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How We Rate Allocation Funds

A closer look at our process.

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Allocation funds are different beasts than most of the funds we rate. While other funds typically focus on one asset class and often have one manager and strategy, allocation funds usually own a mix of stocks and traditional bonds and possibly convertible bonds, preferred stocks, and options as well) and frequently employ multiple managers employing various approaches to investing.

Thus, we look closely at both the equity and fixed-income portfolios of an allocation fund and the personnel and strategy behind each. Has management added value in both asset classes, and what is the likelihood it can do so in the future? Two excellent funds,  Oakmark Equity & Income (OAKBX) and  T. Rowe Price Capital Appreciation (PRWCX), serve as good examples. Clyde McGregor, lead skipper of the Oakmark fund, has built a formidable stock-picking record in 18 years at this fund and more than a decade at Oakmark Global (OAKGX). He’s long focused on stocks that look cheap on absolute--not relative--terms with a great deal of discipline that makes the process quite repeatable. He’s also backed by a squad of topnotch equity analysts and other portfolio managers. The fund’s bond sleeve, however, has been unremarkable: It typically doesn’t venture much beyond the U.S. government-backed debt market (a largely efficient area), and the fund’s advisor, Harris Associates, offers no pure bond funds and has a very modest fixed-income research effort.

Greg Carlson does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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