Patricia Oey: Vanguard Tax-Managed Balanced is a cheap, tax-efficient, set-it-and-leave-it fund and carries a Morningstar Analyst Rating of Gold.
This 50% equity-50% bond fund is comprised of Gold-rated equity fund Vanguard Tax Managed Capital Appreciation and Silver-rated muni fund Vanguard Intermediate Tax Exempt. The equity sleeve slightly underweights dividend payers to reduce taxable distribution, and the managers opportunistically try to harvest tax losses. Despite those tweaks, however, its performance has remained very close to that of the Russell 1000.
On the bond side, the team seeks to manage a high-quality muni portfolio, and currently over 70% of its holdings are rated AAA or AA. Since the fund's inception in 1994, it has not made a capital gains distribution, and its 10-year tax cost ratio of 58 basis points is significantly below that of its peers, which is 120 basis points. Investors can replicate this balanced fund by holding its two underlying funds but may incur some capital gains when they rebalance.
The fund has to maintain at least a 50% allocation in its muni bond sleeve so that it is able to pass through federal tax-free distributions. As a result, this fund's allocation of 50% stocks and 50% bonds is slightly more conservative relative to a standard 60-40 balanced fund.
Over the trailing five and 10 years, this fund's returns have remained within the top decile relative to its 30% to 50% equity allocation peers. With a lower tax cost ratio and a 9-basis-point fee for the Admiral share class, this is an attractive option for the cost- and tax-conscious investor.