Kinnel's Favorite Balanced Funds

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Could investing well be as simple as buying a boring old balanced fund and calling it a day? Joining me to share some perspective on that topic and share a few favorite funds is Russ Kinnel. He's Morningstar's director of manager research.

Russ, thank you so much for being here.

Russ Kinnel: Glad to be here.

Benz: Russ, let's discuss balanced funds. I think some investors say, "Well, I'm too sophisticated for that." But let's discuss some of the pluses that come along with these all-in-one stock bond funds.

Kinnel: Yeah. I think there are a few. One thing we've talked about in the past is how less-volatile funds tend to work well for investors. And so, of course, if you instead of having just stocks, if you combine it with bonds, say, in a 60-40 mix, the classic mix, it's less volatile, and it's easier on investors. It's just less drama, and that works well for investors. Also, there are some firms that are very good at stock and bond selection. Obviously, you want that, or there's no point buying a balanced fund. And again, there's some benefits of combining the two. So, I do think there are some benefits. Even just simply rebalancing within a fund is a little more efficient than if I'm doing it separately with funds because you can do it on a security basis.

Benz: Right. Some investors, I think, let inertia take hold in terms of doing that rebalancing. They might not want to sell the thing that's performed well. So, it does seem like that's a feather in the cap of balanced products. Let's talk about some of the negatives. I think one of the ones that you might hear from especially more-sophisticated investors is, I want control over my asset allocation. With a product like this I'm kind of ceding control.

Kinnel: Exactly. Obviously, a lot of people over time want to gradually move more into bonds and make other adjustments and you can't do that within a balanced fund. And so, I guess, one idea would be to not make it a huge holding, but if you have other holdings that still allow you some of that flexibility, you can get around that. But you're right, you're giving up some of that control, which is an important factor.

Benz: OK. And some of the funds, some of the large balanced funds, are domestically focused, right? So, for investors who want to make sure that they have a globally diversified portfolio, I guess it depends on the fund, but they might not be getting it.

Kinnel: Yeah, there are really a wide variety of allocation funds out there. Some are very global; some are a little global. Some will use, say, a manager choosing among 30 different sleeves within the firm, others will just be classic U.S. equity, U.S. bond. So, there really are a wide variety so you can really pick what fits your needs best.

Benz: OK. So, you brought a short list of balanced funds. We call it allocation 50% to 70% equity funds within this category. The three funds that you're going to highlight all have a value bias. So, let's talk about why that is. Is that your bias perhaps, or why is it that some of the funds that you really like do have that value bias built in?

Kinnel: Yeah, it's funny that a lot of the best allocation funds out there have a value tilt. I think one simple reason is that value strategy has more income on the equity side. So, overall, you have greater income for investors. And obviously, that's an appeal of a fund. I think another reason is simply value is kind of a conservative outlook of equity investing, and balance is kind of a conservative package for it. So, I think there's another reason that those have historically gone together. There aren't a lot of great growth balanced funds, oddly enough.

Benz: OK. So, let's delve into the funds that you like. One is Dodge & Cox Balanced. Obviously, I think it epitomizes what you're talking about, about a shop that is good at both fixed income and equity investing.

Kinnel: Yeah, and really, they do it fairly similarly. It's all about issue selection for them. So, they have a lot of good managers and analysts who are very good at selecting good stocks, good individual bonds, which means corporate bonds. So, the bond portion also has mortgages and Treasuries, both an emphasis on corporates. And Dodge is just a very stable long-term-focused firm and they have pretty low costs, which is another important part of a balanced fund is you don't want to pay equity fund fees for a mix of equities and bonds. You want somewhere in between those two, and Dodge gives you a good value there.

Benz: OK. Oakmark Equity and Income is another fund that you like. Let's talk about it.

Kinnel: Yeah. As you know, Oakmark is really about security selection in equities. And that's what really is the dominant story here. Clyde McGregor is a very good stock-picker. There's a bond portion here, but it's really about the equity side. And of course, Oakmark, it's a value strategy, relatively concentrated, but just built a really good track record over the long haul.

Benz: OK. Vanguard Wellington is a favorite among our Morningstar.com viewers. It might be familiar to many of them because it's so large. This one I wanted to talk about Russ because it is expecting a manager change next year. So, let's talk about that. And we've still got it at a Gold rating. Let's talk about why you and the team still think it's a very solid pick.

Kinnel: That's right. The equity side manager Ed Bousa of Wellington is set to retire next year. And so, they're in the middle of a transition. We still have a lot of confidence though because Wellington is a deep firm. These transitions tend to be pretty smooth. There's really a team around any manager that's been contributing all along. So, we have a lot of confidence around that. Also, their fixed-income side is very strong. And then, of course, Vanguard's incredibly low fees. You're paying about 20 basis points for this fund. It is a great deal. So, that helps out regardless of the manager. But it is something I think it's worth watching how the transition goes. We'll be watching to see if there are any changes. But we just have a lot of confidence in Wellington and that's reflected in the rating.

Benz: Russ, always great to get your perspective. Thank you so much for being here.

Kinnel: You're welcome.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.