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How does the Fund seek to manage downside risk?
As portfolio managers, our job is to take risk. It’s not to avoid risk. The key is
taking risk that’s compensated and avoiding risk that’s uncompensated. But even when
you do that, there’s always going to be not just upside, but downside in portfolio
performance, and that’s important to remember. It is also important to think about the tools
that we have in the Macro Allocation Fund to potentially manage those upside and downside
exposures.
First, we have the opportunity to go long and short. We have the opportunity to sell
assets and currencies that are priced way above fundamental values, and that helps us
avoid things that may decline in price. It doesn’t mean that they won’t go further
up, but we do have the opportunity to take advantage of those dislocations and avoid
the risks that come with that. That ability to go both long and short also results in
a relatively low correlation with respect to the equity market. The Macro Allocation
Fund will tend to have a low correlation and if prices are very, very far above fundamental
values, that correlation could even be negative with respect to the equity market.
If prices are very low, that correlation could go much higher, but on average we think it
would be relatively low. In addition, in managing the Macro Allocation Fund, we have a significant
amount of our active risk taken in currencies. Currency exposure and active currency management
provides a very, very diversifying impact on the portfolio. That’s been our experience
and that as well is our expectation as we go forward. That will help mitigate downside
risk in a portfolio.
Finally, we have the ability to use tools such as options to manage the upside and downside
exposure of the portfolio. Options enable us to buy insurance against the downside when
those options are cheap, and it also allows us on the other hand to sell insurance when
the options are expensive. So we’ll be on both sides of those option transactions, but
when prices are way above fundamental values, buying that protection is an important element
in managing the downside exposure of a portfolio.
So in the end we have a combination of tools. First, the portfolio is expected to have a
relatively low correlation. Second, the exposure to currencies and the active management of
currencies is an important diversifier. And third, we do have the ability and do actively
use options in the portfolio to potentially protect the downside.
DISCLOSURE The opinions and forecasts expressed in the
following interview are those of Brian Singer as of February 3, 2014, and may not actually
come to pass. This information is subject to change at any time based on market and
other conditions and should not be construed as investment advice or a recommendation of
any specific security. Not all securities held in any William Blair strategy portfolio
performed as favorably as those discussed, and there is no guarantee that these or other
securities will perform favorably in the future. Investments are subject to market risk.
The Fund involves a high level of risk and may not be appropriate for everyone. You could
lose money by investing in the Fund. There can be no assurance that the Fund’s investment
objective will be achieved. The Fund is not a complete investment program and you should
only consider the Fund for the alternative portion of your portfolio. Separate accounts
managed by the Advisor may invest in the Fund and, therefore, the Advisor at times may have
discretionary authority over a significant portion of the assets invested in the Fund.
In such instances, the Advisor’s decision to make changes to or rebalance its clients’
allocations in the separate accounts may substantially impact the Fund’s performance. The Fund
is designed for long-term investors. The Fund may use investment techniques and
financial instruments that may be considered aggressive—including but not limited to
the use of futures contracts, options on futures contracts, securities and indices, forward
contracts, swap agreements and similar instruments. Such techniques may also include short sales
or other techniques that are intended to provide inverse exposure to a particular market or
other asset class, as well as leverage. These techniques may expose the Fund to potentially
dramatic changes (losses) in the value of certain of its portfolio holdings.
Investments are subject to a number of other different types of risk, including market
risk, asset allocation risk credit risk, commodity risk, counterparty and contractual default
risk, currency risk, and derivatives risk. For a more detailed explanation and discussion
of these risks, please read the Fund’s Prospectus. Please carefully consider the Fund’s investment
objective, risks, charges, and expenses before investing. This and other information is contained
in the Fund’s prospectus, which you may obtain by calling +1 800 742 7272. Read it
carefully before you invest or send money. © William Blair & Company, L.L.C., distributor.
222 West Adams | Chicago, IL 60606 | +1 800 742 7272 | williamblairfunds.com
William Blair & Company, LLC | 222 West Adams Street | Chicago, IL 60606 | williamblairfunds.com