Funds with bolder allocation strategies are struggling because of the Greek financial crisis. By Russel Kinnel, Contributing Editor July 8, 2010 In recent years, aggressive asset-allocation funds have run circles around traditional balanced funds. Some of these flexible funds cut back their stock holdings dramatically during the 2007-09 bear market -- or even bet against stocks during part of the downturn. As a result, they emerged from the carnage as heroes. If they also leaned heavily on foreign stocks, they performed even better.But it's been another story in 2010. Boring balanced funds, which typically keep about 60% of their assets in stocks and the rest in bonds and tend to focus on U.S. securities, have come on strong. Take Fidelity Balanced (symbol FBALX), which epitomizes dullness. It sticks with a 60/40 mix and keeps its sector weightings in line with those of Standard & Poor's 500-stock index. Year-to-date through June 4, the fund essentially broke even (down 0.3%), topping 88% of its peers. Vanguard Balanced Index (VBINX), as humdrum as they come, outpaced 92% of its rivals. A lousy year In the meantime, some funds with bolder allocation strategies, including those that shift assets all over the world, are struggling because of the impact of the Greek financial crisis on foreign stocks and Europe's currency, the euro. For example, Ivy Asset Strategy A (WASAX) has lost 7.8% so far this year, worse than 92% of its peers. American Funds Capital Income Builder (CAIBX) has shed 6.9%, and BlackRock Global Allocation A (MDLOX) has surrendered 4.4%. Advertisement But one active allocator, Rob Arnott, is looking downright Delphic. Two funds he runs, Pimco All Asset (PASAX) and Pimco All Asset All Authority (PAUDX), have gained 3.6% and 4.5%, respectively, so far this year. Both funds invest in other Pimco funds, giving Arnott the ability to tap nearly every asset class. As you might guess, All Authority is the bolder of the two, permitting Arnott to short stocks (bet that their prices will fall) and to use leverage. A bearish outlook on the U.S. prompted Arnott to short 14% of All Authority's assets at the start of 2010. Although shorting Europe would have been even better, the bet against U.S. stocks paid off during the spring swoon, as did an outsize bet on emerging-markets stocks, which dropped about three percentage points less than Europe did. Arnott says emerging nations have stronger economies and healthier balance sheets than most developed countries. A move into Treasury inflation-protected securities also paid off nicely. One once-hot fund that has turned cold is Ivy Asset Strategy. Manager Michael Avery had also bet against U.S. stocks, so why has his fund struggled so much? As the Greek crisis intensified in early May, Avery grew more bearish and reportedly placed a big order to short the S&P 500 (through futures contracts on the index known as e-minis). Some observers have pinpointed that order, placed precisely at the time of the flash crash on May 6, as a cause of that debacle. (Waddell & Reed, Ivy's parent, says that neither it nor the fund contributed to the sharp drop in the stock market that day -- almost 1,000 points on the Dow Jones industrial average.) In any event, Asset Strategy lost 8.4% in May, and it seems likely that part of the problem was that a chunk of those short-sale orders were placed near the market low on May 6. The Dow subsequently rebounded 600 points that afternoon. Advertisement Avery is now running $24 billion, and it could be that he hasn't adjusted his fast trading style to the reality of his funds' burgeoning asset base. The reports on the e-mini trade said he tried to sell 75,000 contracts (only 50,000 normally trade in an hour, and that's when markets are behaving normally and there's plenty of liquidity, which was not the case on May 6). Asset Strategy, with a ten-year annualized return of 7.9%, still ranks in the top quartile of the world-allocation group for that period, but I'm becoming uncertain about its future. Columnist Russel Kinnel is director of mutual fund research for Morningstar and editor of its monthly FundInvestor newsletter.