3 Offbeat Allocation Medalists

Allocation funds tend to require substantial resources. As I mentioned in a previous Fund Spy on the ratings process for allocation funds, they typically need deft security selection in both the equity and fixed-income markets in order to generate consistently good long-term performance.

But allocation funds from smaller firms can excel, too. Sometimes they do so not by competing with the behemoths of asset management on mega-cap stocks and highly rated bonds, but through more distinctive approaches that may highlight a firm's specialties. Let's take a closer look at a few such funds that have earned a Morningstar Analyst Rating of Silver or Bronze.

 Greenspring (GRSPX)
Analyst Rating: Silver
This moderate-allocation fund's typical asset mix appears quite bold at first glance: Close to half its assets are stashed in small- and mid-cap stocks, while much of the rest is invested in high-yield bonds. That's a far cry from the portfolio of the typical moderate-allocation fund, which is chock-full of large-cap stocks and investment-grade bonds.

However, manager Chip Carlson (who has steered the fund since its 1983 inception) has kept a tight lid on volatility. Credit goes largely to careful security selection. In the equity portfolio, Carlson focuses on companies that trade cheaply relative to their free cash flows and don't require frequent access to capital markets. He also invests primarily in high-yield bonds with shorter maturities, which limits interest-rate risk. Finally, Carlson tends to keep a double-digit cash hoard when valuations appear unattractive. (That stake was nearly 12% at the end of March 2014.)

The resultant risk/reward profile is quite different than might be expected of a fund stuffed with smaller-cap stocks and high-yield bonds. The fund lost less than half as much as its typical moderate-allocation peer in 2008's sharp decline, for example. It has lagged most peers in the five-year rally that began in March 2009, but the fund has topped 80% of the category on a risk-adjusted basis during the decade ended April 30, 2014.

 Leuthold Core Investment (LCORX)
Analyst Rating: Bronze
Leuthold Weeden Capital Management's specialty is the view from the top down. The firm determines the relative attractiveness of stocks and bonds with the help of a model with many quantitative inputs, including valuations, the Treasury bond yield curve, economic activity, and investor sentiment. Quant models also help determine the weightings of such disparate subasset classes as emerging-markets equities, gold bullion, and high-yield bonds, as well as industry groups within equities. Big allocation shifts aren't frequent; management attempts to forecast longer-term trends.

The firm has suffered a number of personnel losses in recent years, including the retirement of firm founder Steve Leuthold. And before those departures, performance had begun to falter--the fund failed to keep pace with its moderate-allocation peers from 2009-12 because of poor stock selection and inaccurate allocation calls. But the team is still led by a number of experienced investors, and the portfolio offers a great deal of diversification: At the end of April, it held U.S. and emerging-markets equities, the government debt of developed nations, investment-grade corporate bonds, high-yield bonds, and municipal bonds, and it also sold short a few industries.

Performance has picked up lately, too: The fund beat more than 70% of peers in 2013 and more than 90% in the first four months of 2014. In part because of that rebound, the fund has surpassed 73% of its peers on a risk-adjusted basis for the 10 years ended April 30, 2014, despite its recent slump.

 Westwood Income Opportunity (WHGIX)
Analyst Rating: Bronze
This moderate-allocation fund roams freely among several corners of the markets, including stocks, high-quality bonds, preferred stocks, convertible bonds, REITs, and MLPs. It will also hold a hefty stake in cash (20% of assets at the end of March 2014). It invests only in income-producing securities, yet yield isn't the goal. Lead skipper Mark Freeman instead seeks solid total returns with limited volatility.

Freeman, who took the helm at the fund's December 2005 inception, lets the weightings among the aforementioned security types wander based on where the team is finding value. The fund's equity stake ranged from 20% to 40% between 2006 and 2008 because management opted for the then-plump yields of high-quality bonds. As a result, the fund lost just 5% in 2008 while its typical peer declined 28%. Following that bear market, the fund's equity stake (including MLPs and REITs) jumped above 50% and has remained there; the hefty cash stake is primarily a result of unattractive bond valuations, according to Freeman.

Although the fund's performance in rising markets is mixed because of its quirky makeup, it has surpassed all but one of its 157 category peers on a risk-adjusted basis since inception.

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