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Although they can vary in their mission and holdings, balanced
funds typically offer investors a way to make modest
returns while minimizing their potential downside. They usually
find the middle of the market — they’ll rarely beat the
average equity fund, but they’ll beat the average bond fund.
Balanced funds are fairly conservative and aim to attain
growth at a reasonable pace, but a growing number of them
are straying from the herd and taking more risks in smallcap
stocks and short-term bonds. They offer investors a way
to be a little more aggressive and value-oriented while still
maintaining a traditional mix of equities and bonds.
The Balancing Act
Michael Kitces, director of research
for the Pinnacle Advisory Group
of Columbia, Md., says the definition
of a “balanced fund” is growing increasingly
flexible, but it generally implies a fund
that has a mix of stocks and bonds.
What exactly that mix is can vary widely,
but it traditionally runs around 60 percent
to 70 percent in stocks and 30 percent to
40 percent in bonds. Kitces says the principle
of most balanced funds is to offer
investors exposure to multiple asset classes.
Investors frequently use balanced funds in
their 401(k) as a standalone portfolio because it’s often
the simplest and easiest way for hands-off investors to
allocate their funds.
Traditional, plain vanilla balanced funds have typically
held large-cap stocks and long-term bonds. Consider
Dodge & Cox Balanced (ticker: DODBX), which currently
has an allocation of 70 percent in stocks and 23 percent
in bonds. Its top 10 holdings include Comcast, Merck,
Wells Fargo, Time Warner and GlaxoSmithKline. (Equities
are mentioned in this article only for educational purposes;
no investment recommendations are intended.)
Kitces says in recent years more funds have been
trying to maintain that stock/bond balanced mix, but
they’re diversifying and balancing within the bond and
equities markets.
“There has been a trend in recent years for funds to
try to do a better job of being more diversified,” he says.
“And if you’re going to be well-diversified, you need to
hold more than large-cap stocks and bonds.”
Like any other balanced fund, the Milwaukee-based
Villere Balanced Fund (VILLX) seeks to achieve longterm
capital growth consistent with preservation of capital
and balanced by current income. But Villere partner
George Young says the fund differs in its investment
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philosophy in that it seeks multicap stocks with a smallcap
focus on com panies that are contrarian or out of
favor. Young says the fund takes a “diamond in the
rough” approach and looks for smaller, undervalued
companies with a potential for long-term growth.
“We are a balanced fund with a (traditional mix of
stocks and bonds), but we have more of a small-cap and
mid-cap bias, and we have 10 percent in junk bonds,”
Young says.
Another fund that takes a nontraditional balanced fund
philosophy is the Greenspring Fund (GRSPX), based
in Lutherville, Md. The fund holds an asset allocation
of 46 percent stocks, 34 percent bonds and 10
percent cash. Of those bonds, 16 percent are con -
vertible bonds (a hybrid security that eventually
can be converted to stock) and 28 percent
are corporate bonds.
Bill White, Greenspring’s vice
president of client development,
says behind that balanced mix
lies an investment philosophy that
fo cuses on value and long-term capital
appreciation in which income is
important but a secondary objective.
“We aim to avoid downturns and try to find
small- to mid-cap, less-followed ideas,” White says.
“We look for things that everyone isn’t already onto.”
Not a Pack Mentality
Balanced funds that stray from the herd often find their
own ways and philosophies about how to allocate their
stocks and bonds. Greenspring looks for undiscovered,
unappreciated companies that are on their way up.One
“
There has been a trend in recent
years for funds to try to do a better
job of being more diversified. ”
such hidden gem White points to is Rush Enterprises,
a Texas-based trucking and transportation company
founded in 1965 that now owns and operates the largest
network of commercial vehicle dealerships in the
United States.
White says that Greenspring purchased a stake in
the com pany at a deep value six years ago when it
didn’t have much of a following and was mainly a
regional player. The share price has grown almost
March 2013 | BetterInvesting | 43