Allocation funds have fallen out of favour with investors since their weak performance in 2022, and in 2023, the classic equity-bond mix portfolio was even declared dead in some quarters. This proved premature, as these portfolios have performed well in recent years.
In a 60/40 portfolio, approximately 90 percent of the risk comes from the equity side, and funds with an overweight in US equities particularly benefited from the stock market rally. Additionally, bonds resumed their defensive role during stock market volatility in 2024, which was encouraging.
Nevertheless, the negative trend in fund flows continues. In 2024, European investors withdrew as much as 39.5 billion euro from mixed funds. Defensive funds within the EUR allocation categories were particularly hard hit, whereas more aggressive allocation funds fared better.
Against this backdrop, we examine two «60/40» investment funds within the broad Morningstar category Mixed Funds USD Neutral, both of which are qualitatively assessed by Morningstar analysts. We discuss their similarities and differences: Capital Group Global Allocation Fund (LUX) and BlackRock Global Funds – Global Allocation.
People
Both strategies have undergone changes within their management teams in recent years, but our confidence in their quality remains strong, resulting in an Above Average People rating for both.
Rick Rieder, CIO for global fixed income at BlackRock, became the lead manager of this fund in April 2019. Although this is his first allocation mandate, Rieder has managed multiple highly regarded bond strategies, including BlackRock Total Return. Following the retirement of co-manager David Clayton in 2023, Rieder is supported by four co-managers who can rely on BlackRock’s extensive resources, giving the team a competitive edge.
Capital Group Global Allocation has also seen changes, with Paul Flynn departing at the end of 2023. This followed previous shifts within the bond portfolio, but it remains a highly experienced group of managers, with an average of over 25 years of professional experience and 20 years of tenure at Capital Group. Unlike BlackRock, each manager oversees their own portion of the portfolio. Hilda Applbaum, Anirudh Samsi, and Tomonori Tani manage the balanced portfolios, while Philip Chitty and Andrew Cormack focus solely on bonds. Capital Group aims for long-term performance, showing patience with managers whose styles may temporarily fall out of favour.
Process
Both global allocation funds aim to outperform the benchmark of 60 percent global equities and 40 percent bonds. Their neutral equity allocation of 60 percent is higher than the average competitor within the Morningstar category.
At Capital Group, four allocation managers oversee 75 percent of the assets, while two fixed income managers invest the remaining 25 percent. Equity exposure is determined by the allocation managers, who can hold up to 40 percent in bonds or cash. Large or sudden shifts in asset allocation are rare, while the fixed income portfolio is typically conservatively managed, serving as a stabilising factor. Outperformance is primarily driven by stock selection. Each manager follows their own investment style but generally focuses on the long term, holding 25 to 50 positions, mainly in large-cap equities. Morningstar analysts rate this strategy as Above Average in the Process Pillar.
BGF Global Allocation, on the other hand, follows a top-down approach and distinguishes itself through the use of non-traditional data, including credit card transactions and internet searches. The management identifies macroeconomic regimes across different regions and the expected risk-adjusted returns associated with them. These macro views, combined with fundamental bottom-up research, determine allocations across asset classes, regions, sectors, and currencies. BlackRock’s equity portfolio consists of 80 percent fundamental, 15 percent quantitative, and 5 percent thematic equity strategies. The managers tactically adjust factor exposures and risks. While this approach is less valuation-driven than before, its robust top-down process is impressive, resulting in a High Process Pillar rating.
Portfolio
Capital Group Global Allocation’s equity exposure has ranged between 52 percent and 67 percent since inception, with changes typically gradual. BGF Global Allocation’s exposure fluctuates more, occasionally exceeding 70 percent in the first half of 2024, although the most significant changes usually occur within underlying allocations. For instance, BlackRock’s emerging market equity exposure has varied between 0 percent and 15 percent.
Despite their differing approaches, both funds favour US equities. Historically, Capital Group has emphasised quality stocks, while BGF Global Allocation, under Rieder’s leadership, has also focused more on companies with strong cash flow and slightly less on valuations.
Capital Group’s fixed income managers may only purchase government and investment-grade corporate bonds. In contrast, BGF Global Allocation’s bond segment is more actively managed with fewer restrictions. BlackRock remains underweight in duration, whereas Capital Group’s maturity profile remains closer to the benchmark. BlackRock prefers shorter-duration US Treasuries and higher credit exposure to achieve greater returns.
Performance
Over the past ten years, both funds have performed similarly in terms of returns. Both finished in the first quintile of the Mixed Funds USD Neutral Morningstar category, outperforming the Morningstar USD Moderate Target Allocation Index. Since the launch of Capital Group Global Allocation in February 2014, both funds have had a comparable beta (1.2).
BGF Global Allocation’s success is largely due to its ability to withstand volatility better than the benchmark, stemming from its strong focus on risk management. While its volatility, as measured by standard deviation, has been slightly higher than that of Capital Group over the past five years, it has outperformed in both rising and falling markets, achieving a significantly higher risk-adjusted return.
BlackRock’s equity portfolio has a slight preference for growth stocks and US companies, though the difference with Capital Group is limited. This positioning could face headwinds if value stocks and non-US securities dominate the market, although the BlackRock team can adjust swiftly when necessary. At Capital Group, such a shift would likely occur more gradually due to its multi-manager approach.
Thomas De Fauw is a manager research analyst at Morningstar. Morningstar analyses and rates investment funds based on quantitative and qualitative research. Morningstar is part of the expert panel at Investment Officer.