Skip to Content
Funds

5 Allocation Fund Picks: Damping Volatility While Delivering Returns

These Medalist allocation funds either beat or nearly matched the S&P 500 while experiencing much less volatility.

Recent market turmoil has given traditional allocation funds a chance to prove they're still relevant. Between the equity market's peak on July 20, 2015, and its trough on Feb. 11, 2016, the large-cap S&P 500 shed 12.9% of its value while the Barclays U.S. Aggregate Bond Index gained 2.8%. Owning these two asset classes didn't keep the typical moderate-allocation Morningstar Category fund from losing money, but it did help preserve capital. The average moderate-allocation fund's 11.4% loss during that period outperformed each of the Morningstar domestic-equity category averages by anywhere from roughly 4 to roughly 11 percentage points.

Balanced funds not only proved their worth during the recent shocks to the equity markets. The best of breed also offered results that were competitive with, if not superior to, equities over a full market cycle, especially when adjusted for risk.

Here's a look at five such funds with Morningstar Analyst Ratings of Gold or Silver that either beat or nearly matched the S&P 500 while experiencing much less volatility, as measured by standard deviation. While their Morningstar Medalist ratings don't guarantee repeat performances in the coming decade, each fund has strengths that leave it well positioned for the future.

American Funds American Balanced ABALX

American Funds' independent multimanager system mutes this fund's volatility and helps it fare well in different market conditions. Four equity managers, one balanced manager (who invests in both stocks and bonds), and four fixed-income managers each run separate sleeves of this portfolio in their styles. Among the equity managers, for example, Gregory Johnson is a growth-oriented investor who owns just 15 stocks, while Alan Berro favors out-of-favor dividend payers in his diffuse sleeve of about 50 stocks.

The fund has a fairly wide band of 50% to 75% for its equity exposure, and it has recently taken advantage of that flexibility to become more conservative. Since year-end 2013, the fund's equity stake has come down 18.2 percentage points to 55.6% as of January 2016. Meanwhile, the bond portion has stayed conservative, too, investing mostly in Treasuries, investment-grade corporates, and agency mortgage bonds, along with some foreign bonds. The fund's defensive turn has helped it preserve capital better than most peers. Its modest absolute gain of 55 basis points during the past year through January 2016 ranks in the moderate-allocation category's top decile.

Mairs & Power Balanced MAPOX

This fund's equity stake stayed within its typical 60%-65% range during the past year through January 2016, which figured into its 3.1% loss. That still placed in the moderate-allocation category's top third for the year ended Jan. 31 and in the top decile over the trailing five, 10, and 15 years. A consistent approach focused on the shares of companies with sustainable competitive advantages and above-average returns on equity and also on investment-grade corporate bonds has helped build this record. The fund's St. Paul, Minnesota, advisor, Mairs and Power Inc., emphasizes companies headquartered in the upper Midwest because it argues that geographic proximity helps it get to know its businesses well and buy their stocks at attractive prices.

The equity portion of the fund will invest in dividend-paying stocks outside of the advisor's home turf, such as

T. Rowe Price Capital Appreciation PRWCX

Manager David Giroux has accomplished much since taking over this fund in June 2006. Through January 2016, the fund's 12% annualized gain is the highest of roughly 160 moderate-allocation peers with track records that long, while its Sortino ratio (a risk-adjusted measure that penalizes downside risk) is one of the best, too. Giroux hasn't outperformed in every environment. For example, the fund had subpar showings during the 2007-09 credit crisis and in 2011's tumultuous third quarter. Still, the fund has been consistently excellent, placing in the category's top quintile or better every calendar year since 2009.

Giroux plies a distinctive, wide-ranging approach. He typically keeps 55% to 65% of the fund's assets in stocks, but tends to look at the fund's overall equity exposure based on its stock weighting plus its convertible bonds' sensitivity to stocks. The combined equity and converts stake can exceed 70% of assets when Giroux finds a lot of cheap companies, as he did in early 2009. The rest of the portfolio varies in its mix of traditional bonds (including both investment-grade and high-yield debt), leveraged loans, and cash. Relative to peers who stay fully invested, Giroux's use of cash is noteworthy. Throughout his tenure, cash has ranged from about 5% to 20% of assets (as of January 2016, it was 11.1%). The fund has been closed to new investors since June 2014, which gives Giroux a better shot to build on his already stellar record.

Vanguard Wellesley Income VWINX

Whereas the other funds discussed here each kept on average about 60% to 65% of their assets in stocks and the rest in bonds and cash during the past decade, this fund's asset mix has been the exact opposite. Fixed-income lead manager John Keogh stashes between 60% and 65% of the fund's assets in investment-grade corporate bonds, agency mortgage-backed securities, and Treasuries. He also eschews big interest-rate bets, keeping the fund's duration close to the Barclays U.S. Credit A or Better Bond Index's. Meanwhile, equity lead manager Michael Reckmeyer invests the remaining 35% to 40% of assets in stocks that pay above-average dividends, like

Vanguard Wellington VWELX

This pre-depression-era fund is the much older sibling of Vanguard Wellesley Income and shares one of its managers. Keogh and his team use the exact same fixed-income strategy in running this fund's roughly 35% bond stake. Wellington Management's Edward Bousa takes a slightly different approach with this fund's roughly 65% equity portion, though. About half of its 95-115 stocks have above-average yields relative to the S&P 500 and competitive market positions. The rest is split between stocks poised to benefit from supply-and-demand dynamics, like fluctuating commodity prices, and growth names bought on dips. Like Vanguard Wellesley, this fund has also been a perennial top performer. Through January 2016, its trailing returns of one year or more all rank in the moderate-allocation category's top decile. With $84 billion in assets, only one category peer is bigger, though the fund has been closed to new investors except those who invest directly through a Vanguard brokerage account since February 2013.

Alec Lucas owns shares Vanguard Wellington.

For a list of the open-end funds we cover, click here. For a list of the closed-end funds we cover, click here. For a list of the exchange-traded funds we cover, click here. For information on the Morningstar Analyst Ratings, click here.

More on this Topic

Sponsor Center