Investors searching fund rankings for a top-performing balanced fund will find
Green Century Balanced hard to miss.
The small fund, which holds only $70 million and operates with an environmentally aware mandate, is the top-performing balanced fund for the year-to-date, one- and five-year periods, according to
Its 38.1% return this year is almost eight times the 4.9% average for the category. The fund's 31% average annual return over three years is more than triple the 10% average.
Great performance, yes. But balanced? That all depends on what you mean by the term.
A balanced fund is, as its name implies, a fund that invests in a balance of stocks and bonds. The ratio of stock-to-bond holdings varies from fund to fund, but a 75%-to-25% stocks-to-bonds split is typical.
, for example, defines a balanced fund, or what it calls a hybrid fund, as one that invests less than 70% of its assets in stocks. (It considers Green Century a growth fund.)
The idea behind the balanced fund is to provide investors with stable growth. By buying bonds, investors are safeguarded if the stock market takes a hit, for example. But, as the Green Century Balanced fund illustrates, investors should look beyond a fund's moniker and evaluate its holdings before investing.
"Don't let a name make you think you know what you buy," says Gerald A. Townsend, president of
Townsend Asset Management
in Raleigh, N.C. "It gives you a general idea of what it is, but that's all."
Green Century Looking Aggressive
Some balanced funds are conservative, and some are aggressive. Green Century is definitely in the latter category. Investors who expect a smooth ride from their balanced funds should check Green Century's historical returns. They'll find that it has lost as much as 22% in a single quarter (the third quarter of 1998).
, a partnership of nonprofit organizations, the fund invests only in the stocks and bonds of companies it considers environmentally responsible.
That mandate obviously limits what the fund can buy. Its prospectus says it may be more heavily weighted in smaller-cap and growth stocks -- an area of the market that is typically more volatile than large-cap or value stocks. The fund also can invest up to 35% of its net assets in high-yield, or junk, bonds -- not the kind of investment for the faint of heart.
"Most attractive green companies today tend to be small- to mid-cap growth companies," says Green Century Balanced portfolio manager Jack Robinson. "It's very difficult for us to find large-cap, conservative, high-yielding companies that fit our charge."
As of July 31, the fund had 67.7% of its assets in stocks and 31.2% in bonds. Roughly 80% of its bond holdings as of June 30 were in the junk category, according to Morningstar.
A comparison between Green Century Balanced's top holdings and those of other balanced funds illustrates the fund's higher risk profile. The $6 billion
Fidelity Balanced fund's portfolio, for example, has a median market capitalization of $48.7 billion, compared with Green Century Balanced's median of $818 million. Around 13% of Fidelity Balanced's assets are invested in volatile technology stocks, compared with Green Century Balanced's 41.8% weighting in tech, according to Morningstar. (But Robinson says that about 15% of what Morningstar classifies as tech investments are actually alternative energy companies that Green Century considers utilities.)
Fidelity Balanced's top 10 holdings include conservative standbys like Treasury bills and stock of established companies like
, which sells for a modest 10 times trailing earnings, and
, which sports a
price-to-earnings ratio of 23.6.
Though some of Green Century Balanced's top 10 holdings are large-cap companies, many also have high P/E ratios, a sign of a high-growth, but potentially more volatile, stock. The fund's largest holding as of July 31 was optical fiber maker
, which has a market capitalization of $91.9 billion and a P/E ratio of 114.6. Green Century acquired its stake in Corning through investments in smaller companies, like
, which Corning acquired earlier this year. Robinson points out that the fund has unloaded about two-thirds of its Corning stake but has no immediate plan to sell any more.
Some of the fund's other holdings include
, solar power company
"A lot of those companies are tiny; they're not big players in the general market," says Morningstar analyst Emily Hall. "This isn't an appropriate fund for nonenvironmental investors. You can't really build a portfolio around it like a normal balanced fund."
Green Century Balanced's Robinson agrees that his fund is a more aggressive balanced growth fund that makes a good fit for environmentally sensitive investors looking for healthy long-term performance.
Robinson also notes that just because a fund is called "balanced" doesn't mean that it can't have an aggressive investing strategy.
"It's not written anywhere that balanced funds have to invest in anything that goes flat or goes down," says Robinson.