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What Made Top Hybrid Funds Work

The best-performing hybrid funds for the second quarter comprised one convertible fund, the Fidelity Convertible Securities Fund (FCVSX), and two domestic focused balanced funds -- namely, the CGM Mutual Fund (LOMMX) and the Evergreen Diversified Capital Builder Fund (EKBAX).

Fidelity's convertible fund returned 10.6% for the three months ended June 30 employing a strategy of investing in lower-quality convertible debt securities (50% allocation) and preferred stock (31% allocation). The fund seeks to earn a high level of total return -- i.e., income and capital appreciation -- and has been aided in this quest by its allocation of 11.5% in the oil and gas sector and 6.51% in oil and gas services, which enabled it to capitalize on the run-up in energy. The other sectors in its portfolio include chemicals (8.53%), semiconductors (6.66%), mining (5.49%) and banking (5.42%).

The CGM Mutual Fund (LOMMX) was the top-performing mutual fund, returning 14.25% for the quarter.

Manager Ken Heebner looks to equities to generate his returns with a 75% allocation and approximately 25% in debt securities. The key to his performance seems to be his sector allocations, with 26% of assets being deployed in the mining sector, 17% in iron/steel, 14% in oil and gas, 6.29% in oil and gas services. This allocation positioned the fund to profit from performance of the energy and natural resources sector.

With gasoline prices falling and the third-quarter outlook uncertain for energy and commodities, Heebner may have to reallocate between sectors, and maybe even between debt and equity, to maintain performance.

The third fund is the Evergreen Diversified Capital Builder Fund (EKBAX), managed by Margret Patel (no relation -- unfortunately).

Like the CGM fund, it allocates favoring equities at 75% and debt around 25% and seeks total return. The fund returned 10.4% for the three months ended June 30.
Sam Patel, CFA, is the manager of mutual fund research for the Ratings.

In keeping with TSC's Investment Policy, employees of Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.

While Patel cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.

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