5 of Our Favorite Moderate-Allocation Funds
Energy and equity weightings told the tale in recent years.
In the short run, asset class and sector weightings generally explain allocation funds’ performance. That’s certainly been the case for the past three years. But over the longer term, manager skill, strategy, and expenses play larger roles. Focusing on those more enduring attributes helps separate the wheat from the chaff. We’ve done that among balanced fund with our Morningstar Analyst Ratings perhaps more than any other asset group. Indeed, our batting average in that area is the highest of any asset class. Over the trailing 10 years, we have a batting average of 90%, meaning 90% of our highest-rated funds outperformed their peers over the time they had our highest rating. And 54% finished in the top quartile.
Our moderate-allocation funds with Morningstar Analyst Ratings of Gold have outperformed over the past three years, though I should note we recently downgraded one that underperformed to Bronze. Over the past three years, an allocation fund’s stake in U.S. equities has been crucial, as they have trounced bonds and foreign stocks. (Moderate-allocation funds are those with at least 10% in bonds and between 50% and 70% in equities over a three-year average.)
It’s no surprise, then, that Dodge & Cox Balanced (DODBX) has top-percentile three-year returns, as it has 60% of assets in U.S. stocks (compared with 47% for its typical peer) and another 6% in foreign equities. Its overall equity stake exceeded 70% at times during that three-year period. But to get a top 3% 15-year return, you have to have great issue selection and low costs.
T. Rowe Price Capital Appreciation (PRWCX) joined Dodge & Cox Balanced at the top of the peer group rankings for three years despite a modest 56% in U.S. equities. A chunk of foreign equities (7%) helped as foreign stocks had higher returns than bonds. In addition, the fund has some of its bond portfolio in lower-quality debt, which has been a star performer the past three years.
Vanguard Wellington (VWELX) has 56% of assets in U.S. equities and 9% in foreign stocks. It has solid top-quartile returns across the board. Ed Bousa’s preference for health care and wariness of basic materials kept the fund chugging along nicely. This fund, along with Dodge & Cox Balanced, has a decided value tilt. The fund is open to those investing directly through Vanguard, but you can’t get it through outside fund supermarkets anymore.
Vanguard Balanced Index (VBIAX) has 59% in U.S. equities. The equity sleeve follows the cap-weighted CRSP US Total Stock Market Index, which tracks nearly every stock in the U.S. market. That cap weighting gives it a bias toward the largest companies, which has been a winning play the past three years. Of course, the long-term appeal here is super-low costs of just 0.09%.
FPA Crescent's (FPACX) three- and five-year returns are top 30% for the category, and that’s really quite good given its approach. The fund’s huge cash stake and light position in equities slows returns in a rally. Manager Steven Romick’s fondness for natural resources didn’t help, but some savvy health-care and tech stocks saved the day. Color me impressed. When a fund you own for its defense still produces a robust return in a market rally, you have to feel quite fortunate. Yes, the fund has a large asset base at nearly $20 billion, but Romick has done a remarkable job.
The now Bronze-rated Manning & Napier Pro-Blend Extended Term’s (MNBAX) equity weighting of 46% (it averaged 44% over the period) was lower than the group norm. But it was made worse by some wayward sector calls as it favored natural resources and other cyclical sectors at a time when health care and technology were better places. I’ll cut it some slack because no one gets those calls right all the time. However, macroeconomic calls are supposed to be one of the firm’s strengths, so it still gets some demerits. Its 10- and 15-year records, though, are still solid.
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Russel Kinnel does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.