Balanced mutual fund may provide greater diversity, better management


March 17, 1991|By WERNER REINBERG

You have seen the data showing that over the years, on th average, it's more profitable to be invested in sound stocks -- despite their occasional plunges -- than in bonds, CDs, or other financial assets.

You also are aware that, when accumulating a nest egg, you may be better off investing in stocks indirectly through mutual funds because they provide professional management as well as greater diversification than you could realize by buying stocks on your own.

But even if you could set aside enough money to meet the low minimum requirements of a couple of funds with different investment objectives, you may prefer to invest in only one fund.

What sort of fund should it be? Consider a balanced fund.

As the prospectus for American Balanced Fund puts it, "The fund approaches the management of its investments as if they constituted the complete investment program of the prudent investor." The prospectus for Dodge & Cox Balanced Fund refers to investors finding it "suitable for their entire long-term investment program."

The notion that balanced funds could constitute a person's complete investment program arises from the fact that their investment objectives typically emphasize conservation of principal as well as growth and income. To achieve these objectives, the funds are invested substantially in bonds as well as stocks.

The SEC requires that any fund purporting to be balanced maintain at least 25 percent of its assets in fixed-income senior securities -- that is, debt securities, such as bonds and notes, and preferred stocks.

A balanced portfolio should include fixed-income securities because they make it less volatile than a portfolio invested only in common stocks. They usually also provide more income than stocks. In some years, bonds outperform stocks, providing positive total returns when stocks fall, as they did in 1990.

With investment-grade bonds recording an average annual rate oftotal return of 9.8 percent over the last five years, as measured by Salomon Brothers' index, you would expect that bond holdings would hold balanced funds' returns below those of the stock market. And, indeed, none of the 33 balanced funds monitored by Lipper Analytical Services during the period matched the 13.1 percent annual return rate of the Standard & Poor's 500 Index. A few came close, though, as the table indicates.

But when you look back 10 years, including the high bond returns of the earlier 1980s, you find that several of the more

conservatively structured portfolios performed as well as stocks while exhibiting less volatility. Of the 24 funds in Lipper's group that have been in operation for at least 10 years, seven exceeded the S&P 500's 13.9 percent annual rate.

While the SEC's definition effectively limits the stock holdings of balanced funds to 75 percent of assets, few exceed 60 percent. Some, such as the George Putnam Fund of Boston and Wellington, tend to stay with such positions, while others vary their commitment to stocks.

Important as asset allocation may be in determining fund performance, stock selection and retention also matter a great deal. Policies vary. Phoenix' Patricia Bannan, for exam

ple, focuses on growth stocks and is not reluctant to turn over her portfolio.

Funds also differ in the management of their bond portfolios. A few like to use convertible bonds, giving them a link to the stock market while providing greater income than stocks. Others avoid them.

Whatever their attitudes toward stocks or bonds, though, fund managers try to stay essentially fully invested. At the end of 1990, most of the top performers had cash positions of only 1 percent to 2 percent.

If you consider a balanced fund, be sure to keep taxes in mind along with your investment goals. Its dividends and capital gains distributions are taxable, whether you take them or reinvest them in additional shares.

Leading balanced funds

Ranked by five-year performance, 1985-1990. Excludes funds not generally available to individual investors.

Total return 1985-1990

Fund . .. .. .. .. .. .. .. .. 12- MO .. .. ..1990 .. .. ..AVG

. . . . . . . . . . . . . . .. .YIELD .. .. .. . ... .. .. Annual RATE

Phoenix Balanced Fund(4.75% load).. 4.7%.. .. .. 7.3%.. .. .. 12.7%

BCGM Mutuel (no load) .. .. .. .. ..4.3 .. .. .. 1.1.. .. .. 12.5

Dodge & Cox Balanced Fund (no load) 5.1.. .. .. 0.9.. .. .. 12.2

Mass. Financial Total Return (4.75%) 6.3.. .. ..(2.3).. .. ..11.4

Fax World (no load) .. .. .. .. .. ..4.1.. .. ..10.5.. .. .. 11.3

IDS Mutual (5%).. .. .. .. .. .. .. 6.4 .. .. ..(3.0).. .. .. 11.2

George Putnam Fund of Boston (5.75%) 5.4.. .. ..(0.9).. .. .. 11.1

Axe-Houghton Fund B (5.75%).. .. .. 6.4 .. .. .. 7.2 .. .. .. 10.9

vTC Wellington Fund (no load) .. .. .. 6.2 .. .. .. (2.8) .. .. ..10.7

Calvert Social Inv. Mgd. Growth (4.75%) 4.9 .. ..1.8 .. .. ..10.7

Standard & Poor's 500 Index .. .. .. .. 3.7.. .. (3.1).. .. ..13.1

Salomon Bros. Broad Investment

Grade Bond Index.. .. .. .. .. N.A .. .. .. ..9.1 .. .. ..9.8

SOURCES: Lipper Analytical Services, Salomon Brothers, Standard & Poor's Corp.

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