4 Top Equity-Heavy Allocation Funds

Recently, we rolled out new allocation Morningstar Categories based on the amount of equity exposure. Given this new angle on allocation funds, I thought I'd take a look at Morningstar Medalists from the highest two equity weightings of allocation. I'll look at three medalists in the Allocation--70% to 85% Equity category and one medalist in the Allocation--85%+ Equity category. You can use them to dial down risk in place of a pure equity fund or just to gain a little bond exposure.

American Funds Income Fund of America AMECX

With a Morningstar Analyst Rating of Silver, this fund boasts a 12-month yield of 3.06%, placing it on the high end of allocation-fund yields despite the modest bond weighting. Yet, the maximum drawdown of 41% and downside-risk capture of 113% mark it as one of the lower-risk funds in this equity-heavy category. (Downside capture for allocation funds is calculated versus the 60/40 mix in the Morningstar Moderate Target Risk Index, and thus you'd expect a high downside capture ratio for funds with higher equity weightings than 60%.) One reason is that it is right on the borderline of the category with a 70% equity weighting. Management has been moving to the equity side because it considers the yields on equities to be more appealing than those on bonds. Prior to 2011, the fund's equity weighting was in the low-60% area. The basic idea of the fund is to maximize yield without taking on too much risk.

That's a strategy that American has executed well here and at other funds. Equities must have a yield well above the S&P 500's. The bond side takes on some interest-rate and credit risk to produce a decent yield. The fund has landed in the top quintile of its peer group for the trailing three-, five-, and 10-year periods.

Fidelity Four-in-One Index FFNOX

The Silver-rated fund has a set asset mix of 48% in

T. Rowe Price Personal Strategy Growth TRSGX

This Silver-rated fund of funds has a neutral setting of 80% equities, making it a fairly aggressive fund. As with other Personal Strategy funds, the asset mix can be adjusted by the allocation team depending on its view of the markets. The underlying funds are strong, and the all-in fee is 0.78%. The fund's maximum drawdown of 48% and downside capture ratio of 153% are worse than the other two Silver-rated funds in the category. On the plus side, the fund has top-quintile returns over the past five-, 10-, and 15-year periods, and its three-year returns are just outside the top decile.

Franklin Mutual Shares TESIX

This Bronze-rated fund takes a value strategy to equities and distressed debt. In its March 31, 2016, portfolio, the fund had 71% in U.S. stocks, 19% in foreign stocks, 4% in bonds, 2% in other (usually convertibles or preferreds), and 4% in cash. That gives it a little less in stocks and a little more in bonds and foreign stocks than a typical large-cap value fund. Its 50% maximum drawdown and 152% downside capture ratio show that things don't always go according to plan.

Also, performance has been rather middling depending on the time period you pick. Lead manager Peter Langerman looks for cheap stocks from a variety of angles, including valuations, attractive merger targets, or other types of distress. That was a good formula for defense in the 2000-02 bear market, but it didn't do so well in the 2008-09 bear market when many deep-value funds got burned by financials or heavily indebted cyclical stocks.

Ratings History Fidelity Four-in-One Index has been rated Silver since June 2012. The other three have had their current ratings since we launched Analyst Ratings in November 2011.

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.