The 2007-2009
bear market started Oct. 9, 2007 and, in the course of 356 miserable trading days, clawed the Standard & Poor's 500 stock index to a 57% loss.
Thanks to that soul-searing
bear market, the S&P has averaged a 7.74% annual total return in the past decade, substantially below the average 10.5% total return for stocks the past 50 years. Balanced funds traditionally keep 40% of their portfolios in bonds and 60% in stocks, although most funds have some leeway in the asset mix. Morningstar classifies them as allocation: 50% to 70% equity.
The rally in bond prices during the financial crisis helped to alleviate some of the suffering. The Bloomberg/
Barclays U.S. aggregate 7-10 year bond index gained an average 4.91% annual total return from October 2007 to March 2009. On average, the group has gained 5.37% a year in the past decade, which will probably not impress many clients, even though the category's 10-year standard deviation is 10.9, versus 15.2 for the S&P 500.
If the bull market continues,
balanced funds' records will start to look more and more milquetoast. Starting in October, funds will begin dropping the worst bear market since the Great Depression from their 10-year returns — as well as some of the best bond market returns in recent history. Nevertheless, if you have clients who are
worried about the stock market, balanced funds make a nice proxy for the virtues of a diversified portfolio. Any adviser can make a reasonable approximation of a balanced fund by mixing stock and bond ETFs — or simply purchasing a balanced index, such as Vanguard Balanced Index Fund (VBINX), up 7.3% a year in the past decade.
Thanks to some astute stock picking — and a healthy slug of bonds and cash — five balanced funds have managed to beat the S&P 500 in the past decade. That's a bit like swimming the English Channel with a credenza on your back. The funds:
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T. Rowe Price Capital Appreciation (PRWCX). This fund — closed to new investment since 2014 — has gained 8.5% the past decade, with a standard deviation of 11.7, versus 15.2 for the S&P 500. About 14% of the fund's portfolio is in cash, and another 20% is in bonds.
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Centaur Total Return Fund (TILDX). This fund up 8.35% a year for the past decade. At least at the moment, this fund doesn't need no stinkin' bonds. It's 56% in cash, with a minor short bet on fixed income. Its holdings range from large-cap to micro-cap. Like T. Rowe Price Capital Appreciation, the fund uses covered calls to gain income.
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RiverNorth Core Opportunity Fund Class (RNCOX). This fund is up 8.13% a year for the past 10 years. Like the Centaur and T. Rowe Offerings, the fund is light on bonds, at least for a balanced fund. It has about 27% of its portfolio in bonds. And, unlike the others, it's a fund of funds, with its main equity holding the closed-end Liberty All-Star Equity fund (USA).
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Columbia Balanced (CBALX). This fund is up 8.01% a year in the past decade. It's a fairly traditional balanced fund, with about 33% of its portfolio in bonds. Its biggest stock holding: Apple (AAPL).
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Janus Henderson Balanced Portfolio Institutional Class (JABLX). This fund is up 7.76% a year in the past decade. Another traditional balanced fund, it's got 35% of its portfolio in bonds, with slight overweights in technology, industrials and consumer defensive stocks.
Not surprisingly, many of the funds that have beaten the category in the past decade have taken significantly different roads to outperformance, and there's no guarantee their past success will produce the same results. The next bear market could well start with
rising rates, which would hurt both stocks and bonds. But if your clients are worried about a bear market, looking at balanced-fund returns should give them some idea of why diversification helps.
