Russel Kinnel is director of manager research for Morningstar and editor of Morningstar® FundInvestor℠, a monthly newsletter.
The move reflects the growth in allocation funds and, in particular, funds of funds. A fund of funds with 85% equity can behave rather differently than a large-blend fund with 85% equity plus some bonds and cash, because the fund of funds may have multiple equity strategies, including foreign equity, thus covering a much wider swath of the market.
We opted for names that used the percentage of equity rather than words like "moderate" or "conservative" because equity risk is only one form of risk. Quite a few income-oriented funds in the old conservative-allocation group took on a lot of credit risk in order to boost their yield. So they may be conservative with regard to equity risk, but their overall profile may be fairly risky.
We also wanted to carve up the categories into more-narrow bands because that will make the ratings and relative performance rankings more meaningful. Ideally, they reflect skill rather than a set bias toward one end of the allocation spectrum.
A couple of weeks ago, I looked at the most equity-heavy allocation categories
, so today I'll look at some of the best in the 50% to 70% equity group.
Picks of the Crop
Mairs & Power Balanced
maintains the classic 60/40 balanced fund profile. It has little overseas exposure as its emphasis is on U.S. blue-chip dividend-payers and high-quality bonds. Its 10-year downside-capture ratio versus a 60/40 benchmark is 94% because the fund's equities are fairly defensive.
likewise has a 60/40 setup, but it has a 108% downside capture, indicating it has lost more than the benchmark in down periods. The fund invests only in Vanguard's actively managed funds. A 20% foreign weighting is part of the reason for the high downside-capture ratio.
Vanguard Balanced Index
is the simplest fund profiled here. The fund, which has a Morningstar Analyst Rating of Gold, has a set 60/40 asset mix that doesn't change. The equities track a U.S. total stock market index, and the bond side follows the Barclays U.S. Aggregate Float Adjusted Bond Index, which gives it an investment-grade portfolio.
T. Rowe Price Capital Appreciation
has been an extraordinary achiever under David Giroux. The Gold-rated fund is closed to new investors, but those in it have done well. Giroux has a fair amount of latitude with regard to asset-class exposure. He spreads investments around equities, convertibles, high yield, cash, investment-grade bonds, and bank loans. His biggest value add, though, has been in selecting quality companies.
T. Rowe Price Balanced
has a higher downside capture (113%) than the funds above because it has a little more in equities and foreign securities. Its neutral positioning is 65% stocks and 35% bonds. This fund, too, spreads out assets among an array of strategies including T. Rowe Price High Yield
, T. Rowe Price Overseas Stock
, and T. Rowe Price Blue Chip Growth
American Funds American Balanced
is a nice low-cost, straightforward balanced fund. The Silver-rated fund charges its equity managers with delivering a yield above the S&P 500's. On the bond side, the sleeve is run relatively cautiously with Treasuries, mortgages, and corporates.
Gold-rated Dodge & Cox Balanced
is one of my favorites. It mixes a value equity portfolio with a corporate-bond-heavy fixed-income portfolio to deliver a great package at low costs. True, that value bias stung in 2008 and 2009, when some bank stocks got crushed, but the fund's long-term results, low costs, and strong stewardship make it a great place to invest.
Silver-rated Oakmark Equity & Income
has had only middling results since Ed Studzinski retired in late 2011, but it has a lot going for it. Clyde McGregor is an excellent investor. He was joined by Colin Hudson and Edward Wojciechowski in 2013. The basic strategy is to pair a focused-value equity portfolio with a low-risk government-bond portfolio. That bond sleeve is largely there for defense, and McGregor hasn't really taken much risk at any point with it.
has a low downside-capture ratio of 83% because of Steve Romick's focus on playing defense. Most of the fund's nonequity exposure is in the form of cash, as Romick likes the ballast it provides as well as the dry powder for a market downturn. Romick's focus is on absolute returns and avoiding a permanent loss, so he looks for stocks with big margins of safety.
is the mirror image of Vanguard Wellesley Income
. It's also managed by Wellington Asset Management, but it has about two thirds in equities. With low costs and strong management, it's pretty clear why this fund is rated Gold.