Balanced funds become popular again A way to reduce exposure to stocks

Mutual funds

March 08, 1998|By Liz Pulliam | Liz Pulliam,ORANGE COUNTY REGISTER

The training wheels have fallen off balanced funds.

For years, many financial planners and investors derided funds that combined stock and bond investments as suitable only for beginners -- if then. High fees and lackluster performance turned off others who might have liked balanced funds' convenience.

Net purchases of balanced funds dropped from $14 billion in 1993 to $1.8 billion in 1995. By contrast, purchases of growth-stock funds bloomed from $21.4 billion to $37 billion.

Since then, however, balanced funds have staged a comeback -- thanks to a volatile stock market and investors' reassessments of their usefulness.

Balanced-fund purchases nearly tripled in 1996 while stock-fund purchases rose 73 percent, according to Investment Company Institute figures. 1997 looks to be another strong year, with balanced-fund purchases through October already topping $7.4 billion.

"Many people are touting balanced funds as being a good way to pull back from too much [stock market] exposure," said John Collins, institute spokesman.

Mutual fund experts say balanced funds give investors some of the best of two worlds: stocks for inflation-beating returns and bonds to limit losses when stocks falter.

Balanced funds typically tip the scales toward stocks, with 60 percent in equities and 40 percent in bonds.

"Balanced funds make fine portfolios or bases for portfolios," said Don Phillips, president of Chicago's Morningstar Inc. mutual fund research company. "They work especially well for smaller accounts, such as an initial IRA purchase, since they provide instant diversification."

Because of their bond investments, balanced funds tend to hold up better in bad markets than pure stock funds. The average domestic stock fund lost nearly 6 percent in 1990, compared with balanced funds' drop of less than 1 percent.

"A good balanced fund is ideal for an investor who wants to sleep at night," said Don Wilkinson of Newport Beach's United Planners' Financial Services of America.

Only when stocks and bonds turn bad at the same time -- as they did in the rising interest rate market of 1994 -- do balanced funds suffer worse; they dropped 3 percent compared with stock funds' 1.3 percent loss.

Balanced funds also trail stock funds in booming markets. Over the past three years, balanced funds returned nearly 19 percent annually -- a respectable performance, but nearly 12 percentage points behind the Standard & Poor's 500 stock index over the same period.

Robert Wacker, a fee-only planner in San Luis Obispo, Calif., says he recommends balanced funds for three types of clients: the timid, the harried and the stubborn.

Fearful investors or those new to the stock market can benefit from a balanced fund's relatively tame ride.

Harried clients like the simplicity of a single fund handling both stock and bond investments, Wacker said. That relieves them of the annual task of buying and selling to rebalance their portfolio.

Balanced funds also help Wacker deal with stubborn clients who judge investments based only on their recent returns, rather than against their peers, Wacker said.

These clients turn deaf ears to Wacker's advice about the importance of diversification and how some asset classes will rise when others fall.

"If interest rates rise, they will think their bond funds are bad

investments," Wacker said. "If stocks drop, they will think their stock funds are bad investments.

The "forced marriage" of a balanced fund prevents them from singling out their stock and bond investments and overreacting to market moves, Wacker said.

Balanced funds have their drawbacks. The fund manager, rather than the investor, decides how to allocate money among stocks, bonds and cash. That makes it harder for investors to customize their portfolios if they want more or less stock exposure than the fund gives them.

"Most sophisticated investors who have enough assets to invest in three or more funds -- perhaps $50,000 or more -- can do better handling their own asset allocation," said Sheldon Jacobs of the No-Load Fund Investor. "If you do it yourself, you'll know exactly what you have [and] you will have greater flexibility in both your equity and fixed-income selections."

Victoria F. Collins of Keller, Coad & Collins in Irvine, Calif., finds balanced funds work best for small conservative accounts. But wealthier clients discover that few fund managers are expert in picking both stocks and bonds, and want better performance.

"We would rather create our own balanced funds by putting the best bond manager together with the best equity manager," Collins said.

A comparison of average returns tells the tale. The average balanced fund returned 17.36 percent through Nov. 30. Someone who put together his or her own portfolio, with 60 percent in the average large-company stock fund and 40 percent in a typical intermediate bond fund, would have earned 18.6 percent, according to Morningstar figures.

The do-it-yourselfer would have also paid less. The average balanced fund charged a whopping 1.4 percent of assets, while the homemade portfolio would cost less than 1 percent a year.

The best balanced funds, however, offer much better-than-average returns at a low cost, the experts said.

Pub Date: 3/08/98

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.