Balanced Mutual Funds Provide Defense
Andrew Leckey

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For conservative investors seeking a little balance in their lives during volatile times, a balanced mutual fund makes sense in 2010.

With a typical mix of around 60 percent stocks and 40 percent fixed income, balanced funds split the difference between growth from stocks and income from bonds. Each portion has different managers, providing an investment that functions like two separate funds in one.

For some investors, this risk-reducing hybrid provides one less thing to worry about. For others, however, it represents just half a loaf because it will never supply the euphoric results of a rousing stock market rally.

Take Fidelity Balanced Fund (FBALX), for example, up 11 percent over the past 12 months with a 10-year annualized return of 6 percent. This giant $20.5 billion fund has 352 stock holdings and 1,200 bonds for a mix of 55 percent stocks, 34 percent bonds and the remainder cash.

Stocks include blue chips such as Apple Inc., Microsoft Corp., J.P. Morgan Chase & Co., Coca-Cola Co. and General Electric Co. The fixed-rate portion includes U.S. Treasury notes and bonds, along with Fannie Mae obligations.

"I would say a balanced fund is best as a core investment for investors who want exposure to equities but have some lingering concerns about them," said Brian Hogan, president of the equity division of Fidelity Investments in Boston. "The disadvantage is that in a dramatic stock market rally the balanced fund would lag behind a 100 percent equity fund."

In the case of Fidelity Balanced Fund, lead manager Bob Stansky, the former manager of Fidelity Magellan, makes sure that equity weightings are aligned with the Standard & Poor's 500, then delegates stock selection to sector specialists. Experienced manager George Fischer heads the team that runs the fixed-rate portion.

"Not only is there a different team running equities than fixed income, but within equities we have a different person running the financial services portion than the technology portion," said Hogan in explaining the fund's risk-spreading. That "no-load" (no sales charge) fund requires a $2,500 minimum initial investment charge and has a low annual expense ratio of 0.68 percent.

Critics say investors should simply buy a stock fund and a bond fund based on their own needs, even though that might require some longer-term asset adjustments by the investor.

"A disadvantage of a balanced fund is that there's nothing customized about it so will fit each individual's needs," said Harold Evensky, certified financial planner with Evensky and Katz in Coral Gables, Fla. "One investor might in reality need 70 percent equities to meet goals and a balanced fund might be 60 percent equities, while another investor who doesn't want growth and might do best with 80 percent in bonds."

Evensky does acknowledge that "reasonably-priced and reasonably-allocated" balanced funds have the advantage of simplicity since they keep rebalancing themselves as time goes on.

The $50.5 billion Vanguard Wellington (VWELX), with a 65/35 split between stocks and bonds, is a good "no brainer" investment, he said. It has a 12-month return of 11 percent and a 10-year annualized return of 7 percent. John Keogh is lead fixed-income manager and Ed Bousa is in charge of equities.

Wellington currently holds 105 stocks and 858 bonds. Stocks include AT&T, IBM, Chevron Crop., ExxonMobil Corp. and Wells Fargo Co., with U.S. Treasury notes its primary fixed-income holdings. This no-load fund requires a $10,000 minimum initial investment and has a miniscule annual expense ratio of 0.34 percent.

If you fancy yourself a self-directed investor, you might get itchy not knowing exactly how all the pieces of the balanced-fund machinery are performing. It's hard to go with automatic transmission when you're used to driving stick shift.

"A problem is that you can't separate out the performance of the stocks and bonds but instead will receive the overall performance of the fund in total," said Greg Carlson, fund analyst with Morningstar Inc. in Chicago. "So if we have a huge rally with the Standard and Poor's 500 up 50 percent, your balanced fund won't be up 50 percent because the equity performance is suppressed by the fixed-income component."

The low expense ratios of balanced funds is due to the fact that there are few active asset allocation decisions. This is also money that stays put because conservative investors don't want to try anything fancy.

The $14.6 billion Dodge and Cox Balanced Fund (DODBX) is another notable balanced fund, according to Carlson. It has a 12-month return of 9 percent and a 10-year annualized return of 6 percent.

Run by a 15-member investment committee, it is more bullish on stocks than are many other balanced funds and willing to take chances on out-of-favor stocks. It currently has 71 percent of its portfolio in stocks, 27 percent in bonds and the rest cash.

Dodge and Cox Balanced owns 82 stocks and 252 bonds, the top stock holdings recently including Hewlett-Packard Co., Capital One Financial Corp., Comcast Corp. "A", Merck and Co. Inc. and Wells Fargo Co. This no-load fund requires a $2,500 minimum investment and has a low annual expense ratio of .53 percent.

Dull and boring? For conservative investors, balanced funds are a sensible balancing act that lets them sleep better in turbulent times.

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