Bond half of balanced fund needs quality management

A look at 4 portfolios each in capable hands

Dollars & Sense

August 25, 2002|By Russel Kinnel | Russel Kinnel,MORNINGSTAR.COM

Do you know who manages the bond half of your balanced fund? Are you disappointed by your balanced fund's performance? If you answered "no" to the first question, you probably said "yes" to the second.

Fund investors usually spend more time researching the stock part of their portfolio than the bond part. If you do that, though, you'll miss some of the protection that a well-structured bond portfolio can provide in a down market.

Generally, the bond half of a balanced fund will be managed in a similar fashion to a bond fund run by the same manager. Check out the record for the bond fund and you'll have a good idea of whether you've got a skilled manager picking bonds for you.

Our fund analyses also provide guidance on the quality of management. Some fund companies are hoping you won't do this, though, because they don't have the expertise to run fixed-income funds. I asked our analysts for some of their favorite bond managers in domestic hybrid funds. Here are their picks.

Scudder Pathway Conservative (SUCAX): This fund of funds got a big upgrade when the team that runs Deutsche Fixed Income was given the reins at Scudder Income. The team took home the Morningstar Fixed-Income Manager of the Year award in 1997, and it has continued to provide good performance.

The group avoids big interest-rate bets while focusing on issue selection. This fund isn't a slam dunk, though. While the bond side has gotten a big upgrade, the stock funds are a mixed bag.

Fidelity Balanced (FBALX): Like the Deutsche team, Fidelity's bond managers avoid big macro bets. They let issue selection and Fidelity's modest expenses take care of outperformance. Kevin Grant, who handles bond selection here, has done a bang-up job at Fidelity Investment Grade Bond.

The nice thing about this fund's bond portfolio is it's highly unlikely you'll get a nasty surprise because it's structured so conservatively. In fact, Fidelity Balanced has held up a little better than most during the bear market. The only disappointment here is that former stock manager Robert Ewing bolted for AXP in February. I'd expect his replacement, Larry Rakers, to do a respectable job.

Vanguard Wellesley Income (VWINX) and Vanguard Wellington (VWELX): Both funds are managed by Wellington Management Company, though they have different managers. Wellesley has a larger bond stake than Wellington.

Both funds have shifted to more conservative bond positioning, and that's a good thing with interest rates so low. When you have Vanguard's low costs to begin with, there's no need to take big chances. Paul Kaplan and Earl McEvoy do a fine job at Wellington and Wellesley, respectively.

Dodge & Cox Balanced (DODBX): Regular readers have seen me rave about the joys of Dodge & Cox Income (DODIX), and Balanced has the same team running its bond portfolio. The management team is deep, skilled and cautious.

That's made Dodge & Cox Income about the most dependable bond fund around. Every month it beats the competition by a modest amount, and those modest amounts add up over time.

That shows up in Dodge & Cox Balanced's returns, too. It ranks in the top 10 percent of its category over the trailing three-, five- and 10-year periods.

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