If you wanted to put all your eggs in one basket and forget about them, a global balanced fund seems hard to beat. Such an all-in-one fund invests in a broad range of stocks and bonds in the U.S. and overseas. You don't have to figure out how to distribute your money among different assets or markets. All you have to do is find a fund you trust.
And therein lies the rub. Very few global balanced funds are worth a hoot. The standouts in the category carry sales charges and charge high annual fees.
That's why three exchanged traded funds from Invesco PowerShares are so intriguing. The ETFs -- Autonomic Balanced NFA Global Asset Portfolio (symbol PCA), Autonomic Balanced Growth NFA Global Asset Portfolio (PAO) and Autonomic Growth NFA Global Asset Portfolio (PTO) -- are global balanced funds and the first of their kind to trade on a U.S. exchange. They track a sophisticated index that covers stocks, real estate, bonds, commodities and currencies in the U.S. and foreign markets.
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Each PowerShares fund has a different mix of stocks and bonds: A 60-40 split for the balanced fund, a 75-25 split for the balanced growth fund and a 90-10 split for the growth fund. Each is a fund of funds and holds 27 different ETFs. All but nine of the underlying fund holdings are PowerShares ETFs.
If you buy these funds of funds, you have to trust the black box built by New Frontier Advisors. Hardly a household name, the Boston research firm made its bones telling institutions where to put their money. New Frontier created a patented process that determines how to allocate money among a wide spectrum of assets -- everything from emerging markets debt to stocks of very tiny companies to gold and oil. The process aims to keep trading costs low and usually adjusts the indexes quarterly, unless there are wild swings in the markets.
The PowerShares funds are untested. Launched May 20, their short track records tell you nothing meaningful. But looking at the performance of the underlying indexes can give you a clue about how the funds behave. Over the past five years through May 31, the New Frontier Global Dynamic Balanced index -- the one followed by the most conservative PowerShares fund -- returned an annualized 15%. That beats the five-year annualized gain of the typical global balanced fund by an average of two percentage points per year. (New Frontier’s balanced growth index had a five-year annualized gain of 17% and the growth index returned 19%.)
But you can't eat index returns, and past performance is no guarantee of future results. So the other feature of the PowerShares funds that any indexer can appreciate is their relatively low fees. The funds carry an annual charge of 0.25% of assets for managing the portfolio of ETFs plus the 0.50% to 0.61% per year for the expenses of the underlying ETF funds. So investors are looking at all-in cost of 0.75% to 0.86% per year depending on which fund they pick. That's pricey for most ETFs but rock-bottom when it comes to costs for global investing. The average global balanced fund has an expense ratio of 1.2%, according to Morningstar.
The critters from PowerShares aren't for every investor. Most do-it-yourself investors want to create their own blend of stocks, bonds and foreign investments. But if you like the simplicity of an index and the diversification of a balanced fund, these ETFs are worthy contenders.
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