Balancing Act Gets Tougher for Funds

The long shadow of higher interest rates hanging over the markets may be worrying investors, but imagine the challenge faced by managers of balanced mutual funds, which invest in both equities and bonds with a low-risk bias.

A look at the approach of balanced fund managers shows a variety of strategies to rising interest rates, and indicates there's probably no single right answer for how to be ready when the Federal Reserve Board finally acts.

The recent sharp decline in bond prices has prompted some managers to move to stocks and cash, while others are increasing fixed-income allocations to hunt for opportunities. Other managers -- by choice or by design -- say they'll stay put and stick to long-term investment plans regardless of interest rate moves.

While the average return for stock-weighted "moderate allocation" funds doesn't light up the sky, those managers sell themselves as stable, long-term investors. Morningstar shows an average 1.69% year-to-date loss for the 341 stock-weighted balanced funds it tracks, compared to the S&P 500's 0.9% total return. The top 20 balanced funds posted returns of about 2% to 4% for the same period (see chart).

Over time, returns on balanced funds even out a bit, returning 12.51% for the last 12 months, compared to the S&P's 22.88%, with total average three-year returns of 0.36% against the index loss of 2.36%. Over five years, the meat-and-potatoes investment style had an average return of 1.12% against the S&P's loss of 2.26%.

After a few years out of favor, these prefab blends are attracting money from investors who don't want to sweat changes in the market.

"Flows have been consistent and steady into this field as investors have shied away from making allocation decisions," says Lipper analyst Jeff Tjornehoj. He said balanced funds received $10.1 billion in the first three months of this year, nearly half their $21.4 billion inflow of 2003 and close to the $13.1 billion inflow of 2002.

Balancing Act Balanced fund returns
Category	YTD	1 Year	3 Years	5 Years
Moderate allocation balanced funds	-1.69%	12.51%	0.36%	1.12%
Vanguard Wellington (VWELX)	-1.12	13.33	4.01	4.09
Hester Total Return (AHTRX)	4.05	24.26	3.30	2.94
Buffalo Balanced (BUFBX)	3.47	21.67	2.37	3.57
MainStay Balanced (MBAIX)	-1.31	14.72	7.76	5.60
S&P 500	0.10	22.88	-2.36	-2.26
Source: Morningstar (through April 30, 2003)