6 funds that let you sleep at night
Portfolios that combine stocks and bonds provide a smoother ride without sacrificing returns.
(Fortune Magazine) -- If the stock markets' wild swings have been making you nervous, it might be time to consider an asset-allocation fund. These hybrids mix stocks, bonds, and cash in parachute portfolios designed to catch wind in boom times and to cushion against sharp drops.
To find the best, we asked Morningstar to examine the returns of allocation funds with more than $100 million in assets and a track record of at least 15 years. We looked at how each fund fared in a series of three-year periods ending each month over that 15-year span, and we focused on the ones that consistently landed in the top quartile of their peers.
To further pare the list, we excluded funds with any showings in the bottom quarter. We also considered the funds' volatility (measured by standard deviation) and expense ratios in coming up with the six strong, steady performers that delivered both profits and peace of mind. For example, in 2002, when the S&P 500 index fell a staggering 22%, the funds we selected had losses ranging from 3% to 10%. But that relative stability hasn't come at the expense of long-term gains. Over the past 15 years (through March 31), they have nearly matched or topped the 9.5% annualized return of the S&P 500. The six standout funds are profiled below, in order of their 15-year annualized returns.
"Our goal is equity-like returns on the upside but not the downside," says co-manager Nick Calamos, who has run the fund with his uncle John Calamos Sr. since 1988. The managers augment the traditional stock-and-bond mix with a big chunk of convertible securities, now 40% of assets, for an extra layer of diversification that helps mitigate risk and boost performance. Fixed income is about 8% of the fund, while common stocks make up roughly half the portfolio. Calamos (CVTRX) is bullish on large-cap growth stocks, especially companies that do a lot of business in developing markets.
This time-tested fund has just reopened its doors to new investors, amid an uncharacteristic period of poor performance that led to shareholder redemptions. Holdings like Citigroup stock and GMAC bonds were trounced in the subprime meltdown, and big bets on Motorola and Wachovia continue to disappoint. But Morningstar analyst Dan Culloton sees a great buying opportunity for a fund (DODBX) whose basic value-oriented strategy, low turnover, and low costs recommend it as a solid long-term investment. "I have a lot of faith that they're putting the portfolio in position to do well in the future," says Culloton.
In the fund world, Wellington has long been shorthand for steadfast. Its cautious style dates back to 1929 - the fund began operations just months before the stock market crash - and boils down to a broadly diversified portfolio of stocks and high-quality corporate bonds. True to form, Wellington (VWELX) kept its balance during last year's market swings to outperform 78% of its peers in 2007, according to Morningstar, thanks in part to co-manager Ed Bousa's early decision to reduce his holdings of financial stocks.
Westwood Holdings Group founder Susan Byrne says she and co-manager Mark Freeman run this fund (WEBAX) with jittery investors in mind, and its performance goes a long way to soothe frayed nerves. "You're investing in the manager here, and Susan Byrne brings a long, consistent track record as a very timely stock picker," says Morningstar analyst Andy Gogerty. Byrne's value-oriented style, with a focus on large multinationals, helps drive the fund's performance, while Freeman's bond portfolio provides income and stability.
Now there's a way to own this fund for less: Byrne and Freeman's two-year-old WHG Balanced fund clones this portfolio but has lower annual expenses (1% vs. 1.27%) and can be bought through a fund supermarket like Schwab's or Fidelity's.
This fund of funds delivers broad diversification at a low cost. It holds stakes in 11 actively managed Vanguard bond, domestic stock, and foreign stock funds, including standouts like Windsor and Primecap. "It's a great one-stop fund for someone who wants to keep their portfolio simple," says Morningstar analyst Bill Rocco. With no additional layer of fees, Vanguard STAR (VGSTX) also boasts an expense ratio of just 0.32%.
The only socially screened fund that made our list, Pax World Balanced (PAXWX) offers investors a second reason for a sound night's sleep. (A third is its low cost of entry: $250.) Manager Chris Brown, who succeeded his father in 1998, is a growth investor, with 72% of the fund in stocks. He also looks abroad for top performers like Aracruz Celulose, a Brazilian pulp producer. He uses his conservative fixed-income portfolio, mostly shorter-term government agency and high-quality corporate bonds, as the fund's shock absorber.