Four domestic hybrids with quite good records

Something for the bold, the conservative, even the miser

Dollars & Sense

March 03, 2002|By William Samuel Rocco | William Samuel Rocco,MORNINGSTAR.COM

Domestic-hybrid funds are looking good these days. They handily outgained the S&P 500 index in both 2000 and 2001. Moreover, while these offerings haven't kept pace with the index over the long term, they've earned a solid 9 percent per year over the past decade and suffered relatively limited volatility along the way. Domestic-hybrid funds have a 10-year standard deviation of 10, in fact, whereas the S&P 500 index has a 10-year standard deviation of 16.

Of course, the best domestic-hybrid offerings have even better records. More and more investors are likely to become interested in these funds - and their sturdy risk/reward profiles - if, as many believe, we're entering a period of more-normalized investment returns.

We've identified four domestic-hybrid funds we believe are particularly compelling: Oppenheimer Quest Balanced Value, Van Kampen Equity Income, American Balanced Fund and Vanguard Tax Managed Balanced.

Oppenheimer Quest Balanced Value: This fund is the boldest of our four near-picks. Manager Colin Glinsman, who has been in charge here since late 1992, typically holds less than 40 equities, readily takes sizable positions in individual stocks and sectors, and consistently is flexible about the credit quality of his bonds. But the fund has been significantly less volatile than the S&P 500 index; its 10-year standard deviation is just 12. More important, it has gained 14.3 percent per annum over the past decade - the best in the category and significantly better than the S&P 500 index - as Glinsman's security calls have usually been on the mark.

Van Kampen Equity Income: This fund isn't too daring, but it's certainly no wallflower. Lead manager Jim Gilligan, who has run this fund for more than a decade, isn't afraid to overweight equities while searching for stocks with improving earnings and reasonable prices. He also devotes a good portion of his fixed-income stake to converts. Thus far, he has deftly executed this moderately aggressive approach. The fund has returned 13.8 percent per year over the last 10 years - second best in the domestic-hybrid group and a bit more than the S&P 500 index.

American Balanced Fund: This fund is an excellent choice for conservative investors. Its savvy management team keeps the asset mix steady and straightforward, with 55 percent in equities, 30 percent in debt and the rest in cash. Moreover, it favors attractively priced blue chips on the stock side and top-quality credits on the bonds side. And the team has taken advantage of this moderate strategy to produce some of the best long-term returns in the category while keeping volatility quite low.

A relatively hefty yield and a fetching expense ratio add to its appeal.

Vanguard Tax Managed Balanced: Misers will be happy here. It invests its fixed-income assets, which make up about half of assets, in municipal bonds. It devotes the rest to stocks that reflect the Russell 1000 index, while favoring those with low dividend yields.

The end result is a broad-based portfolio of more than 500 securities that delivers solid pretax returns and terrific post-tax results. A minuscule expense ratio of just 20 basis points is an added plus.

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