Mixed-Asset Mutual Funds Offer the Best of Both Stocks and Bonds


With stock market returns running considerably lower than expected thus far in 2010, and with yields on 10-year Treasury bonds offering only about 2.65% through the end of August, investors have been hard pressed to find mutual funds that can deliver positive returns with less volatility than we've seen in the capital markets lately.

To combat that problem, Standard & Poor's Equity Research suggests investors consider "mixed-asset" or blended mutual funds, which invest in a combination of stocks and bonds, to capture the income generation strengths of both asset classes with less volatility.

Sponsored Links

S&P divides mixed-asset funds into three classes: growth, which have an asset allocation with more equities; conservative, which contain more fixed-income investments; and moderate, which hold roughly half bonds and half stocks. S&P mutual fund analyst Todd Rosenbluth says S&P favors the moderate group of mixed-asset funds at this time because, "Given where the yield of the 10-year Treasuries was, and given where the stock market was, it felt appropriate to take a middle-of-the-road approach."

Funds that capture the best of the stock and bond worlds might appeal to investors who missed out on the stock market rally of 2009 because fear caused them to move their money into cash or to bonds. They may also appeal to investors who moved money into equities early in 2010, only to see the bond market go on to outperform stocks.

"The sense we have is that people still want to have stock exposure in case the market recovers, but also fixed-income exposure to get enough protection and income on the downside," said Rosenbluth.

Three Funds to Watch

With S&P chief investment strategist Sam Stovall predicting that U.S. equity markets will remain in "the confines of a continuing correction" in the near term, a more balanced asset allocation may yield better results for investors. According to Rosenbluth, the moderate group of mixed-asset funds that S&P tracks had an average return of 0.6% through Aug. 31, versus the S&P 500's loss of 4.62%. By contrast, conservative mixed-asset funds averaged a 3.1% return, and growth mixed-asset funds averaged an 0.84% decline.

"This year, the more bonds you had in a mixed-asset portfolio, the better you would have done," Rosenbluth said.

Looking ahead, S&P Equity Research is predicting the S&P 500 index could gain as much as 13% over the next 12 months, climbing to the range of 1190. S&P has identified three funds that could deliver better-than-average returns over that period based on the strong track record of their management, their relatively low expense ratios, and the quality of the stocks they currently have in their portfolios:

• The Vanguard Tax-Managed Balanced Fund (VTMFX) has about 46% of its assets in stocks that include blue chips JP Morgan Chase (JPM) and IBM (IBM). It boasts investment-grade, tax-free fixed income securities with an average credit rating of AA. As of July 31, the fund was up 2.19% for the year.

• The Franklin Income Fund (FKINX) only has about 35% of its assets in equities, but invests in blue chip dividend payers like Merck (MRK) and ExxonMobil (XOM). The fund generates a higher rate of income from non-investment grade corporate bonds that pay higher yields. The average credit rating of the bonds in its portfolio was B. As of July 31, it was up 4.7% in 2010.

• The Hartford Balanced Income Fund (HBLAX) has about 42% of its portfolio invested in stocks, including a number of dividend payers such as Pfizer (PFE) and ConocoPhillips (COP). The fixed-income investments in its portfolio are mostly investment-grade corporate bonds with an average credit rating of BBB. As of July 31, the fund was up 5.21% in 2010.