If you believe a mutual fund could help you to achieve your long-term financial goals and if at last you have the money to begin investing in one, are you putting it off because of talk that stock prices are due for a correction from their near-record levels?
Alternatively, if you are a few years from retirement and are invested in equity funds that live up to your expectations, does such talk make you want to reduce your exposure to the stock market now -- while continuing to aim for a decent return and inflation protection?
In either case, you may wish to consider gradually investing in, or switching to, a balanced fund.
Balanced funds generally invest in both common stocks and bonds to achieve three investment objectives -- conserve principal, pay current income, and increase both principal and income -- while being less subject to stock market risk than funds only invested in stocks.
The Securities and Exchange Commission requires funds purporting to be "balanced" to maintain at least 25 percent of their assets in bonds and preferred stocks. Some may actually go to 40 percent.
When the stock market is hot, balanced funds run behind more aggressive equity funds, as you would expect. But when stocks are down, balanced funds typically fall less because of their bond cushions.
Over periods as long as five or 10 years that have included both up and down markets, leading balanced funds have performed as well as broad stock price indexes such as the Standard & Poor's 500, -- if not as well as leading all-stock funds. Yet, they've also been less volatile.
While pursuing similar investment objectives, top balanced funds may differ in other aspects: whether to have variable or fairly constant stock-bond ratios, to emphasize growth or value stocks and large- or small-company stocks, to own bonds of low credit quality and long maturity.
As you study prospectuses and shareholder reports, you should be able to find one whose approach you feel comfortable with.
That there can be different approaches to managing balanced funds well is illustrated by Robert Haber, who follows slightly different policies in managing two of the leading performers: the Fidelity Advisor Income & Growth Portfolio, which is sold with a 4.75 percent load through securities dealers, and Fidelity Balanced Fund, a no-load fund that can be bought directly from Fidelity.
Fidelity Balanced is the more conservatively managed of the two. Its "normal" stock-bond ratio is 60-40 vs. 70-30 for Income & Growth. While Haber favors dividend-paying value stocks for both, Fidelity Balanced tends to be invested in stocks of larger companies because, with assets of $1.2 billion, it's five times as large. Moreover, Fidelity Balanced is only permitted to own investment grade bonds; Income & Growth can -- and does -- own junk bonds.
Since November 1990, Haber has reduced the equity allocations of both funds from their "normal" levels to 30 percent for Fidelity Balanced and 40 percent for Income & Growth.
"There's little absolute value in the U.S. equity market," he says, comparing today's stock prices with book values and earnings. "U.S. bonds are relatively more attractive."
Pax World Fund, a social responsibility fund organized in 1970, invests in "life-supportive goods and services" and is not permitted to invest in companies involved in military weapons, liquor, tobacco products and gambling. These limits have not kept Anthony S. Brown, portfolio manager since its inception, from scoring high returns.
Having started 1992 with equities at 50 percent, Brown is back at his norm of 70 percent. He established or added to positions in food and health care stocks that had gone down by 20 percent or so: companies such as Merck, Syntex, General Mills, Quaker Data, Campbell Soup, and Heinz. "At these levels," he says, "the downside risk is minor."
For his bond allocation, Brown uses federal agency securities. He avoids U.S. Treasury obligations because proceeds from their sales may be used for military spending.
Patricia A. Bannan, who has emphasized growth stocks in the six years that she has managed Phoenix Balanced Fund, also was at 50 percent in stocks at the start of the year, but today they account for only about 40 percent of its assets. (Her norm: 65 percent.)
"We're a little nervous about the market," she says, referring to high valuations. "Earnings estimates have been adjusted upward too quickly." Having 23 percent in low-yielding cash reserves, she's "looking for an opportunity to get back in."
For bonds, Ms. Bannan leans primarily on Treasuries: "I'm unwilling to take a lot of risk in the fixed income portion."
C. Beth Cotner, manager of Kemper Investment Portfolios' Total Return Portfolio, is also a growth stock player, but she is almost fully invested, having only 6 percent cash. Her top holding: Philip Morris, accounting for 3.4 percent of the portfolio.
Managing for total return, she picks many stocks that don't pay dividends but that have growth potential. This strategy, combined with the fund's 0.75 percent 12b-1 fee, holds down its dividend distribution rate.