Don't Overlook These Conservative All-in-One Funds

Funds with the latitude to invest in multiple asset classes--including allocation and target-date funds--have been a true bright spot in the actively managed fund industry over the past several years. Whereas active U.S. equity funds have seen outflows of $125 billion (yes, billion with a "b") over the past year alone, multiasset funds have taken in $37 billion over the same period, according to Morningstar's fund flow data.

The rapid uptake of target-date funds, which are often the default options in company retirement plans, explains some of the popularity. But flows into fund types with more stable asset allocations--Morningstar's conservative-, moderate-, aggressive-, and world-allocation funds--have also been positive. Of course, it's hard to generalize about what's motivating large groups of investors at any given point in time. But one conjecture about traditional allocation funds' ongoing popularity is that investors figure that if they're going to pay up for active management, they want their managers to have as much latitude as possible. That means flexibility to make intra-asset-class decisions, as well as the ability to tweak asset-class exposures.

In a market that rewards risk-taking, it's only natural that investors might be attracted to the subset of allocation funds that have made the most of stocks' six-year rally--and have shiny return records to match. On the flip side, investors might tend to overlook those allocation funds whose bull-market performance has struggled due to their conservative positioning, even though they have better defensive properties.

To help shine a light on the latter type of allocation vehicles, we turned to our Premium Fund Screener. We screened on conservative-allocation funds that earn Morningstar Medalist ratings from our analyst teams and have Morningstar risk ratings of average or lower. To help add a contrarian element to the screen, we looked for those whose returns landed in the bottom third of their categories during the past five years. We screened out institutional funds and those that are not accepting new investor dollars.

The following two funds made the cut as of March 24, 2015. Premium users can click

to adjust the screen to suit their own specifications. Of course, these funds won't be appropriate for younger investors or those with long time horizons, but they might be worthy options in certain situations, as outlined below.

Analyst Rating: Bronze

Whereas the standard formula for conservative-allocation vehicles is to pair a high-quality bond portfolio with a smaller, high-quality equity stake, this fund takes a completely different tack. Its aim is to serve as an all-in-one inflation hedge, so it bundles together a number of investment types with explicit or implicit inflation-fighting properties: Treasury Inflation-Protected Securities, floating-rate loans, commodity-linked notes, and real estate investments--both fixed income and equity. Given that inflation has been benign amid sluggish growth in much of the world, it's not surprising that demand for most of these securities has been slack and this fund's performance looks weak relative to its peers'. Commodities and TIPS, in particular, have dragged down this fund's returns relative to the plain-vanilla stock/bond portfolios that dominate the conservative-allocation group. (Real estate securities have been a notable bright spot.) The fund's recent showing underscores that it's not designed as a substitute for investors' core stock/bond exposure, but rather as an add-on to provide one-stop purchasing-power protection. Analyst Elizabeth Foos gives the fund plaudits for the depth of its team: Veteran managers Ford O'Neil and Joanna Bewick (lead manager) oversee the overall portfolio, while experienced managers run the subportfolios.

Analyst Rating: Gold

With a smaller equity portfolio than its typical peer's--20% versus the category average of 35%--this fund hasn't been able to keep up in the conservative-allocation category during the past five years. Yet, it remains a no-nonsense option for investors seeking stability and income with a dash of equity exposure. It invests in four ultra-low-cost Vanguard index funds and takes a strategic approach to asset allocation. For example, while Vanguard recently moved to increase the portfolio's foreign-bond and stock weightings, that move was motivated not by top-down considerations but by the firm's research showing that a more globally diversified portfolio will produce better risk-adjusted results over the long term. In contrast with the Fidelity fund, this offering is ideal core-holding material, but only for very conservative investors. It's also worth noting that its core fixed-income position, Vanguard Total Bond Market II Index VTBIX, is longer than the typical intermediate-term fund, meaning it could experience more volatility in a rising-interest-rate environment.