Equity MDEGX (essentially an equity and nongovernment fixed-income carve-out of its allocation strategy) in addition to its global-allocation strategy. That, too, is calculated. "You find that thing you do well, stick with it, try to refine it, but you don't try 10,000 new initiatives," Stattman says.

BlackRock Support
Stattman is enthusiastic about the support his team got when BlackRock took over Merrill Lynch Investment Managers in 2006. "BlackRock brought much more direct attention and interaction with top management, as well as the encouragement to build the team," he says.

Since the BlackRock transaction, several key contributors to the fund's long-term success have officially joined the team. Roldan, senior analyst Eric Mitovsky, and the group headed up by Ben Moyer that once oversaw BlackRock Pacific MDPCX have all come on board. Those arrivals reflect the team's efforts to bring all of its security selection in-house.

Chamby says that the team's previous structure, which relied in part on external teams for security selection, had become "an anachronistic construct. You have to look at the world as one, then start looking at things from a sectoral perspective."

In addition, the team has hired a growing bench of research associates and has firmly plugged itself into BlackRock's formidable technology and risk-management platforms.

Looking forward, Stattman is wrestling with how to take advantage of the expertise that resides elsewhere in the firm. "BlackRock has a vast amount of capabilities and knowledge, so I've got a challenge that's not available to a lot of other people," he says. "How do I take advantage of that size and of all those opportunities? That's what I'm thinking about."

Given his team's trailblazing history, there's little doubt that it will find those answers, too, most likely a bit further down the path.

Michael Herbst is a mutual fund analyst with Morningstar.

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