Alluring funds in the domestic-hybrid arena

Four explored here from 30 standouts among 350 offerings

March 11, 2001|By William Samuel Rocco | William Samuel Rocco,MORNINGSTAR.COM

Domestic-hybrid funds are often thought to be for conservative retirees and other cautious investors only. It's easy to see why: Most of these offerings hold a safe mix of blue-chip stocks and plain-vanilla bonds, while providing decent but unexciting returns, a respectable amount of income and a smooth ride.

But buried in the large domestic-hybrid group (there are more than 350 offerings in the category) are 30 or so funds that should appeal to a broader audience. These funds have handily outgained the typical large-blend offering over time and suffered significantly less volatility along the way. Thus, they have what it takes to be an attractive core holding for mainstream investors. Many of these fetching domestic-hybrid funds, like a lot of their more pedestrian peers, are fairly pricey, pretty tax-inefficient or easily replicated by combining a large-blend offering with a high-quality bond fund. However, several of these top-performing domestic-hybrid funds are inexpensive, reasonably tax-efficient and cannot easily be re-created - including my four favorites:

Oakmark Equity & Income, Van Kampen Equity Income, Pax World Balanced and Janus Balanced.

Oakmark Equity & Income: This fund gained 16.7 percent per year during the five years ending Feb. 21, which is the best return of my four favorites and much better than the large-blend average of 13.7 percent.

Further, it has been about 40 percent less volatile than the typical large-blend offering. Managers Clyde McGregor and Edward Studzinski, who have had the benefit of a small asset base, have achieved this impressive risk/reward profile by combining deep-value stocks with Treasuries and high-yield bonds. While the fund's expense ratio of 1.18 percent is the most expensive of these four domestic-hybrid offerings, it is in line with the large-blend norm.

Van Kampen Equity-Income: This fund's expense ratio, at 0.82 percent, is the lowest of these four funds, and its risk/reward profile is almost as attractive as Oakmark Equity & Income's. Lead manager Jim Gilligan, who has been at the helm more than 10 years, has delivered the goods by buying issues with improving earnings and moderate valuations on the stock side and a mix of convertibles, Treasuries and corporates on the fixed-income side.

Pax World Balanced: This socially responsible fund has really impressed since Chris Brown and Robert Colin came aboard in early 1998. It has been only about half as volatile as the typical large-blend offering over the past three years while returning much more, thanks primarily to Brown and Colin's good growth-oriented stock selection. While the fund's fixed-income stake isn't quite as diverse as those of my other favorites - it's primarily agency bonds - it still wouldn't be easy to re-create this offering by combining a stock fund with a bond fund. There aren't a lot of socially responsible bond offerings, and many of them are expensive or have high minimums.

Janus Balanced: Despite its fairly new manager, I think this fund makes a good core holding for many investors. Karen Reidy worked as analyst and assistant manager at Janus for years before taking charge here, so she is well-versed in the firm's bold growth style. She keeps about half the portfolio in fast-growing stocks and divides the rest between Treasuries, high- and mid-quality corporates and converts. This approach has disappointed lately as many of the fund's tech stocks have faltered, but it has produced an average return of 16.3 percent per year over the past five years while keeping volatility below that of the average large-blend offering.

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