These 8 Funds Could Help Steady Portfolios During Rough Markets

Too many funds and stocks in a portfolio can create clutter and make rebalancing time-consuming.

Why It Matters

Allocation funds, such as balanced funds, can make it easier to stay diversified and invested during market volatility. That’s because these funds automatically rebalance, moderating big gains and losses. And the funds can provide exposure to more than one security type and market.

Russ Kinnel, senior principal of ratings for Morningstar and editor of the Morningstar FundInvestor newsletter, discusses his list of the best balanced and allocation funds.

12 Questions on the Simplicity of Asset-Allocation Funds

1. The markets are experiencing volatility with the war in Iran. How do balanced funds decrease a portfolio’s risk?
2. What type of investors are these funds suited for?
3. These funds tend to appeal to income investors. Is that why they steer clear of growth strategies?
4. How have these funds worked in practice for investors?
5. In February’s Morningstar FundInvestor newsletter, you highlighted what you believe are the best balanced and allocation funds based on their foreign exposure. Why focus on foreign exposure?
6. Vanguard Global Wellesley Income has the highest foreign exposure among the names on your list. What do you like about this fund?
7. First Eagle Global had the second-highest foreign exposure, but only in stocks. How is this fund playing defense well without fixed income?
8. Vanguard Global Wellington and American Funds Capital Income Builder offer heavier equity weightings. How do these funds balance yield and capital appreciation to pay dividends?
9. Why do you consider Pimco Inflation Response Multi-Asset to be a supporting player rather than a core holding in a portfolio?
10. How does T. Rowe Price Retirement Balanced provide inflation protection and income?
11. Fidelity Strategic Dividend and Income and BlackRock Tactical Opportunities have single-digit foreign exposure. What are these funds’ strategies to produce income while reducing stock risk?
12. What’s the takeaway for investors who are considering whether they want to add a balanced or allocation fund to their portfolio?

Key Quote on Allocation Funds and Investor Returns

They’ve really been good. If you look at investor returns, which tell us how much of a fund’s actual returns investors had, we see generally that these kinds of funds, whether they’re target-date or traditional balanced funds, they do really well. So, investors tend to get nearly all or all of those actual returns because, whereas an equity fund might go from a 28% gain to a 15% loss, these more often are in the range of maybe they are up 6% one year or up 9% this year, maybe they’re down 2%. They’re much more moderate. They’re more boring. They don’t bring your emotions out. They don’t inspire fear or greed, which tend to lead us to make bad decisions.

The Takeaway: Before adding a balanced or allocation fund to a portfolio, investors should first review what they need first. Kinnel says life changes can influence what should be added and whether there’s an underweighting among asset classes in an overall portfolio. A review could reveal if there’s not enough foreign, domestic, or value exposure. Checking for that could help narrow the search. Then, look for some of the best balanced and allocation funds to fill the void. The editor of the Morningstar FundInvestor newsletter shares his list and the non-US equity and non-US bond breakdown of 10 allocation funds.

More From Morningstar on Allocation Funds’ Appeal to Investors

Allocation funds are not for investors who want to choose and control their exact allocations to stocks, bonds, and so on, says Kinnel. They typically appeal to investors looking for wide-ranging funds that offer simplicity and lower portfolio risk. And Morningstar Investor subscribers can check out the Morningstar Medalist Ratings for moderate-allocation funds and moderately aggressive allocation funds.

These funds steer clear of growth strategies since income investors tend to favor them. Growth stocks generally produce zero to very low dividends due to firms reinvesting in their businesses, he says. For a lot of balanced funds, income tends to rank high on the priority list. These funds tend to tilt toward the value side of the market to pay dividends.

Securities Mentioned in This Episode

Vanguard Global Wellesley Income VGYAX

First Eagle Global SGENX

Vanguard Global Wellington VGWAX

American Funds Capital Income Builder CAIBX

Pimco Inflation Response Multi-Asset PZRMX

T. Rowe Price Retirement Balanced TRRIX

Fidelity Strategic Dividend and Income FSDIX

BlackRock Tactical Opportunities PCBAX