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Too Skittish to Picks Stocks or Bonds?

August 13, 2003

NEW YORK (AP) _ Investors unnerved by recent volatility in the stock and the bond markets are no doubt torn about where to invest. They might consider a kind of mutual fund, called a balanced fund, that invests in both stocks and bonds.

``A good balanced fund can be a great holding to anchor your portfolio, because it gives you a broad level of investment exposure across asset classes,″ said Emily Hall, senior fund analyst at Morningstar, a mutual fund and stock researcher based in Chicago.

Because the stock and bond markets typically move in opposite directions, these funds are supposed to act as a balance. When stocks are doing poorly, bonds are usually there to pick up the slack.

``If anything, we have learned about (the importance of) asset allocation″ from the bear market when investors top-heavy with stocks suffered severe losses, said Don Cassidy, senior researcher at fund-tracker Lipper Inc. ``With this fund, you get some of each.″

Both Hall and Cassidy said having balanced fund can reduce the number of funds investors have in their portfolios, which itself is a good thing because it could mean paying less in fees.

Federal regulations require balanced funds have at least 30 percent in either stocks or bonds and cash. That usually translates into moderate returns over the long term.

``It is a great investment vehicle for people who don’t want to do the allocation between stocks and bonds (themselves), because we, as managers, are doing it for them,″ said Joan Sabella, manager of the Mainstay Eclipse Balanced Fund. ``There might be other mixes that could produce somewhat better returns, but there is more risk involved.″

There are over 500 balanced funds in the United States. Morningstar divides the funds into two categories: Those with a higher concentration of stocks are called moderate allocation funds, while those that favor bonds are called conservative allocation funds.

So far this year, moderate allocation funds have provided a return of 8.3 percent, while conservative allocation funds have returned 2.3 percent, according to Morningstar.

According to Morningstar data, those returns fall between the 13.3 percent returned this year by large-capitalization growth funds, which ruled the bull market, and the 0.1 percent return so far in 2003 by intermediate-term government bond funds, which are a benchmark of sorts for bond investors.

``The thing is these funds are never going to be designed to give you (the high) stock market gains,″ Hall said. ``The point is to have equity and fixed-income exposure in a single portfolio.″

The Mainstay Eclipse Balanced Fund, for example, has a year-to-date return of 9.4 percent, according to Morningstar. The Dodge & Cox Balanced fund has a year-to-date return of 11.2 percent, while the Janus Balanced fund has a year-to-date return of 4.8 percent.

Before buying a balanced fund _ as with any fund _ investors should research how it is run and determine if that is in keeping with their objectives and allocation strategy. Investors should find out the answers to such questions as:

_ How is the fund split between stocks and bonds?

_ Is that allocation fixed or does the fund manager change it depending on market conditions?

_ What kind of stocks are in the fund’s portfolio. What kind of bonds are included?

And, since the funds tout delivering moderate returns over the long term, investors should look at performance over the course of several years. Still, they must keep in mind that past performance doesn’t guarantee the future will be the same.

The Mainstay Eclipse Balanced Fund maintains an allocation that has 60 percent of its assets in stocks and 40 percent in bonds. Within the stock portion, the fund concentrates on mid-sized companies across a broad swath of industries, while the fixed-income component focuses on short- to intermediate-term bonds.

The Dodge & Cox Balanced has 70 percent of its portfolio in large-cap value stocks and 30 percent in intermediate-term bonds and cash, according to Morningstar.

Overall, balanced funds provide very modest returns over the longer term. Moderate allocation funds have a five-year annualized return of 1.7 percent, while conservative allocation funds have a five-year annualized return of 3.2 percent, according to Morningstar.

But on an individual fund basis, returns vary widely _ as with most fund categories. While the Dodge & Cox Balanced fund has a five-year annualized return of 10.1 percent, that of the Fidelity Balanced fund is 6.2 percent, according to Morningstar.

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