Sophisticated investors often pooh-pooh one-stop investments such as balanced funds or any of the offerings that land in Morningstar's conservative-, moderate-, or world-allocation categories. They view such funds, which include varying mixes of stocks and bonds, as starter investments that don't befit investors who already have other holdings in their portfolios.
Many seasoned investors also want to maintain fairly tight control over their portfolios' asset allocations, so they avoid these one-stop investments because they're concerned that the funds will cause their asset allocation to swing wildly from one asset class to the next.
Finally, many all-in-one funds have brought a bad rap upon themselves. Too many of these offerings aren't well-conceived but instead consist of a stock fund soldered together with a bond fund, without a lot of attention to how the pieces fit together. It's also worth noting that not many shops field topnotch stock and bond managers, leaving them short of the raw material needed for a worthwhile all-in-one fund.
The Case for All-in-One Investments
I'll admit that it's not a disaster if investors downplay these funds when putting together their portfolios, or even avoid them altogether. Many funds in this category aren't all that hot. Yet there are a few key reasons why you shouldn't dismiss them out of hand.
The first is simplicity, one of the greatest--but in my view, woefully underrated--virtues when managing a portfolio. Whether you're a 50-year-old saving for retirement or a 35-year-old saving for your 10-year-old's college fund, it's hard to go too far wrong with a no-nonsense hybrid fund such as Vanguard Balanced Index (VBINX). Yes, you may be able to calibrate your own portfolio of individual investments that adheres to a tightly controlled, age-appropriate asset mix. But that will require a lot more work at the outset--and more ongoing oversight--than if you simply opted for an all-in-one fund.
Those who avoid all-in-one/allocation funds because they want to retain more control over their stock/bond mixes have a point. If you've gone to the trouble of creating an asset-allocation framework and staying on track via a rebalancing plan, it can be annoying when your overall mix gets thrown off course because of a portfolio manager's jockeying.
But if that's a key concern for you, I'd say you're better off sticking entirely with index funds or exchange-traded funds and avoiding actively managed investments altogether. Because once a portfolio includes active funds, it's going to be difficult to maintain very tight control over its stock/bond/cash weightings. Even stock- or bond-only managers usually hold some cash. That means that you're going to have to put up with asset-class slippage from time to time, and you're also going to have to use a tool like Morningstar's Instant X-Ray to get your arms around your total stock/bond/cash mix. (As a side note, the asset allocations of many all-in-one funds--especially so-called "balanced" funds--don't drift around all that much from year to year, so asset-allocation devotees may be overestimating the havoc such offerings might wreak on their portfolios.)
Finally--and I'd say this is the key reason why it's a mistake to avoid all-in-one allocation funds--flexibility can be an important advantage for talented managers who choose to take advantage of it. In a column last April, I noodled on what constitutes a core holding, and Morningstar.com users chimed in with their own take on this topic. The mother of all core investments, as one poster argued, is one that has the freedom to go wherever opportunities beckon.
Although the past few decades have brought an increased interest in style purity, resulting in the slicing and dicing of the investment universe into ever-smaller segments, some of the world's greatest investors are grazers. They pay no attention to whether their portfolios stay focused on a single square of the style box, but instead go where the opportunities are, whether in stocks or bonds, cash or convertibles. To the extent that such managers run mutual funds, their funds will land in our conservative-, moderate-, or world-allocation categories. Among Morningstar's favorite funds of this ilk are FPA Crescent (FPACX), BlackRock Global Allocation (MDLOX), First Eagle Global (SGENX), and Vanguard Asset Allocation VAAPX. Dodge & Cox Balanced (DODBX), though it doesn't make dramatic shifts among asset classes, offers another spin on the flexible idea: The same analysts cover each company across the capital structure, giving the fund leeway to scoop up the most attractive opportunity at a given firm, whether it comes in stock or bond form.
A version of this article appeared May 3, 2010.
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Christine Benz does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.