Allocation funds offer a break from trendy industry offerings. Our screen looks at these one-stop options for stock and bond exposures.
This article originally appeared in the October/November 2013 issue of MorningstarAdvisor magazine. To subscribe, please call 1-800-384-4000.
With so much attention paid to selecting the right stock or bond fund, investors often seem to give short shrift to the humble allocation fund. These funds, formerly called balanced funds in the Morningstar lexicon, hold significant allocations to both stocks and bonds. Furthermore, they can act as a one-stop option for investors looking for a single investment vehicle to provide some of the return potential of stocks with some of the diversification and volatility-reducing qualities of bonds. (Of course, that bond exposure also brings with it interest-rate exposure, which could weigh on allocation fund performance if rates continue to rise.)
Morningstar groups allocation funds into conservative (20% to 50% equity exposure), moderate (50% to 70% equity), and aggressive (70% to 90% equity) categories. The biggest of these categories is moderate allocation, with more than 250 funds available.
Given some of the uncertainty in the market right now we thought it made sense to construct a screen that shined a spotlight on moderate-allocation funds. After all, these types of allocation funds are designed to provide some of the performance upside of stocks with some of the downside protection of bonds. We conducted the screen in September using Morningstar Office.
Morningstar Category = Moderate Allocation
And Total Ret Annlzd 5 Yr >= 7.6
First, we highlighted funds that have performed well through the ups and downs of the past five years. As a benchmark for moderate-allocation fund performance, we used Gold-rated Vanguard Balanced Index VBINX, which invests about 60% of its assets in a cap-weighted index of nearly all U.S. stocks while holding about 40% in the Barclays Aggregate Bond Index, a common fixed-income benchmark. The Vanguard fund has returned an annualized 7.6% the past five years through Sept. 4. Funds that made our cut had to meet or exceed that mark. For the sake of comparison, during that time the S&P 500 has returned 8.4% annually, while the Barclays Aggregate Bond Index has returned 3.7% per year.
And Morningstar Analyst Rating >= Silver
And Oldest Share Class = Yes
And Closed to New Investment = No
We then looked for funds that carried at least a Silver Morningstar Analyst Rating. This ensures that funds on the list have quality managers, reasonable fees and a parent firm that is a decent steward of capital. We used the Oldest Share Class data point to weed out duplicate share classes and limited the screen to funds that were accepting new money from investors. Below is a sampling of the funds that popped up on the screen.