Best Hybrid Funds Walk the Stock-Bond Line

The best-performing hybrid funds in the second quarter struck the correct balance between equity and fixed-income investments.

The best-performing hybrid fund from March 31 to June 30 is the CGM Mutual Fund(LOMMX Quote). This fund gained 14.25% in the second quarter on stellar performances by United States Steel(X Quote), up 45.86%; Cummins(CMI Quote), up 40.19%; and Petroleo Brasileiro(PBR Quote), 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 Quote), 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 Quote), Celanese Corp.(CE Quote), Freeport-McMoRan Copper & Gold(FCX Quote) and Bank of America(BAC Quote). The fund also holds the convertible debt of Halliburton(HAL Quote) and Peabody Energy(BTU Quote).

Up 10.40% for the quarter is the D-rated, third-ranked hybrid fund, Evergreen Diversified Capital Builder Fund(EKBAX Quote). 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 Quote) and Weyerhaeuser(WY Quote).

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.

Best-Performing Hybrid Funds in Second Quarter 2008
Fund (Ticker) Rating	Total Return 3 Months	Total Return 1 Year	Objective
CGM Mutual Fund (LOMMX) U	14.25%	26.15%	Balanced - Domestic
Fidelity Convertible Securities (FCVSX) A	10.60%	4.15%	Convertible
Evergreen Diversified Capital Builder A (EKBAX) D-	10.40%	2.10%	Balanced - Domestic
Eaton Vance Balanced A (EVIFX) C-	5.25%	4.30%	Balanced - Domestic
Performance Fds-Adv Growth Port C (PALFX) E	4.90%	-2.75%	Asset Allocation - Domestic
Arrow DWA Balanced Shares A (DWAFX) D	4.72%	8.62%	Asset Allocation - Domestic
Caldwell & Orkin Mkt Opportunity (COAGX) C+	4.69%	25.41%	Asset Allocation - Domestic
Legg Mason Prt Inc Fd Con Cl A (SCRAX) C+	4.64%	-7.71%	Convertible
Arrow DWA Balanced Advisor Shares C (DWATX) D-	4.49%	7.79%	Asset Allocation - Domestic
FPA Crescent Fund (FPACX) C	4.20%	1.94%	Balanced - Domestic
Source: TheStreet.com Ratings

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