A reader gets us thinking about quirky allocation funds.
The best ideas often come from our readers. Two weeks ago, reader David M. sent feedback on my coverage of Manning & Napier Pro-Blend Moderate Term EXBAX. We swapped e-mails about that fund and other favored allocation funds. David noted that many of the funds on our mutual short list were quirky allocation funds from obscure boutique shops that investors should be reminded about. He said I should write an article about them. He even gave me the title. So, hat tip to him, and here we go.
Once Bitten . . .
It's natural: Get burned bad enough and you start avoiding the stove. That's what has happened to some equity fund investors since 2008's brutal market. They were scorched and have sold their stock funds and piled into Treasuries, CDs, and money markets. But if you have a long time horizon, you need some stock exposure or, at least, exposure to securities with the potential to post equitylike returns.
And even those who discovered the hard way that they had too much money in stocks shouldn't completely withdraw from them. It may be impossible to make back your nest egg over time if you don't keep at least some riskier, but potentially higher-returning, asset classes in your portfolio mix.
Allocation funds can fill the gap. The classic balanced fund kept a 60%/40% mix of stocks and bonds. The former was anchored in blue-chip stocks, and the latter portion was in Treasuries and the highest-quality corporate debt. Fine examples of the classic format still exist.
Breaking the Mold . . .
But there's a different breed of more-flexible offerings that have proved their mettle over the long haul. They go further afield, own a variety of more-esoteric securities, and often drastically adjust their asset allocations. The best have hit the sweet spot of equitylike returns--or better--with considerably less volatility than stocks. They're worth a look for all investors.
Berwyn Income BERIX
This conservative-allocation fund keeps its equity exposure to less than 30% of assets, yet it has returned an average of 8.6% annually since its 1987 inception. Its managers are experienced and have a record of strong stock-picking across the market-cap spectrum, focusing on dividend-paying stocks. They're no slouches on the bond side either, excelling with their picks in corporate and high-yield debt and convertible bonds. The fund is dirt-cheap and nimble. It deserves more attention.
Manager Chip Carlson has done a great job over 20+ years at this distinct moderate-allocation fund. He buys a mix of small-cap value stocks, high-yield debt, and convertible bonds. He has a knack for busted converts--bonds where the option to convert to an equity position is worthless because of a depreciated stock price. This fund hits the occasional pothole, but, considering its sterling long-term risk/reward profile, it's amazing that it has only $400 million in assets. The fund's expense ratio has held steady at 1.06% for years. Not the cheapest, but reasonable considering the fund's tiny asset base. Check it out.
Calamos Growth & Income CVTRX
This one's quite a bit riskier than the typical moderate-allocation fund. Managers John and Nick Calamos invest in convertible bonds and equities. Not surprisingly, this Fund Analyst Pick got whacked harder than its more conservative category rivals in 2008's brutal equity market. But it's on the mend, and its long-term record remains stellar. The fund is much more sensitive to movements in the stock market than most moderate-allocation funds, so use it accordingly.
Lord Abbett Balanced Strategy LABFX
This fund of funds has something for nearly everyone. It holds nine other Lord Abbett funds that invest in a range of securities including small-, mid-, and large-cap stocks, high-yield bonds, international stocks, a bit of convertible debt, and even some floating-rate bonds. Its fine long-term record was built under a different setup, but its constituent funds are all solid. But keep in mind that its high-yield stake gives it a more implicit equity exposure because junk bonds are economically sensitive and can be as volatile as stocks. Still, it's worth a look.
FPA Crescent FPACX
This fund is good. Manager Steve Romick has free rein to invest in stocks of all sizes, and he can take short positions as well. He moves around on the bond side, buying convertible debt, corporates, and high-yield paper. If nothing looks cheap, he'll sit on cash. Lots of it. Cash was nearly 40% of assets in early 2009 and has been higher in the past. Still, the fund has gained an average of 10.5% annually since its 1993 inception, proving that Romick knows his stuff.
We can't fully endorse this fund because, well, it doesn't do interviews. An investment here requires blind faith in management. Managers Robert and Jeffrey Bruce like to let their fund's performance speak for itself, and it does so loudly. The fund has returned an average of 14.1% annually over the past 15 years, smoking nearly every fund in our database--regardless of category. The fund isn't for the fainthearted. It aggressively manages its asset allocation and has made big forays into Treasuries and cash at times. It has also held big slugs of micro-cap stocks, high-yield debt, and convertible bonds from tiny, early-stage biotech firms. Shareholder letters are skimpy, and you only find out what this fund's doing after it's done it, which is hardly ideal. The past isn't prologue, but this fund's strong record indicates that the managers have made a risky strategy work in the past.
Michael Breen is a senior analyst with Morningstar.