Morningstar Advisor - February/March 2010 - 52

Undiscovered Managers Dennis Stattman 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. 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 BlackRock Global Allocation MDLOX $16K 14 12 10 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. K Michael Herbst is a mutual fund analyst with Morningstar. Morningstar Moderate Target Risk 06 07 08 09 Category ' World Allocation Morningstar Rating Expense Ratio (%) 1.12 5-Yr Anl Total Rtn (%) 7.60 5-Yr Anl TR % Rank Cat 18 QQQQ Minimum Investment $1,000 Data as of Dec. 31, 2009. Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Risk Awareness Feb-05Jul-05Dec-05 Jun-06 Feb-07Jul-07 Feb-08Jul-08 Feb-09Jul-09Dec-09 Mar-05 Sep-05 Apr-05 Oct-05 May-05 Nov-05 Aug-06 May-07 Jun-05 Aug-05 Sep-06 Jun-07 Oct-06 Nov-06 Aug-07 May-08 Nov-08 May-09 Nov-09 Jun-08 Aug-08 Jun-09 Aug-09 Despite theirJul-06 Apr-07Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 conviction,Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Stattman and the Jan-10 Feb-06 Mar-06 Dec-06 Apr-06 May-06 Mar-07 Nov-07 Dec-07 Dec-08 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 52 Morningstar Advisor February/March 2010

Morningstar Advisor - February/March 2010

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