There’s a downside, though. Go-anywhere funds may completely upset the best-laid asset allocation plans and fail to live up to their billing. Still, go-anywhere funds, also known as multi-cap funds, can have a place in your portfolio if they meet certain criteria.
Just what are go-anywhere funds? Well, going anywhere means they aren’t shy. For stock funds, nothing is sacred: big, mid-size, foreign, growth, value — you name it. There are go-anywhere funds that really shop around, including bonds and, in some cases, even commodities and other alternative investments in their portfolios. If a fund goes anywhere within the stock universe, it’s usually known as a multi-cap fund. This means that the manager crosses market-capitalization boundaries in search of whatever type of companies the fund specializes in. Some multi-cap funds tend to focus on certain types of companies, such as small-cap ones, but also hold other, larger companies. Meanwhile, other funds spread their assets out more evenly over small-, mid- and large-cap companies.
Funds that venture into a variety of asset classes usually do so with a plan in mind. Greenspring Fund (ticker: GRSPX), for example, is a balanced fund that primarily holds small- and mid-sized companies in the stock portion of its portfolio and convertible bonds in the portfolio’s bond portion. Permanent Portfolio (PRPFX) holds a portfolio of gold, silver, real estate, natural resources, Swiss francs, aggressive growth stocks and U.S. Treasuries in an effort to beat inflation.
It all depends on the fund’s investment objective and strategy, typically found in the fund’s investing prospectus. It’s no secret where most fund managers are going and how they plan to execute a particular mandate: The Securities and Exchange Commission says it all needs to be spelled out. So don’t be intimidated by the word prospectus and take a look at it. If you’re not convinced, funds also list their investment objective and strategy on their websites, so you can get the CliffsNotes version there. Here are six pros and cons to keep in mind when considering investing in a go-anywhere fund:1. Pro: Managers
A go-anywhere mandate doesn’t automatically endow a manager with investing prowess, but many of the best are quite good. The best go-anywhere managers — like the best managers of any type of fund — share specific characteristics. They often have strong long-term track records against their peers and indexes, though go-anywhere managers are more difficult to benchmark simply because they follow such individual mandates. Also, these managers generally stick around: Look for at least five years in the same job.
Look for consistency within these funds’ stated objective and strategy; a twist in the market shouldn’t lead such a manager to throw in the towel on whatever his or her strategy is. Before investing in a go-anywhere fund, scrutinize a manager’s track record. Many go-anywhere managers have sustained success over time, but if they don’t have a successor waiting in the wings, that success may be hard to replicate if they retire or quit the fund.2. Con: Volatility
By their very nature, go-anywhere funds aren’t timid. They don’t hug indexes or follow the crowd along the route of a narrow style niche. Their boldness can mean lots of stomach-churning ups and downs. Know what you’re getting into before you buy in. The best way to do this is look at a fund’s year-over-year returns. Your BetterInvesting membership might include access to the mutual fund tools at the website; information’s also available at Morningstar, Yahoo! Finance and MSN Money. (See Websites of Interest.)3. Pro: Diversification
Go-anywhere funds can be great ways to diversify your portfolio. When you invest with managers dedicated to following a specific strategy through thick and thin, your overall portfolio can benefit. These managers may spot opportunities others miss, adding diversification and returns to your portfolio. Some go-anywhere managers aren’t afraid to make big bets on certain positions to bolster their portfolios; many fund managers who stick to certain corners of the style box or stay close to indexes are wary of large, concentrated positions. Such concentration in a fund portfolio works when the manager is right, but they also present more downside risk if the investments go awry.4. Con: Asset Allocation Issues
If you allocate your assets among specific areas of the stock style box, a go-anywhere fund likely won’t fit into your strategy. But leaving room in your mutual fund portfolio for a go-anywhere fund can provide rewards just because such funds defy easy classification. You’ll need to monitor these funds, however: Go-anywhere or multi-cap funds can wreak havoc with carefully laid asset allocation plans. When you review your portfolio once a year and rebalance, take a good look at any go-anywhere funds and see how they correlate with other funds you own.
Tools such as Morningstar’s Portfolio Allocator and Instant X-Ray (see Websites of Interest) can help you determine whether holdings overlap and you need to tweak allocations.5. Pro: Up When Everything Else Is Down
In some markets no one can hide from plummeting values, and the 2008-09 bear market was one of those times. In the rapidly falling market spawned by the financial crisis, bonds, stocks, most commodities, real estate and other assets were all hit hard. Just about the only assets that held their value or increased were gold and U.S. Treasury bonds.
But in more mundane bear markets, go-anywhere funds tend to zig when the rest of the market is zagging. Some of this is becayse of their distinctive style; in other cases, these funds are more diversified than others because they’re so flexible. A manager who pursues a specific, defined style can have successes in markets that others find difficult to navigate. Some managers who have done well tracking macroeconomic trends and translating that into investment success do well in bear markets.6: Con: Costs
Go-anywhere funds can be more expensive than other funds, though that isn’t always the case. They are, without a doubt, going to be more expensive than the average low-cost index fund or exchange-traded fund.
But go-anywhere funds also can be more expensive than other actively managed funds because the managers may spend a lot of time and energy analyzing the economy or specific companies and implementing a certain strategy. Some aren’t that expensive, though, and others that perform well — consistently — are clearly a better deal than the many badly managed, expensive, actively managed funds that stick to one corner of the style box or another.
Adding Spice to Your Portfolio
Go-anywhere funds can make an interesting addition to a mutual fund portfolio. Although usually not the best way to build a portfolio exclusively, they can add diversification, return and interest to a portfolio anchored around a traditional asset allocation strategy. Before you invest, do your due diligence and make sure that whatever fund you choose fits with your investing goals and objectives.Websites of Interest
Yahoo! FinanceMSN MoneyMorningstar’s Portfolio AllocatorMorningstar’s Instant X-Ray