Hang On to These Allocation Funds in Outflows

It’s been a tough time for allocation funds. They’ve lost market share as investors have gravitated to one-stop options such as target-date strategies, and in 2022, both U.S. stocks and investment-grade bonds (which dominate many of these portfolios) posted double-digit losses. As a result, investors have pulled money out of allocation funds at a greater pace. But it’s rare for both asset classes to suffer at the same time, so don’t give up on good allocation offerings. Below we take a closer look at some proven funds that have been hit the hardest by redemptions.

Vanguard Wellington VWENX and Vanguard Wellesley Income VWIAX are rock-solid in many respects: Both have delivered superior long-term returns while limiting both valuation and credit risk. Nevertheless, Wellington and Wellesley Income suffered $8.3 billion and $6.7 billion in net outflows, respectively, in the 12 months ended September 2023.

Both funds have seen manager retirements in recent years, but the current leaders still inspire confidence. Loren Moran has been the sole fixed-income manager on both funds for just two years, but she’s been a named manager on the funds for more than six years and has more than 20 years of investment experience. Moran has also maintained her predecessors’ strategy of boosting yield through an emphasis on investment-grade corporate bonds. At Vanguard Wellington, Daniel Pozen took the reins of the equity portfolio in 2020 and reduced a long-standing tilt to value stocks to put the focus on stock selection; results have been strong thus far. Matthew Hand just became the sole equity manager of Wellesley Income in June 2022, but he worked alongside predecessor Michael Reckmeyer for two decades, so he knows the investment process (which emphasizes quality and dividends) quite well.

Yield-seeking funds such as American Funds Income Fund of America AMECX fared better than many allocation peers in 2022, as many (including this one) invest substantial slices of their portfolios in value stocks and high-yield bonds, which lost less than growth stocks and investment-grade debt, respectively, as interest rates soared. Indeed, this fund held up better than 90% of its moderately aggressive allocation Morningstar Category peers in 2022. Yet the fund saw a net $5.7 billion in redemptions in the 12 months through September 2023.

Although the fund has seen a few recent manager retirements, a veteran crew still steers the portfolio: The nine managers average 10.9 years of tenure on the fund. The managers run their own sleeves of stocks or bonds, and though their investment styles vary somewhat, the fund has continued to deliver significant yield (3.4% for the A shares after fees in the 12 months ended September 2023) as well as attractive long-term risk-adjusted returns. And with rates higher now, the fund may be able to generate a solid yield while taking less credit risk in the future.

Fidelity Puritan FPURX is a traditional balanced fund that has continued to generate steady returns since Dan Kelley took over as lead manager in 2018. But investors have headed for the exits, yanking a net $3.1 billion from the fund in the 12 months through September and $12.2 billion over the trailing five years. The fund did stumble in 2022, losing more than 85% of its moderate-allocation peers. But that’s not a surprise in that market environment, given the fund’s long-standing tilt to growth stocks and heavy dose of investment-grade bonds. The investment process here doesn’t stand out. Kelley determines the asset mix (the neutral weighting is 60% stocks/40% bonds) and selects the stocks, while the firm’s fixed-income team runs distinct investment-grade and high-yield sleeves. But Kelley is a proven stock-picker, and Fidelity’s fixed-income team is well-resourced and accomplished.

This article first appeared in the September 2023 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting this website.