Like a Pinto standing tall among cracked-up Porsches, poky balanced funds are looking smart after avoiding much of the past year's damage.
Unlike most funds, which typically invest all oftheir money in either stocks or bonds, balanced fundsown both. The idea is that they give you access tohigher-returning (over the long haul) stocks whileusing bonds to lighten volatility and reduce capitallosses.
In the tech-led bull market, these stodgyfunds weren't too popular, since their returns laggedfar behind those of tech-heavy stock funds. In 1999,for instance, they averaged an 8.5% gain, which wassmall potatoes next to the average tech fund's 137%gain.
Since then, however, balanced funds have lookeddownright sporty compared to the scrap heap of cratered stockfunds. The average balanced fund is down 8.5% over thepast 12 months, compared to a 24% fall for the
and a 41% tumble for the average big-cap growth fund.Consequently, balanced funds are getting far moreattention and money than usual these days, which iswhy they are the focus of this week's Big Screen.
In sifting through the category, we singled outfunds that beat their average peer over the past one,three and five years, according to Chicago fundtracker Morningstar.
Then we yanked out any thatproduced above-average expenses, required a minimuminvestment north of $10,000 or kept more than 80% ofits money in stocks. We ranked the survivors by theirannualized gains over the past five years; here arethe top 10.
There are plenty of standouts on this list, thoughthe standard balanced formula is simple: Invest abouttwo-thirds of assets in cheap large-cap stocks andslug the rest into investment-grade government andcorporate bonds.
The folks at Dodge & Cox funds are stars atpracticing this low-octane approach. The no-load Dodge& Cox
Balanced fund is run by the 10people who manage the firm's
Income funds. That might seemlike a lot of chefs, but the resulting broth is farfrom spoiled. By blending solid stock picks withprudent bond selection, the fund has beaten at least90% of its peers as well as the S&P 500 over the pastone, three, five and 10 years, according toMorningstar.
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Source: Morningstar. Annualized returns through Oct. 3.
The three no-load Vanguard funds on our list offersomething for everyone, notably low fees. Each hasoutperformed at least 75% of its peers over the pastone, three, five and 10 years, and none has an expenseratio above 0.34%, compared to 1.27% for the averagepeer. That means investors in these funds would payabout $34 annually on a $10,000 investment, barely one-quarter of what they'd fork over in the averagebalanced fund.
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Wellesley Income fund is themost conservative, typically keeping 60% of its moneyin investment-grade bonds picked by Earl McEvoy. Therest is invested in cheap stocks picked by Jack Ryan.The fund has had only five down years since its 1970inception, the steepest a 6.4% dip back in 1974.
Star fund is also a low-riskchoice, simply because it spreads money widely. Ratherthan buying individual securities, the fund invests in11 Vanguard stock and bond funds, with about 62% ofits money in stocks and the rest in bonds. Thisapproach gives shareholders access to a vast array ofstocks, bonds and styles, keeping it from relying tooheavily on any asset class or sector. Since its 1986launch, the fund has had only two down years, with theworst being its 3.6% dip in 1990.
Wellington fund is atraditional balanced portfolio, with about 65% of itsmoney in stocks and the rest in bonds. Ernst vonMetzsch picks the stocks, favoring the cheap shares ofcompanies that pay dividends, while bond-shopper PaulKaplan sticks with investment-grade debt. Since 1980,the fund's worst fall was a 2.8% tumble in 1990.
You'll notice that the funds on our list don'tdabble much in growth stocks, which tend to be morevolatile than cheaper fare. Since balanced funds aredesigned to limit volatility, few bother with growthstocks -- and most of those that do are now laggingbehind their peers, thanks to the tech sector'scollapse. That said, if you're looking for a growthybalanced fund, where you get access to zesty techstocks with less risk, you might want to check out theJanus
Balanced fund, which justmissed our cut.
Karen Reidy took the reins last year, just as techstocks were preparing to take their medicine. JanusBalanced has fallen harder than its peers over thepast 12 months, though over five years the fund's12.8% annualized return beat the S&P 500 and 97% ofits peers.
Who knows? With this kind of performance thesePintos might even win favor among the beautifulpeople.
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.