8
The falling bond market of the past several months
has left many allocation funds well behind broad
equity indexes. Conservative-allocation funds, which
invest
20%
to
50%
of their assets in stocks and
typically stash much of the rest in bonds, have been
hit hardest. As the yield on the
10
-year Treasury
bond rose from roughly
1
.
6%
on May
1
,
2013
, to
2
.
78%
on Aug.
31
,
2013
, the typical conservative-allocation
fund has lost
2%
. Equities have risen significantly;
over the same period, the S
&
P
500
Index has
gained
3%
.
Allocation funds with bigger equity stakes have taken
a hit, too. Moderate-allocation funds, which invest
50%
to
70%
of assets in stocks, also lag the S
&
P
500
with a paltry
0
.
1%
gain. Even aggressive-allocation
funds, which have fairly heavy equity exposure at
70%
to
90%
, have been held back by bonds’ decline:
They’ve posted a median gain of
0
.
7%
during the
period, less than half as much as the S
&
P. World-allo-
cation funds have suffered as well. They invest
roughly half their assets, on average, in stocks and
lost
2
.
6%
from May
1
through Aug.
31
, while the
MSCI
All Country Index lost
0
.
7%
.
These results underline the importance of buying an
allocation fund that boasts not just stock-selection
expertise, but savvy fixed-income investors as well.
Gold-rated
Dodge & Cox Balanced
DODBX
is one
such fund, and it has bested nearly all of its moderate-
allocation rivals during bonds’ recent swoon. True,
the fund’s above-average equity stake (
74%
at the end
of June) certainly helped, but fixed-income security
selection was a factor as well:
Dodge & Cox Income
DODIX
, which also earns a Gold rating and virtually
mirrors the bond portfolio of Balanced, held up better
than
95%
of its intermediate-bond peers during this
stretch. Other allocation funds that sport particularly
strong fixed-income teams include
PIMCO All Asset
PASDX
,
Vanguard Wellesley Income
VWINX
,
and
Vanguard Wellington
VWELX
—all Gold-rated;
Silver-rated
Janus Balanced
JABAX
; and Bronze-
rated
Fidelity Puritan
FPURX
.
On the flip side, some otherwise well-regarded allo-
cation funds are comanaged by fixed-income teams
that have struggled, and some don’t have much fixed-
income expertise behind them at all. Examples of
the former include Silver-rated
American Funds
American Balanced
ABALX
,
American Funds Cap-
ital Income Builder
CAIBX
, Silver-rated
American
Funds Income Fund of America
AMECX
, and Bronze-
rated
American Funds Global Balanced
GBLAX
.
The funds’ bond portfolios are managed in part by the
same team that runs
American Funds Bond Fund
of America
ABNDX
, which is rated Neutral and sports
a medi-ocre long-term record. Another fund that
boasts excellent stock-pickers behind it, Silver-rated
Oakmark Equity & Income
OAKBX
, doesn’t have
a dedicated bond team. Consequently, the fund’s bond
sleeve has long been dominated by a big stake in
Treasury bonds that doesn’t change much. That stance
is fine when Treasury bonds perform well, and it
does reduce credit risk, but the fund may find itself
well behind peers if Treasuries take it on the chin
for an extended period.
Struggling Amid the Rising Tide
Some of the more notable allocation funds that take a
tactical approach—making portfolio shifts to take
advantage of anticipated market movements—have
A Tough Challenge for Allocation Funds
Morningstar Research
|
Greg Carlson
Data from May 1, 2013–Aug. 31, 2013.
Measurement in USD.
11,000
10,600
10,200
9,800
9,400
Total Return %
p
Barclays US Agg Bond TR USD
p
S&P 500 TR USD
p
US OE Aggressive Allocation
p
US OE Conservative Allocation
p
US OE Moderate Allocation
p
US OE World Allocation
05/2013
06/2013
07/2013
08/2013
