Investors have continued to pour money into the hybrid fund category that includes both balanced funds and asset allocation funds, also known as flexible funds. The Investment Company Institute recently reported that hybrid funds took in $3.07 billion in May, versus $2.71 billion in April.
In short, asset allocation funds take over where balanced funds leave off, making more pronounced changes to their mix of stocks and bonds than balanced funds do. For example, an asset allocation fund can own stocks and bonds, but it might not own both at all times. See "Asset Allocation Funds: When Models Make the Tough Calls" under the news section of FundAdvisor.
While investors should be aware that asset allocation funds offer the benefit of one-stop shopping, they should also realize that these funds can make bold changes to their mix of stocks and bonds, and may, based on quantitative models, be entirely in stocks and out of bonds, or entirely in bonds and out of stocks, effectively changing the risk profile of the fund quite dramatically.
FundAdvisor found that in the domestic hybrid category, balanced funds have, on average, outperformed asset allocation funds both in the short term and over the long. What's more, when compared with each other within this hybrid category, the riskiest funds, as measured by standard deviation, are the asset allocation funds, or flexible funds. They also have slightly lower risk-adjusted returns.
In short, while asset allocation fund managers enjoy greater flexibility than balanced fund managers, timing when or when not to be in stocks or bonds hasn't worked as well for them when compared to the performance of balanced fund managers.
One-Year Return (%)Avg. Three-Year Ann. Return (%)Avg. Five-Year Ann. Return (%)Avg. Ten-Year Ann. Return (%)Avg. YTD Return (%)
Balanced Funds-2.3-2.6+1.5+7.7+8.1
Asset Allocation Funds (flexible)-2.9-3.5+0.8+6.5+7.1
Balanced and Asset Allocation Funds-2.5-2.8+1.4+7.3+7.8
S&P 500-Stock Index-8.1-10.8-1.1+9.9+10.3
Balanced Index* +1.1-1.9+3.0+9.4+8.4
Even though the balanced funds performed better than asset allocation funds overall, 10 funds from both categories have been ranked among the top 20% for the one-, three-, five-, ten-, and year-to-date periods as of May 30, 2003.
Interestingly, the Bruce Fund, a flexible fund, showed up as the best performer for all periods. The portfolio has no minimum or maximum percentage requirement when it comes to being in stocks or bonds, and has ranked in the top 1% among both balanced and asset allocation funds on a 12-month basis. The remaining nine funds on the list are all balanced funds.
In addition, all 10 funds ranked as top performers on a risk-adjusted basis, with an average expense ratio of 1%, and a three-year average turnover of 49.6%. Those figures were well below the 1.3% average expense ratio and the 86.9% average turnover of the combined balanced and asset allocation fund categories. The funds are sorted below by one-year return.
–Daniela Valle
