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Best Hybrid Funds Walk the Stock-Bond Line

Kevin Baker

The best-performing hybrid fund from March 31 to June 30 is the CGM Mutual Fund(LOMMX). This fund gained 14.25% in the second quarter on stellar performances by United States Steel(X), up 45.86%; Cummins(CMI), up 40.19%; and Petroleo Brasileiro(PBR), up 39.05%. As measured at the beginning of the period, the fund balanced these equities with 26.4% of net assets invested in United States Treasury Bills. This is in line with the stated objective target of 25% in fixed income.

The second-place hybrid fund, Fidelity Convertible Securities Fund(FCVSX), returned 10.60% with its strategy of investing at least 80% of fund assets in convertible securities, including both debt and preferred shares. This strategy may provide some downside protection, because convertible securities, which are income-paying instruments, trade like bonds when the underlying stock price is low, while retaining upside potential as a company's stock rises.

The largest preferred holdings of the A-rated Fidelity Convertible Securities Fund include those of El Paso Corp.(EP), Celanese Corp.(CE), Freeport-McMoRan Copper & Gold(FCX) and Bank of America(BAC). The fund also holds the convertible debt of Halliburton(HAL) and Peabody Energy(BTU).

Up 10.40% for the quarter is the D-rated, third-ranked hybrid fund, Evergreen Diversified Capital Builder Fund(EKBAX). This fund's allocations are 73.4% common stock, 17.0% corporate debt and 7.3% convertible debentures. The two biggest equity holdings, at 2.6% and 2.2% of assets respectively, are Thermo Fisher Scientific(TMO) and Weyerhaeuser(WY).

All three of these funds have been hit pretty hard so far in July. This is either an attractive entry point or a late start in the bear market. Only time will tell.

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