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Toolkit of a Global Go-Anywhere Portfolio

Christine Benz

Christine Benz: Hi, I'm Christine Benz for

Its International Week on, so we thought it would be helpful to sit down and talk about how Morningstar's Investment Services team puts together its global allocation portfolio.

Here to discuss that is Marta Norton; she is an investment manager with Morningstar Investment Services. Marta, thanks so much for being here.

Marta Norton: My pleasure.

Benz: So you help run this global allocation portfolio. I want to talk first about what is the case for putting together a "go anywhere" global allocation portfolio like this one?

Norton: Well, the reasons most often cited in the marketplace and the reasons that make a lot of sense is really the diversification that you get when you have another country in the portfolio, and the fact that you're really widening your opportunities set. You have great companies that aren't listed necessarily in the U.S. and maybe in Europe or other places people traditionally seek. So this portfolio allows you to access those companies.

But going beyond that, when we were putting together this portfolio, we were really thinking how we individually think about managing money, and it really isn't to target a specific corner of the style box or manage to a benchmark. It's much more absolute; we want a compound wealth, and we thought having a portfolio where we could really go anywhere would help do that. Because we wouldn't be tied to, maybe, say, large-cap equity, when large-cap equity is out of favor.

Benz: So, the baseline asset allocation is 60-40 stock-bond. But you really do have a lot of leeway. You can take your stock position anywhere from 20% to 80%, and do the same with the fixed-income allocation. So it does have a tactical element.

Let's talk about how you adjust tactically, and also I am curious to get your take on the evidence about tactical investing and why you think that tactical is the way to go with at least a portion of this portfolio?

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Norton: Well, we certainly structured the portfolio for maximum flexibility, and we want that flexibility on two ends. We want to be able to make any adjustments we see necessary, and we also want our managers to go where they see the best opportunity is, right? Because that was really the driving thrust of the portfolio.

So, when we think about tactical, we're not thinking about going 100% to cash or being in the top-performing asset class every year. We think of it more as finding the right fundamentals and finding the right valuations. So, when we're evaluating asset classes, we're thinking of those two criteria, and largely speaking, that's what our managers are thinking about, too.

I think it comes down to how you define "tactical." If you think "tactical" is going all to cash and being in that high-performing asset class, this isn't really that. But it is something where we are taking advantage of different opportunities in the marketplace.

Benz: So if you, for example, have a manager who you really like, who isn't finding anything to buy and he or she takes the portfolio to 30% cash as a residual to that bottom-up approach, you don't worry about it too much?

Norton: Right. We certainly have managers who have that kind of flexibility and actually view cash in and of itself as an asset class, and so they would move to cash, if they thought it was more attractive than other areas.

Benz: Okay. So I want to focus on the international piece of this portfolio a little bit. Emerging markets in particular, as you know, there has been this stampede of investor assets into emerging markets, but when I look across this portfolio, it looks like you are actually a little bit light there, but you do have a lot of non-dollar exposure elsewhere. Let's talk about how you are positioned from that standpoint?

Norton: Well, we'd be the first to agree that emerging markets have a fantastic secular story behind them, and a lot of people are pointing out, and we agree, that they are far healthier than a lot of the developed nations. So, if that were the only criteria, we would be all emerging markets.

But it really comes down to valuation. There is a lot of great research out there that shows attractive economies, fast-growing economies, don't necessarily translate into attractive asset class or security price performance. So we want to make sure we are getting in at the right price.

On emerging equity side, we don't think it's flashing red, but we certainly don't think it's a buying opportunity or at least, you know, very cheap. So we are lighter there, and we are getting a lot of our emerging exposure on the equity side actually through companies that are either domiciled in the U.S. or in Europe that sell to emerging markets, and we think that's a way to participate in the growth there without paying high prices.

But then on the fixed-income side, valuations are more attractive, for one, particularly on a relative basis, if you think on where Treasuries are, where a lot of healthy corporate U.S. bonds are, a lot of what we see in emerging markets is offering us a better bang for our buck, and they are healthier economies, and that's appealing, too. And we also want to diversify a little bit more away from the dollar. We don't want to be so tied to the dollar, when we see some really, really fierce secular headwinds heading in that reaction. So we want to get exposure to countries that are a little bit healthier.

Benz: So that would be emerging markets bonds and some developed markets bonds as well?

Norton: That's more on the emerging-market side. Actually our global bond manager who can go anywhere in the world has some exposure to Norway, to Sweden, but also has a lot of exposure in the emerging markets, and is avoiding some of the big name countries that everybody thinks are necessary in the global bond portfolio.

Benz: So, also in the realm of "go anywhere" investing, you have got this alternative sleeve. I know for a lot of investors, they grapple with what goes into an alternatives component of a portfolio. Let's talk about your thinking there?

Norton: So, as you pointed out earlier, it's a generic split for this portfolio, 60-40 stock-bond, but really we structured it that way so that we wouldn't have to own any other asset class if we didn't think they were attractive, but if they were, we could add them to the portfolio, and that's the case with alternatives.

Really we see them as a volatility dampener similar to bonds, but without all the interest rate risk. And of course you are going to have to really vet alternatives; you are not going to want to throw any old long-short or alternative fund into the portfolio.

Benz: ...Bernie Madoff type of investment...

Norton: You certainly have to do your due diligence, but the funds that we have we think they are pretty good at what they do. They have been doing it for a long time. They are cheaper than others, and we think they provide that smoother ride that we are looking for.

Benz: Can you provide some examples of the types of alternatives that you use and tend to think provide that attractive risk-free award profile?

Norton: Well, first it really comes down to manager expertise. It doesn't matter what alternative you are, if you can't execute, that's going to be a big red flag to begin with.

But in terms of what types of alternatives we use in this portfolio, it's a fund of funds. So it has a lot of different types of strategies within its own portfolio, and that provides a lot of diversification benefits.

But we also like convertible arbitrage strategies. We like long-short strategies--although oftentimes investors forget that these still have a great deal of equity exposure, so they are not a complete hedge against the market. And we have a host of others. We have even a credit arbitrage fund on the fixed income side. So, we are pretty open-minded as long we think that there is a rationale behind the mandate, and a manager who is responsible and knows what he is doing.

Benz: Well, thank you, Marta. Thanks for sharing your insights into this whole area of global allocation, very helpful.

Norton: Sure. Thanks for having me.

Benz: Thanks for watching. I am Christine Benz for