Balancing Act Gets Tougher for Funds

Balanced funds' labor-saving appeal is clear -- they get equities and fixed income to work together in one portfolio. So is the service they provide. Lipper shows the average balanced fund allocation in March 2003 was 69% stocks, 26% bonds, a bit more than 4% cash and the remainder in other instruments. By February, that shifted to 60% stocks, 34% bonds, 4% cash and a mix of convertible bonds and other instruments for the remainder.

Finding the Right Balance

Some funds, such as the venerable Vanguard Wellington fund (VWELX Quote), are set up with little flexibility in their stock-bond mix, generally 60% equity, 40% fixed-income. But balanced fund managers working outside that basic allocation are equally convinced their strategies are right for an uncertain market.

John Gunthorp, co-manager of the Hester Total Return fund(AHTRX Quote), looks at possible interest rate moves and says bonds have had their day. Over the last year, the fund has thrown its lot in with stocks, trimming its 20% bond allocation from last summer and moving to a 90% stock and 10% cash weighting.

"The improving economy is pushing up interest rates, and we're getting some inflation pressure, and that's not good for bond prices," he says. "We felt we'd gotten the best prices we could for our long Treasuries, and that it was an opportune time to take our gains."

But John Kornitzer, manager of the Buffalo Balanced Fund(BUFBX Quote), another top performer, thinks there's still plenty of room to make fixed income work for his fund, and is considering moving to a 50-50 allocation from his current 60% stock and 40% bond weighting (see chart).

"Basically, the anticipation on interest rates has already moved up prices in the bond market, and depending on how much the Fed raises rates, it might already be in the price," he says.

By shifting to shorter maturities and setting up a "laddered" portfolio where bonds come due every year, Kornitzer expects to find good deals if interest rates rise in 25-basis-point increments, in line with Fed signals. "If interest rates rise you'll have bonds maturing and you can be reinvesting them at higher rates."

From Stock to Bonds Despite an upswing in stocks over the last year, balanced mutual funds are putting more of their money to work in fixed income.
Date	Stock	Bonds	Convertibles	Other	Cash
March 31, 2003	68.55%	26.13%	0.01%	1.10%	4.22%
June 30, 2003	68.02	27.90	0.22	0.01	3.86
July 31, 2003	59.72	35.13	0.46	0.01	4.68
Aug. 31, 2003	70.87	26.47	0.25	0.00	2.41
Sept. 30, 2003	61.09	32.79	0.02	2.85	3.25
Oct. 31, 2003	61.60	32.28	0.12	2.85	4.15
Nov. 30, 2003	56.42	38.64	0.11	0.00	4.83
Dec. 31, 2003	57.41	35.78	0.10	0.36	6.35
Jan. 31, 2004	59.41	34.49	0.09	1.19	4.82
Feb. 29, 2004	60.26	34.10	0.07	1.35	4.22
Source: Lipper