The Top and Bottom Conservative Allocation Funds
We look at the highs and lows in our new hybrid category.
We look at the highs and lows in our new hybrid category.
Last week we divided Morningstar's domestic-hybrid fund category along equity-allocation lines so investors could do a better job of finding skilled managers and funds with the right asset mix. Today, I'll profile our new conservative allocation category, a group in which funds have at least half of their assets in bonds and cash. The group also includes market-neutral funds, which blend long and short positions in an attempt to lock in modest gains.
If you want a fund that has some equity exposure, but where the downside is kept in check, these offerings might be for you. When you're looking for a good conservative allocation fund, be sure to check out the firm's skill in running fixed-income funds. Except for market-neutral funds, funds in this category have more in fixed income than stocks, so there's no point in settling for a fund run exclusively by a stock manager with little expertise in running bond funds.
Now that we've shrunk the category down to a more manageable size, let's look at some of the funds that stand out.
Highest Five-Year Returns
Calamos Market Neutral A (CVSIX)
This fund has returned an impressive 9.81% over the past five years despite the bear market. It also tops the list for best aftertax returns. Unfortunately, those returns have brought in so much money that the fund is closed to new investors.
Even so, there's a useful lesson here for anyone interested in a market-neutral fund. The most successful entrants in this field are funds like Calamos Market Neutral that use arbitrage strategies rather than simply holding long positions in one group of stocks and short positions in another. With arbitrage, a money manager is playing off two securities with an understandable relationship. In this case, Calamos takes long positions in a company's convertible bonds and shorts the underlying stock of the same company when it appears that the convertible bond is more attractively priced than the stock.
Lowest Costs
Vanguard Tax-Managed Balanced (VTMFX)
This fund charges just 0.18%, and it's one of my favorites in the category. Technically speaking it isn't an index fund, but it is close enough that it is able to have index-like costs. The fund's idea is to have a passive stock portfolio with a little bit of active management solely for the purposes of realizing losses in some holdings. By doing this, the fund is able to avoid distributing capital gains. The bond half of the portfolio is munis rather than taxable bonds since it's designed for investors in taxable accounts.
Least Volatile
Gabelli ABC (GABCX)
If you're really looking for low volatility, then this is the fund for you. Its standard deviation is a minuscule 1.6. The fund buys companies that have agreed to be acquired. Such companies' shares typically trade below the purchase price because of the uncertainty about whether the deal will close. Thus, the key is for management to pick deals that go through. At the moment, though, there aren't enough deals in the works for the fund to stay fully invested, so it has closed to new investment and allowed cash to rise to more than 80% of assets. When deals come back, the fund will reopen.
Lowest Five-Year Return
Federated Capital Income A (CAPAX)
This fund lost an annualized 6.6% over the trailing five years, but it's not as bad as it sounds. Until last year, the fund was a utilities offering, but it changed its mandate to an income-oriented allocation fund. The next worst on the list really is as bad as it sounds. Gabelli Mathers is down an annualized 0.36%. Ironically, it's been bearish for a long time, yet it still managed to lag the bulls over the trailing five years.
Highest Expense Ratio
Alger Balanced Institutional I
I thought this fund’s 6.72% expense ratio was a typo, but it's true. Next on the list is Phoenix Market Neutral A , which charges 3.78% and illustrates the fact that some market-neutral funds are too pricey to be worthwhile.
Fund Analyst Picks
Morningstar fund analyst Josie Raney has been scouring this new category to come up with a list of the best funds that are open to new investors. Click here to have a look.
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