It's raining on Wall Street, and lower-risk balanced funds are the rattled investor's umbrella. But some will keep you drier than others.
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A lot of people are buying balanced funds these days because these funds typically invest most of their money in stocks but reduce risk by putting about one-third of their money in high-quality bonds. Of course, popularity should never be confused with quality. To illustrate our point, today we're inducting the
Dodge & Cox Balanced fund into our Ima Winner Fund Club and dragging the punch-drunk
CGM Mutual fund into the unhallowed halls of our Ima Loser Fund Club.
Through Aug. 31, investments into these funds outpaced redemptions by more than $6.3 billion, reversing a $26.5 billion net outflow in the same stretch last year. It's no surprise that a river of money is gushing into their coffers, because funds devoted strictly to stocks are down some 19% on average over the past 12 months. That's worse than any calendar-year loss in the past 30 years, according to Chicago fund tracker Morningstar.
Let's focus on the positive by looking at our winner first.
Yep, Ima Winner
If balanced funds are the stock-fund world's easy listening bin, the no-load Dodge & Cox Balanced fund is the category's
The 70-year-old fund is run by a 10-member team of managers from the firm's
Income funds, all but one of whom has worked on this fund for at least a decade. The team typically slugs about 60% of the fund's money in mid- and large-cap stocks they think are trading below their fair value, keeping the rest of the fund's money in investment-grade government and corporate bonds. Sounds pretty boring, but the results are anything but.
The fund beats the S&P 500 and at least 97% of its peers over the past one, three, five and 10 years. This isn't the product of a few home-run years, either. The fund has beaten the category average in eight of the past 10 years.
Skittish types will find its risk control even more impressive than its gains. The fund's last down year was back in 1981, when it fell 2.5%. And the fund has earned a "below-average risk" tag from Morningstar by falling less than its average peer in down months over the past three years.
Thanks to a low turnover approach, the fund also has been more tax-efficient than 98% of its competitors; its 3.2% yield tops the category's 3% average. The icing on the cake is its 0.53% annual expense ratio. That adds up to a $53 annual toll on a $10,000 account, compared with $128 for the average balanced fund.
Keep in mind that this fund's price-conscious approach to stock-picking means that it probably will trail its competitors when growth and tech stocks come back into favor. But its sterling performance, low volatility and modest price tag make it worth a long look.
Source: Morningstar. Returns through Oct. 16.
Hi, Ima Loser!
Prepare to meet the Dodge & Cox fund's bizarro twin: the no-load CGM Mutual fund.
Portfolio manager Ken Heebner, who also manages the (LOMCX) CGM Capital Development and (CGMFX) - Get Report Focus funds, is known far and wide as a gunslinger. He typically holds just 20 or so stocks and shuffles his holdings as often as most people change their socks. That's fine for an aggressive, focused fund, but doesn't make much sense for the balanced category where few, if any, investors want or expect to swing for the fence.
On June 30, Heebner had about 75% of the fund invested in just 18 stocks. Nine of these picks were new and he had some 9.5% sunk into tobacco titan Philip Morris (MO) - Get Report. The rest of the fund was invested in bonds, but some were risky emerging markets issues.
As you might imagine, this is a feast-or-famine style. In 1999, for instance, the fund gained 20.5%, topping 92% of its peers. But those highlights have been too infrequent. The fund has finished three of the past four years in the category's bottom quartile and its 17.4% fall since Jan. 1 trails 97% of its competitors. The fund trails at least eight in 10 balanced funds over the past one, three, five and 10 years, according to Morningstar.
Making matters worse, too much of the fund's gains have gone to Uncle Sam, thanks to Heebner's quick-draw style. The fund's 200% turnover equates to a complete overhaul twice over the past year. It has been less tax-efficient than about 90% of its competitors over the past three, five and 10 years, according to Morningstar.
The bottom line: While this fund probably will have its occasional boffo year, it's hard to argue the average balanced-fund shopper has any use for it. That said, no doubt some daredevils will say they like it. I'm picturing the type of leadfoot who buys racing gloves.
One wonders though, if shareholders of this fund would've had the cash for a fast car in the first place.
Source: Morningstar. Returns through Oct. 16.
Ian McDonald writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
email@example.com, but he cannot give specific financial advice.