In the Long Run, a Stock-Bond Balance Pays Off

The frustrating thing about this year’s investment slump isn’t just that stocks have fallen or bonds have dropped, but that they’ve declined together.

During the first quarter of 1994, the two categories moved down virtually the same path. Equity funds, including international and sector portfolios, fell an average of 3.2%, according to Lipper Analytical Services of Summit, N.J.

Taxable-bond funds in general were down 2.2%. U.S. government bond funds declined 3.2%, the same amount as stocks.

Of course, such close synchronization is to be expected, since rising interest rates hurt both markets, right?

Well, not exactly.

While higher rates clearly harm bond prices, the link isn’t always so certain with stock investments. Rising rates are usually accompanied by stronger economic activity, and that can be a plus for equities, says C. Frazier Evans, chief economist of the Colonial mutual fund group in Boston.

“Equities can resist rising interest rates--it depends on the level of rates and how fast earnings are growing,” he says.

Research on the financial markets from 1926 through 1993 by Ibbotson Associates of Chicago supports this assertion.

Long-term government bonds were down 18 of those 68 years. Blue-chip stocks had 20 down periods. But the two fell together in the same year just five times.

Perhaps more telling, there have been only two years, 1931 and 1969, when large stocks and government bonds fell by more than 2%, as they’re on pace to do for 1994 based on the first quarter’s results.

If history offers any guide, then one of the two groups is likely to bounce back, or at least stabilize, over the rest of the year.

The above results stay substantially the same even if you substitute small stocks for blue-chips, or corporate bonds for governments.

Ibbotson’s numbers track unmanaged portfolios of stocks and bonds, so they aren’t exact proxies for mutual funds. Yet the data seems clear enough.

“Stocks and bonds tend not to move together,” says Keith R. Getsinger, a senior consultant for Ibbotson.

He adds, however, that the two asset groups have been moving a bit more in step since the 1970s, even if the numbers quoted above don’t show it. Getsinger dates this modest convergence to 1979, when the Federal Reserve changed its basic inflation-fighting policy in a way that made the bond market more volatile.

What all this means for investors is that it still makes sense to maintain holdings in stock and bond portfolios, one lousy quarter notwithstanding.

Asset-allocation or flexible funds tend to hold such a combination, often with cash, real estate, gold or foreign securities thrown in. These funds were off 3% during the first quarter, faring better than stocks but worse than bonds, as might be expected.

But another hybrid group, the balanced funds, did worse than both, falling 3.3% on average.

Many balanced portfolios got stung because they had fairly large stakes in utility stocks and brand-name companies, two groups that got banged around, says A. Michael Lipper of Lipper Analytical. Longer term, he adds, the funds are likely to continue offering compromise performance, somewhere between those of stocks and bonds.

Historically, a stock-bond mix has been a good one.

“There’s a reason why pension funds tend to run about 60% stocks, 40% bonds,” says Evans. Based on Ibbotson’s numbers, a 60-40 split would have made money in every rolling five-year period since 1937-1941, he says.

Balanced and asset-allocation funds tend to maintain a respectable equity exposure most of the time, and their bond holdings provide for a smoother ride.

Each group had a 52% weighting in stocks at last count, according to Morningstar Inc. of Chicago.

Simply put, a hybrid fund is a good choice for people who can afford only one.

But if you have more cash to invest, you might want to build a balanced portfolio by selecting individual stock and bond funds. Few fund families are superior in both the equity and fixed-income sides of the business, so it might pay to shop around.

In addition, you can more finely tune a portfolio of two or more funds to better fit your preferences. For example, with a single balanced or asset-allocation fund, the bonds you get are almost always going to be taxable government, corporate or foreign issues.

Yet if you’re in a high tax bracket, you might want to use municipals for the fixed-income portion.

Many advisers think tax-free bonds offer compelling values at the moment, especially after taking a dive in the first quarter.

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The latest round of mutual fund openings, closings and additions includes some prominent names.

AIM Aggressive Growth, which enjoys above-average marks from the Morningstar and Value Line rating services, plans to shut its doors to new investors after May 2.

Existing shareholders will be able to keep adding money after that date.

The Houston-based stock fund ((800) 347-1919) now counts more than $330 million in assets, roughly 10 times its size of two years ago. It carries a maximum 5.5% sales charge.

Meanwhile, two big no-load portfolios, Mutual Shares and Mutual Qualified, opened to new investors on April 6.

Despite their large size--$3.4 billion and $1.5 billion, respectively--the funds are finding buying opportunities thanks to the stock market’s correction, says management.

These funds ((800) 553-3014) also enjoy good marks from the two rating services. They’re part of the Mutual Series group in Short Hills, N.J.

And New York-based Neuberger & Berman ((800) 877-9700) has unveiled a Socially Responsive fund.

It will seek out companies with good environmental and workplace records, while avoiding those that earn revenue from alcohol, tobacco, gambling, nuclear power or weapons. There is no sales charge.

First Quarter Winners

These balanced and asset-allocations funds were among the better performers from January through March and have good records over lengthier periods.

Max Fund 1st-Qtr 1-Year 5-Year sales phone name return return return charge (800) Dodge & Cox Balanced -1.3% +7.4% +12.7% None *434-0311 Fidelity Puritan -0.5% +10.7% +12.9% None 544-8888 Flex-Funds Murfield 0.0% +7.1% +11.7% None 325-3539 Founders Balanced -1.0% +14.1% +12.2% None 525-2440 Merrill Lynch Global Allocation B -0.2% +11.6% +14.3% 4% call local office Quest for Value Opportunity A -0.7% +4.7% +14.6% 5.5% 232-3863 20th Cent. Balanced -0.9% +5.3% +12.9% None 345-2021

*(415) Source: Lipper Analytical Services. All periods ends March 31, 1994.