Flexible hybrid funds are a special class of balanced funds that have the leeway to invest in a range of securities, including commodities, real estate, and short positions, as well as stocks and bonds, in whatever allocations the managers deem attractive at the time. In contrast, the typical balanced fund usually keeps a 60% to 40% mix, or thereabouts, of only stocks and bonds.
One of the best long-term performers in this sector class, the $690 million Leuthold Core Investment Fund (LCORX), can hold anywhere from 30% to 70% of its assets in either equities or bonds. However, during periods of extreme market activity, the portfolio may have significant investments in money market instruments, foreign securities, or other assets.
Lead-managed by Steven C. Leuthold, chairman of Leuthold Weeden Capital Management, the fund has a high minimum initial investment requirement of $10,000. However, over the five years through 2004, the fund has beaten its benchmark, the S&P 500 Index, with an 8.14% annualized gain, versus a 0.52% drop by the Index. Moreover, it outperformed with significantly less volatility.
As of March 4, 2005, the fund had 52% of its assets invested in domestic equities (mostly companies of industries like unregulated energy, healthcare, and oil and gas exploration); 2% in cash; 24% in 3-year Treasury notes; 6% in emerging country funds; 7% in physical industrial metals; and 9% in shorted zero-coupon bonds. The fund's performance in 2004, a gain of 8.25%, was helped by its participation in robust emerging market equities.
The fund's current lack of exposure to traditional bonds reflects the rising interest rate environment and the managers' expectations for weak long-bond performance. As for its shorted zero-coupon bond holdings, these benefit the fund since those securities gain in price as interest rates rise. As bond prices fall, they can be purchased back at lower prices.--Palash R. Ghosh