Sturdy Hybrid Funds for Shell-Shocked Investors
If you've been burned by a hefty equity stake, check out these relatively safer havens.
The free-fall in the equity markets has understandably spooked investors. The S&P 500 Index has lost 41% for the year to date through Nov. 17, 2008, and many stock funds that focus on smaller companies or non-U.S. firms have posted even bigger declines. We think this is a bad time to give up on stocks, which unfortunately is what many investors seem to be doing--mutual fund outflows have soared. For some, however, the bear market may serve as a rude awakening that their asset allocation plan was too aggressive. Those who are more risk-averse or have shorter-term savings goals in mind could be better served by a fund that owns a slug of fixed income in addition to equities. There are a number of fine choices in the moderate-allocation, conservative-allocation, and world-allocation categories that fit the bill. True, these funds have taken hits this year as well, and not just from their equity stakes--most types of bonds have lost money, too. But their shareholders haven't suffered as much damage to their nest eggs--the typical moderate-allocation fund (which holds 50% to 70% in equities) has lost 32%, the typical conservative-allocation fund (20% to 50% in equities) has lost 22%, and the typical world-allocation fund (less than 70% in stocks and at least 40% in foreign stocks and/or bonds) has lost 34%.
In order to narrow down the universe of 500-plus funds across these categories and identify some attractive options, we used Morningstar's Premium Fund Screener. We searched for funds in the three categories that have managers who have spent at least 10 years at the helm and that have outpaced 75% or more of their category rivals over that span. We also wanted to focus on funds that have navigated the current turbulence relatively well, so we excluded those that didn't land in their category's top quartile for the year to date through Nov. 17, 2008. Of course, we also wanted funds that are within reach of a broad range of investors (minimum purchase of $10,000 or less) and charge lower expense ratios than their typical rivals. Finally, we narrowed the list to funds covered by our analysts, in part because these categories include some oddball funds that require some serious peeking under the hood before purchase. The screener pulled up six funds; here's the full list.
One of our favorites on this list is moderate-allocation offering Oakmark Equity & Income (OAKBX). It has been run since its 1995 inception by Clyde MacGregor (Ed Studzinski joined as comanager in 2000) and boasts a superb long-term record. The fund's bond portfolio is a plain-vanilla collection of Treasury bonds--one reason this fund hasn't become an Analyst Pick in its category is that it isn't supported by a dedicated fixed-income team at the firm. However, a value-oriented stock-picking approach that favors companies with healthy balance sheets has won the day here. We're not the only ones who like MacGregor--he was recently chosen by Litman/Gregory to run slices of Masters' Select Equity (MSEFX) and Masters' Select Value (MSVFX).
Greg Carlson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.