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.

Like bonds, convertibles make fixed interest payments. Convertibles currently yield 2.6% on average. The interest payments tend to prop up values during periods when investors become nervous. When stocks are rising, convertibles can be converted into common shares. As a result, convertibles can deliver some of the upside of stocks.

Solid balanced mutual funds that hold convertible stakes include Invesco Equity and Income ( ACEIX - Get Report), Northern Income Equity ( NOIEX - Get Report), and Value Line Income & Growth ( VALIX - Get Report). All three funds outdid the S&P 500 by a wide margin during the downturn of 2008. In the rally of the past four years, the balanced portfolios delivered decent results.

Northern Income Equity has about two-thirds of its assets in stocks and most of the rest in convertibles. The convertibles proved their resiliency recently. With interest rates rising during the past month, bond prices dropped, and the average moderate allocation fund sank into the red. But Northern returned 0.8%. During the past 10 years, the fund returned 8.4% annually, topping 96% of peers.

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.

Invesco Equity and Income typically has 60% of assets in stocks and 15% to 20% in convertibles. Portfolio manager Tom Bastian looks for depressed stocks that have begun turnarounds. He sometimes gravitates to troubled companies that have made management changes. "New managements often have licenses to do whatever is necessary to improve poor operations," he says.

A holding is Avon ( AVP - Get Report), the cosmetics company that has been struggling with stagnant revenue and earnings. The company hired a new CEO who has begun an effort to cut costs and execute a plan to boost sales.

Value Line Income & Growth typically keeps from 50% to 65% of assets in stocks, with the rest in convertibles and fixed income. These days portfolio manager Mark Spellman is near the upper limit of his stock allocation. He says that many bonds and convertibles are relatively unappealing because of their low yields. During the past ten years, the fund returned 8.3% annually.

To pick stocks, Spellman relies on the Value Line system, which ranks 1,700 stocks according to factors such as earnings and price momentum. Since 1965, stocks that carried the top ranking have outdone the benchmark, while the lowest-rated shares have trailed badly. For his fund, Spellman only takes stocks that carry the top three rankings in the Value Line System. Of the 1,300 eligible stocks, he picks about 100 for his portfolio.

Spellman favors stocks that can increase their dividends at healthy rates. A holding is Capital One ( COF - Get Report), a financial institution, with banking and credit-card operations. After the financial crisis, Capital One took advantage of depressed prices to make two acquisitions. The purchases are beginning to produce improved results, says Spellman. "In the second half of this year, they will raise the dividend and start buying back a lot of stock," he says.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.