Balanced Funds Look Better Over Long Haul

Looking at the recent performance of balanced funds and their near cousins, you can’t help but be reminded of the proverbial glass that’s either half full or half empty.

On the one hand, balanced funds--defensive portfolios that maintain at least some stock holdings--have held up much better than equity funds in general during this difficult year.

But on the other hand, most balanced funds are showing losses for 1990 and will wind up in the red unless stocks rally strongly during the next seven weeks. If you bought a balanced portfolio under the notion that it would avoid losing money, you might be in for a surprise. Several of these funds have stumbled by more than 10% so far this year.

For the group as a whole, the losses aren’t nearly as severe. The average balanced fund declined 6%, including dividend income, during the first 10 months of the year, according to Lipper Analytical Services. That’s not bad compared to an average 13.8% setback for equity funds. Balanced portfolios typically hold stocks, bonds and cash, and the latter two components help cushion any blows. It’s not misleading to think of balanced funds as “all-weather” investments.

In hindsight, you would have been better off this year holding bonds or cash, of course. That might still be the wisest investment strategy. Walter Rouleau, editor of the Growth Fund Guide newsletter in Rapid City, S.D., suspects that stocks will decline even further in the months ahead and thus recommends money market funds that hold short-term U.S. government debt instruments.

But if you switch to cash, you will eventually have to decide when to get back into equities. With balanced funds, there’s no such decision to make. Because they maintain at least some stock holdings at all times, they will participate in any rallies.

In fact, if you’re a conservative investor who recognizes that stocks--unlike bonds or cash--tend to beat inflation by a comfortable margin over lengthy periods, balanced funds might be a wise choice.

“It’s difficult to get quite a few people, especially those in their mid-50s and up, to come back to the stock market at all,” says James B. Rea Jr., president of the Rea-Graham Balanced Fund, based in West Los Angeles. “This is a good way to get them to stay with equities over the long haul.”

Dick Strong, head of Strong Funds in Milwaukee, believes that the balanced approach is the wisest choice for smaller investors lacking the money to buy a lot of funds. He suggests diversifying among three balanced portfolios run by different firms. “Go with the three best management companies you can find.”

Following that advice should lead to even less volatility and more consistent returns than a single portfolio can deliver. For although balanced fund managers are a conservative lot, they don’t necessarily share similar market outlooks.

For example, Strong has a decidedly bearish lean at the moment. He’s concerned about a sluggish economy, negative inflation-adjusted growth in the money supply and sickness in the banking sector. “Banks serve as the heart in terms of the flow of money in the system. If there’s a heart attack, that would lead to other problems.” Strong says he would grow more optimistic if bank stocks, badly battered of late, showed signs of firming.

By contrast, Rea has turned cautiously optimistic. “The current bear market is already a year old. We think now might be the time to buy.” Since late August, Rea-Graham Balanced’s common stock weighting has increased to 32% from 26%, with cash and a few bonds composing the remainder. But just in case this bullishness is unwarranted, the fund maintains a decidedly risk-averse posture; its stock holdings sell at an average price/earnings ratio of just 7.

Of course, balanced funds aren’t the only low-risk equity selections available. Here’s a look at some of the other categories that fit an all-weather description:

* Asset allocation. These funds typically hold more than just equities, bonds and cash. For example, USAA Cornerstone, run by USAA Investment Management of San Antonio, maintains roughly equal weightings in gold stocks, foreign stocks, government bonds, real estate stocks and “basic value” shares. Rouleau likes this fund but says it has been bogged down by the gold holdings. Cornerstone gained at least 8% annually each year from 1985 through 1989, but it dropped 13% through Oct. 31 of this year.

* Income. Funds in this group are generally more conservative than their balanced cousins, simply because they focus more on bonds and less on stocks. According to Morningstar Inc. of Chicago, the average income portfolio has 52% of its assets in bonds, 30% in stocks and 11% in cash. For balanced funds, the numbers are: stocks 50%, bonds 32% and cash 13%.

* Utility. Funds that focus on utility stocks and, to a lesser extent, bonds often hold up well during broad market declines. That’s because electric and natural gas companies tend to pay big dividends, and that gives their shares a bondlike resiliency.

But the telecommunications business is another matter. Deregulation, the explosion of cellular phones and fax machines, and other factors have transformed once-sedate telephone utilities into growth enterprises. As a result, phone stocks have become more volatile, as have the funds that buy them. Fidelity’s Select Telecommunications fund, for example, plunged 24% through Oct. 31 of this year after a 51% gain in 1989. So, when examining a utility fund, be sure to find out if it’s a slow mover or a volatile selection.

The same goes for other types of funds, too. Some growth portfolios, for example, are remarkably defensive (see chart). That goes to show you can’t always judge a fund by its label.

ALL WEATHER FUNDS

If you can’t stand much risk, you’ll want to select mutual funds that give ground grudgingly. That would eliminate the vast majority of stock-oriented portfolios, most of which are showing double-digit losses so far in 1990. But not the funds listed below. None has lost more than 1% in any of the past five calendar years, and a few have done considerably better.

Fund (Type) 5-Year 1990 Sales Return Return Load Mathers (G) +127% +7% None (800) 962-3863 Pax World (B) +77% -0% None (800) 767-1729 Phoenix Balanced (B) +96% +0% 6.9% (800) 243-4361 Phoenix Total Return (GI) +74% -1% 4.75%* (800) 243-4361 Rightime (GI) +70% +1% 4.75%* (800) 242-1421 Strong Investment (B) +60% -0% 1% (800) 368-3863 USAA Mutual Income (I) +61% +1% None (800) 531-8000 Lipper All-Equity Funds Avg. +69% -13%

Notes: B = balanced, G = growth, GI = growth and income, I = income.

* May include 12b-1 fees

Performance results for periods ending Sept. 30, 1990, are provided by Lipper Analytical Services.