There's no actual pot of gold at the end of James Balanced: Golden Rainbow, but long-term investors aren't seeing their money disappear, either.
This article first appeared in the February/March 2011 issue of Morningstar Advisor magazine. Get your free subscription here.
There is good reason why James Balanced: Golden Rainbow
It's worth the trek. The fund is in the top decile of the conservative-allocation category over the trailing five-, 10-, and 15-year time periods. And although it has performed well in down markets--typical of balanced funds--it has also done a solid job of keeping up with the market during rallies. The fund captured just 48% of the market's losses the past decade, while capturing 73% of its upside. By comparison, the fund's peer group captured 67% of the downside and 68% of the market's gains during that time period.
Over the past decade, "you saw funds that hit their peaks, and then they got crushed," says Bob Feighan, an advisor with Ameriprise, based in Westchester County, N.Y. "I am not looking to outperform the market with this fund, but I am also not looking to lose my clients' principal."
Small-Cap Momentum Tilt
A look under the hood of the fund explains that track record. It typically keeps 50% of its assets in high-quality bonds--nothing surprising there. But on the equity side, the fund invests almost 60% of its assets in small- and mid-cap stocks; the category average for those types of securities is 25%. (It's had a similar stance for most of its 20-year history.) The average holding's market cap is $7.3 billion, one fourth the category average. That has put this fund in two of the sweet spots of the past decade--bonds and small-cap stocks.
The roots of that positioning can be traced back to a 40-year-old Ph.D. dissertation thaat Frank James, the patriarch of this family-run fund shop, wrote while at Rensselaer Polytechnic Institute in Troy, N.Y. Boiled down, his paper surmised that stocks that were hitting their highs, especially small caps, had a good chance of heading higher--what investors now call a momentum strategy or relative strength. That thinking was contrary to a book that was getting buzz in 1973, Burton Malkiel's A Random Walk Down Wall Street. Malkiel argued that trying to outperform the market over the long haul was futile because asset prices behaved in random, unpredictable patterns. The book helped kick-start the index investment movement.
Undaunted, James moved his family to Ohio to take a teaching job and on the side ran money for a few local doctors out of his house. But the mid-1970s' bear market gave him a rude awakening, so he tweaked his strategy to include risk and valuation measures. That helped him land a trust account run by a local savings and loan firm, whose logo was a golden rainbow. When the S&L went public in the 1980s, it sold off the product to James, who kept the Golden Rainbow moniker. James launched the retail version of the fund in 1991 and later offered market- neutral and small-, mid-, and micro-cap offerings. James Advantage Funds now manages just more than $1 billion in retail assets, and Golden Rainbow remains the flagship fund.
Almost 20 years after its launch, the fund has returned an average annual 8.5%, 2 points ahead of the category average.