Russel Kinnel is director of mutual fund research for Morningstar and editor of Morningstar® FundInvestor℠, a monthly newsletter.
Instead, how about some conservative-allocation funds that have less risk than stock funds but still give you some participation in the stock and bond markets.
I've pulled five medalists that might appeal to you.
Silver-rated Berwyn Income is a nice steady option that has generally stayed below investors' radar. The fund divvies assets among dividend-paying stocks, corporate bonds, preferreds, convertibles, and cash. The pure equity exposure is limited to no more than 30% and was 28% at the end of August.
Managers are also conservative about how much they want to run. The fund's strong bear-market performance led to a spike in inflows, so it closed to new investors in late 2010 before reopening in September 2011. Ray Munsch will retire next year, but we have confidence in the remaining managers George Cipolloni III, Lee Grout, and Robert Killen.
Manning & Napier Pro-Blend Conservative Term
At Manning & Napier one investment committee steers all the funds. That's not as difficult as it sounds, as most of the funds have similar holdings only with different asset weightings. This one has a targeted equity range of between 15% and 45%. At the end of August the fund had 26% in U.S. stocks, 7% in foreign stocks, 62% in bonds, and 4% in cash.
Like most Manning funds, it has been dependable. Its 15-year returns are 6.1% annualized, good enough for top 13% in the category. Likewise, the manager and analyst staff have been quite stable over the years.
T. Rowe Price Personal Strategy Income
This is similar to a fund of funds except that it invests directly in the underlying portfolios of various T. Rowe funds, so you'll see top holdings that list securities rather than funds. With an array of 10 strategies, it provides tremendous diversification at a decent price tag of 0.46%. Management adjusts allocation to assets around a target mix of 40% stocks, 40% bonds, and 20% cash. The fund doesn't stray dramatically from that mix. At the end of June, it was 43% equities, 40% bonds, 16% cash, and 2% other.
Three of the fund strategies in this fund have a Silver rating: T. Rowe Price Blue Chip Growth
, T. Rowe Price Small-Cap Stock
, and T. Rowe Price High-Yield
. Four are rated Bronze, two are Neutral, and one is not rated.
Vanguard Tax-Managed Balanced
I'm amazed that the concept of a balanced fund where the bond portfolio is munis hasn't caught on more. Anyway, this trailblazer is still a great gem. Vanguard Tax-Managed Balanced has a little more than half its assets in munis, and the rest in a passively managed U.S. equity sleeve. Today munis look at least relatively attractive when compared with Treasuries, so why not? The fund has never paid out a capital gains distribution, and it costs just 0.12%. This is a rare case of a very successful Vanguard fund that somehow hasn't been noticed by investors.
Vanguard Wellesley Income
This fund, on the other hand, is no secret, at $34 billion in assets under management. It's on pace to beat its peers for the ninth calendar year out of the past 10 thanks to good management, a sound strategy, and a 0.25% expense ratio. This comes despite the fact that rising interest rates are a challenge for a fund with a long duration on the bond side. The fund typically holds about 60% of assets in high-quality long-term debt, so it's pretty well protected from credit risk but not so interest-rate risk.
As its track record shows, this fund has been a dependable vehicle under John Keogh and W. Michael Reckmeyer III of Wellington. Reckmeyer manages the equity side in a dividend-oriented large-value style with a contrarian streak. Keogh taps Wellington's strong team of credit analysts to find attractive corporate bonds. The fund has outperformed peers handily over the past 15 years as well as the past five, which coincides with the current managers' tenure.
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