NEW YORK ( TheStreet) -- With markets heading for the summer doldrums, this could be a time to consider cautious balanced funds, which hold mixes of stocks and bonds. Balanced managers aim to provide mild-mannered vehicles that can deliver some gains in bull markets and avoid the worst losses in downturns. The steady approach has worked admirably in the erratic markets of the past decade. During the last 10 years, the balanced funds in Morningstar's moderate allocation category returned 7.7% annually, outdoing the S&P 500 slightly while taking less risk.Classic funds in the moderate allocation category hold about 60% of assets in blue-chip stocks and most of the rest in high-quality bonds. But a few managers spice up the fixed-income recipe by including convertibles, preferred shares or other instruments. These wide-ranging portfolios could be sound choices at a time when interest rates have been climbing. When rates rise, bond prices tend to sink. But convertibles can be more resilient, sometimes gaining when most bonds are falling.
Because the fund aims to deliver income, portfolio manager Jackie Benson most often buys dividend-paying stocks. Benson likes unloved companies that seem poised to exceed market expectations. A holding is the common stock of Xerox (XRX - Get Report), the copier company that has struggled to expand in outsourcing services. The stock yields 2.6% and has a modest price-to-earnings ratio of 9. "The expectations for the stock are low, but the company is turning around and delivering cash flow," Benson says.