Many investors with a long-term horizon who are leery of timing the market often consider balanced, or hybrid mutual funds. These funds provide capital appreciation and income by investing in both stocks and bonds. They typically allocate 60% of their assets to stocks and 40% to fixed-income securities. Portfolio managers may vary these proportions, depending on overall market conditions.
Despite the instant diversification that they offer, balanced funds appear to be less popular this year than last. According to the Investment Company Institute, hybrid funds had inflows of only $647 million through the first two months of 2006, versus inflows of $9.32 billion for the same period a year ago. “Inflows into balanced funds have suffered because investors are pouring money into the equity markets and stock funds,” says Lou Harvey, president of Dalbar Inc., a Boston-based mutual fund consulting firm. “But, I think that in the coming years, balanced funds will become increasingly attractive because they make the most sense for the retirement investor.”
For the ten-year period ended April 28, the average balanced fund returned 7.4% annualized, versus a gain 8.8% for the average domestic equity fund, according to Standard & Poor’s data. Still, a number of balanced funds have put up competitive returns compared to pure equity offerings. Below is a sampling of balanced funds that have delivered strong performance over the past three years and carry relatively modest expense ratios. All of the funds profiled are open to new investors.
Bruce Fund (BRUFX)
One of the top-performing funds of this style, the $188-million Bruce Fund (BRUFX), is its own kind of balanced fund. Co-manager Jeff Bruce says he makes no attempt to strategically allocate investments among asset classes. Rather, Bruce seeks out the most attractive capital appreciation opportunities available, whether they are in stocks or in bonds. He and co-manager Robert Bruce set no limits on their asset allocations.
The fund has soundly beaten both the S&P 500 and the average hybrid fund for the one-, three-, and five- year periods through March 2006. In fact, it delivered outstanding returns of roughly 60% in each of calendar 2003 and 2004. Although the fund boasts a low turnover rate of 10.1%, the securities in the portfolio are themselves volatile For example, the fund has a high standard deviation of 14.5, versus 6.2 for the peer group, indicated that it is riskier than its peers. The equity portion includes small- and micro-cap stocks, some in turnaround situations; while the fixed-income component includes short- to intermediate-term bonds selling at significant discounts to par.
In addition, the fund also has a sizable cash position; money-market instruments represented 21.5% of assets at the end of 2005. At that time, the fund had a 46.4% stake in common stocks and 31.0% in bonds, including 23.0% in corporate convertibles. While this fund has a higher risk profile than others in the group, it has also delivered consistently higher returns.
Mairs & Power Balanced Fund (MAPOX)