So far into 2011, the stock market has been doing a pretty good Dr. Jekyll and Mr. Hyde impersonation, with dizzying drops one day and outsized gains the next. Rising oil prices, political turmoil and natural disaster around the globe, and now the downgrading of the outlook for U.S. debt have contributed to the incredible volatility in the stock market recently. It's not easy to make money in a sideways market, but investors are looking to some new avenues to make this volatility more palatable.
Choppy waters
According to Bloomberg Businessweek, our current equity market is the most volatile in history, going back to 1942. Given the fragile state of our economic recovery and the immense fiscal challenges we face, it's not too surprising that the incredible bull run of the past two years has given way to a choppy, more volatile market. Despite the fact that the bond market will face incredible pressures in the coming quarters once interest rates start to head up, investors are still somewhat skittish about getting back into the stock market.
Their answer to investing in this challenging market is to direct money into balanced mutual funds -- ones that invest in both stocks and bonds. The Investment Company Institute recently reported that in the first quarter of the year, investors stuffed $18.6 billion into these hybrid funds, the highest amount since ICI began tracking fund data in 1984.
By their very nature, balanced funds are caught in the middle between risky, high-return-potential stock funds and low-risk, capital-protecting bond funds. As a result, they can sometimes get overlooked by investors when building their asset allocation program. But there are some first-rate hybrid funds out there that have outperformed their similarly situated peers and beaten the broader stock market at the same time. If you're still hesitant about moving more heavily into stocks in this environment, you might want to consider a solid balanced fund. That way, you can get your stock exposure without betting the farm. Here are two excellent options for any portfolio:
Vanguard Wellington (VWELX)
This old-timer fund has been around since 1926. And while a lot has changed since then, the team at Wellington Management continues to apply its successful investment approach to drive this fund to the top of the heap. The fund is run by two co-managers, one on the stock side and one on the fixed-income side. Manager Ed Bousa looks for undervalued stocks with improving fundamentals, while John Keogh manages the fixed-income side, favoring high-quality corporate bonds.
Right now, low-P/E financial and health-care names are getting a lot of play in the portfolio and include favorites such as Wells Fargo
Over the years, Vanguard Wellington has maintained somewhere in the neighborhood of a 65% stock/35% bond mix. This positioning has helped fuel the fund to a 6.7% annualized return over the past decade, compared to a 3.3% showing for the S&P 500. Vanguard Wellington won't be a top performer in hot, growth-led markets, but its cautious, value-oriented approach should serve investors well in today's volatile climate.
T. Rowe Price Capital Appreciation (PRWCX)
Manager David Giroux has only been heading this fund for the past five years, but in that time, he has steered the fund to a 5.7% annualized return, ahead of 95% of all funds in the Morningstar Moderate Target Risk category. Giroux has some flexibility within his mandate and can adjust the fund's equity allocation as he sees fit, although it tends to range somewhere between 50% and 70%. Although Giroux is willing to delve into less well-known large-cap names, he prefers high-quality, low-priced blue chips like IBM
On the fixed income side, Giroux has chosen to bypass the usual Treasuries and mortgage-backed bonds, as he sees little value in these securities in the current low-rate environment. Instead, he dedicates the fixed-income portion of the fund to convertible bonds, leveraged loans, and high-yield corporate bonds. Because of this positioning, T. Rowe Price Capital Appreciation doesn't look like a lot of its more conventional peers. However, this has worked to the fund's advantage more often than not. This fund remains one of the top choices in the balanced fund category and would make a fine core holding for nearly any investor.
While investing in the stock market may seem especially scary in today's volatile climate, investors can't afford to wait it out in bonds, given where that asset class is likely headed. That means at least some stock exposure is a given. Picking up a top-rated balanced fund may be just the key to helping some investors get back into the game while still keeping a lid on risk.
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