These Funds Can Ferret Out Value Across Asset Classes
When nothing looks cheap, these funds can still deliver.
The violent ups and downs of the equity and bond markets since October 2007 were the result of a financial crisis, a recession, a rebound by the credit markets and, finally, glimmers of an economic recovery. All that tumult has left investors with what some would describe as an unexciting scenario. Prospects for near-term economic growth seem modest, the screaming bargains found in equities in the depths of the bear market in early 2009 now look to be few and far between, Treasury bonds offer only tiny yields, and lower-rated bonds no longer offer fat yield premiums in exchange for credit risk.
In a time when neither stocks nor bonds look very appealing, it seems prudent to take a closer look at funds that have the freedom to invest in both (yet don't have to follow a predetermined asset-allocation path like target-date funds do). Of course, they should have skilled managers on board who have successfully navigated both treacherous environments such as the brutal downturn from October 2007 to March 2009 and the furious rally that has followed. So we used Morningstar's Premium Fund Screener to sort through the conservative-allocation, moderate-allocation, and world-allocation categories. We set the screener to identify distinct share classes of funds within these categories that are covered by Morningstar's fund analysts, require no more than $10,000 as an initial investment (we also excluded those that list a minimum initial investment of zero, as these are institutional share classes), and are open to new investors.
We also wanted funds that held up better than the majority of their category peers in 2008 (when the bulk of the market's decline occurred) and managed to generate at least a 20% gain in 2009. Because last year's rally was led by speculative, economically sensitive fare, we didn't want to exclude funds that lagged their category peers in 2009 yet still posted a sizable absolute return. (World-allocation funds gained an average of 25% in 2009, while moderate-allocation funds gained 24% and conservative-allocation funds gained 20%.) Finally, we wanted funds with managers who had been on board for a minimum of five years, beat at least three fourths of their category peers over that span, and had below-average expense ratios.
Greg Carlson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.