An Investment for Gun-Shy Investors
Although the stock market is close to flat on the year, investors are still somewhat skittish when it comes to investing in equities. The fiscal dangers in the eurozone loom larger every day, threatening an already anemic recovery here at home. Thanks to all the uncertainty floating around out there, market volatility has been off the charts in recent months, with large daily swings in the stock market more the norm than the exception. And while folks are still holding equities at arm's length, there is one investment that seems to be gaining favor in these troubled times.
A balancing act
According to the latest data from the Investment Company Institute, money is still flowing out of the stock market. In the week ending Oct. 12, investors withdrew $2.9 billion from long-term mutual funds. Perhaps not surprisingly, investors pulled roughly $5.9 billion from U.S. stock funds, while adding $4 billion to bond funds. But there was another area of the mutual fund market that saw gains -- $512 million was added to hybrid funds, or funds that invest in a mix of stocks and bonds. So while stocks may still be a bit scary for some folks, investments that take a more cautious approach to stock market investing -- by tempering that exposure with a hefty fixed-income allocation -- seem to be more up investors' alley right now.
While it's easy enough to buy a mix of stocks and bonds on your own, hybrid, or balanced, funds make perfect sense for investors who don't have the time or knowledge to buy individual positions. If you've been sitting on the sidelines, taking a more defensive position in light of current events, balanced funds are a good way to dip your toes back into the waters of the stock market. You get measured equity exposure that won't leave you totally exposed to another potential downturn in the market. The key here is to pick the right balanced funds -- and to that end, here are two of the best picks in this asset class.
Vanguard Wellington (VWELX)
With a history dating back to 1929, Vanguard Wellington is one of the oldest mutual funds in existence today. And while the current management duo running the fund hasn't been around for quite that long, they have been on the job since 2000 and 2003. Manager Ed Bousa of Wellington Management looks after the stock side of the portfolio while John Keogh makes the decisions on the fixed-income portion of the fund. Investment-grade corporate bonds are the main attraction for Keogh, accounting for approximately two-thirds of the fund's bond exposure. Bousa prefers out-of-favor, large-cap stocks that are trading at low valuations while offering reasonable dividend yields. Right now, names like ExxonMobil (NYS: XOM) , AT&T (NYS: T) , and Chevron (NYS: CVX) , all with dividend yields well above 2%, are getting a lot of play in the portfolio.
The fund sticks pretty close to a 65% stock/35% bond split, so you don't have to worry about allocations changing too meaningfully over time. Wellington Management is a tremendous talent in the investing world, and its track record on this fund demonstrates why. Over the past decade, the fund ranks in the top 4% of all moderate allocation funds with an annualized 6.5% return. In comparison, the S&P 500 index has gained just 3.5% in that time frame. With a very low 0.3% expense ratio, a moderate risk profile, and reasonable 35% annual turnover, Vanguard Wellington is an excellent choice for any investor looking for a first-rate balanced fund.
FPA Crescent (FPACX)
Now if you're looking for a hybrid fund with a little more leeway to play the field, you may want to give FPA Crescent another look. Here, longtime manager Steve Romick looks across market capitalizations, geographical regions, and different asset classes to find the best opportunities in the market. Historically, the fund has maintained an equity exposure between roughly 35% and 55% of assets, and isn't afraid to hold a lot of cash. In fact, at last glance, cash accounts for roughly 30% of fund assets. This has lead to the fund holding up better than its peers during downturns. The fund did not lose any money in the bear market years of 2000-2002, and while it lost 20.5% in 2008's difficult market, it rebounded quickly the following year, putting up gains of 28.4%. The fund now ranks in the top 1% of its peer group over the most recent 10- and 15-year periods.
More recently, Romick has been loading up on more defensive consumer stocks as well as health-care names, in light of the firm's somewhat downbeat view of the economy and the ongoing fiscal difficulties in Washington. In the portfolio, recession-resistant, low-P/E names like Wal-Mart (NYS: WMT) sit alongside health-care giants such as Johnson & Johnson (NYS: JNJ) , which Romick was drawn to based on the strength of the company's business franchise and the stock's low price. This fund isn't quite as cheap as Vanguard Wellington, at 1.28%, but for investors in search of a flexible, go-anywhere hybrid fund that keeps risk in check, FPA Crescent is a solid choice.
Remember that a balanced fund can be your best friend in times like these. If you're not ready to go whole-hog back into the stock market, think about taking a few baby steps with a fund that invests in the best of both worlds.
At the time this article was published Amanda Kish is the Fool's resident fund advisor for the Rule Your Retirement investment newsletter. At the time of publication, she did not own any of the funds or companies mentioned herein. Motley Fool newsletter services have recommended buying shares of AT&T, Chevron, Wal-Mart, and Johnson & Johnson, as well as creating diagonal call positions in Wal-Mart and Johnson & Johnson. The Motley Fool owns shares of Wal-Mart and Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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