The Benefits Of Balance

Funds that play both stocks and bonds might shield you in tough times

We wouldn’t be surprised if earlier this year a lot of Dow watchers were getting a bit seasick. One day the market was reaching a new high, and the next day it seemed to recoil as quickly as it had risen. On top of that kind of volatility, the buzz was less than glowingly optimistic in the investing world, centering on whether stocks were overvalued or on if and when the Federal Reserve would raise rates and put a halt to the stock market’s run.

Where do you put your money in such an environment? The mutual fund industry’s answer for jittery investors like yourself has been a type of hybrid investment called either balanced funds or asset allocation funds. The two breeds are similar: they invest in both stocks and bonds, offering the capital appreciation of the former and the secure yield of the latter. The underlying logic behind the hybrids is simple: when stocks are hot, the funds will be able to tap the trend. When stocks are shaky,investors will probably seek shelter in bonds. That’s when the bond portfolio of a balanced or asset allocation fund will steady things.

There are minor differences, though. Balanced funds typically mandate that portfolio managers keep a set mix, say 60% of their overall investment in the stock market and 40% in bonds. Asset allocation funds tend to be looser, allowing managers to roam from category to category.

Typically, a hybrid fund under good management, while not quite keeping up with the high flight of the stock market, will at least beat out indices for the bond market. In 1996, the group average return was 13.4%, almost 10 points behind the S&P 500 but still nearly 10 points above the Lehman Aggregate Bond Index for the year. In 1995, hybrids turned in a respectable 24.31% average return. Although that trailed the S&P 500 by 13 points, it exceeded the Lehman bond index by 6 percentage points.

All the same, despite the calming reassurance of names like “balanced” and “asset allocation,” there is some risk, especially as seen in years like 1994, when both stocks and bonds turned in weak performances. Some hybrid funds, like Fidelity’s Asset Manager, got clobbered, suffering a 6.6% drop in total return for the year, compared with a 1.32% gain for the S&P 500, and a 2.92% drop in the Lehman Aggregate Bond Index. On average, the group fell 3.05% that year.

That warning aside, there are a number of good hybrid funds to choose from, many with ample ability to keep up with and even surpass the stock market. In hunting for funds, we turned to Morningstar, the Chicago mutual fund rating group. Within their Principia database, BE tracked funds that turned in above-average performances over the last five years, a good long-term measure of management’s skills. We looked for funds that didn’t charge load fees when buying in or cashing out of the fund. Our criteria included an above-average showing in 1994, a year we feel was a very

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