Funds That Keep It Simple

Mutual Funds

Funds That Keep It Simple

The ultimate in convenience: a single fund that exposes you to a spectrum of stocks and bonds.

Ted Miller doesn't like unnecessary distractions. So when the 24-year-old decided to roll over retirement money from a previous job, he chose a target-date fund from T. Rowe Price. "A fund like this saves me time, my most valuable resource," says Miller, an assistant admissions director at Trinity-Pawling School, a private school in Pawling, N.Y.

Miller is part of a wave of investors who want the ease of a one-fund fix. A target-date fund holds a diversified portfolio and, as the fund approaches its target date, lowers the percentage of assets in stocks in favor of more bonds and cash. "The mix of the fund matches the evolution of my financial needs," says Miller. And target-date funds aren't your only one-stop choices: You can satisfy your desire for simplicity with balanced funds as well.

Although many investors have sidelined money because of this year's bearish market, target-date funds continue to attract assets because they streamline investing decisions. All you need to do is find a fund sponsor whose investing strategy you trust and pick the fund with the date closest to the year you want to retire. Miller, for instance, has his whole career ahead of him, so he chose T. Rowe Price Retirement 2050 (symbol TRRMX). Target-date funds have broad portfolios of investments, with stocks of companies large and small, U.S. and foreign, as well as bonds.

Thirty-eight fund families have target-date offerings, and the differences among them are significant. A fund's "glide path" is the formula that determines how the blend of stocks and bonds will change over time. The stock allocation in a 2020 fund, for example, can range from 50% to 90%, depending on the management company.


We like T. Rowe Price in this category. The firm's low-cost target-date funds put a heavy emphasis on stocks over the long run, and their underlying funds have a solid track record. Managers of the 15 funds that make up the T. Rowe target-date portfolios select the stocks and bonds. Jerome Clark, who runs Price's retirement funds, sets the overall allocation that each underlying fund will have in the target-date funds.

Clark boosts asset allocations by up to five percentage points in areas he views favorably. (Currently, the funds overweight stocks of large companies with growing earnings and put more money in higher-rated bonds than in junk-rated IOUs.) The funds initially keep 90% in stocks and gradually ratchet down that allocation to 50% by the target date. The funds sport below-average expense ratios, which range from 0.56% to 0.74%, depending on the target date.

Strike a balance. Target-date funds may be as trendy as post-partisan politics, but they aren't the only choices appropriate for a one-fund portfolio. Plenty of balanced funds also offer one-stop solutions. Such funds normally hold stocks and bonds in a 60-40 mix, and the best have been around for a while. "The track records of target-date funds are not that long," says Tom Dugan, co-manager of Dodge & Cox Balanced (DODBX). Although the first target-date fund debuted in 1993, most have been available for less than ten years. By contrast, says Dugan, "our balanced fund has a 77-year track record."

Dodge & Cox Balanced, which reopened to new investors on February 4, is a stalwart. It performed dismally over the past year to July 1, losing 14%, but the fund has delivered solid long-term returns. Over the past decade, the fund returned 8% annualized. That beats the typical balanced fund by an average of four percentage points per year.


The fund's team of veteran managers analyzes both stocks and bonds with an eye for bargains and is not afraid to go against the crowd. Balanced has been buying beaten-down financial stocks, such as Wachovia, even as the financial sector gets hit by a cascade of subprime-loan defaults and tighter credit.

Investors find Vanguard Wellington (VWELX) as comfortable as a pair of their favorite jeans. Ed Bousa handles the stock picks and John Keogh runs the bond side. The fund has returned an annualized 10% since Bousa took over in January 2003. That beats the gain of the typical balanced fund by an average of two percentage points per year.

The $49-billion fund continues to generate steady returns despite its considerable heft. But the fund's size means that Bousa generally must invest in big companies. "We try to overweight sectors that will benefit from long-term trends in supply and demand," he says. That has led him to stocks of energy companies, such as Chevron. Bousa also prefers dividend payers, such as General Electric. And Keogh generally sticks to bonds rated A or better. The one drawback is the fund's high minimum investment of $10,000.

Run by a one-fund shop in Lutherville, Md., Greenspring (GRSPX) is one of the more eccentric balanced funds. Chip Carlson and his right-hand man, Mike Fusting, invest in more small-company stocks and lower-rated bonds than most balanced funds do. The oddball approach has worked.


Over the past decade, the fund has returned an annualized 9%, which trumps the gain of the typical balanced fund by an average of five percentage points per year. Carlson and Fusting search for out-of-favor stocks of companies with little debt and predictable revenues that benefit from a catalyst -- such as new management, a new product or takeover activity -- that will make the shares go up. "We try to focus on stocks that are not dependent on a favorable stock market or a robust bond market," says Carlson, who has managed the fund since 1987.

Go global. Balanced funds tend to limit their foreign-stock holdings to less than 20% of their portfolio. If you want more exposure to overseas markets, consider a global balanced fund, which invests in stocks and bonds from around the world. Note, however, that many of the best global balanced funds carry either sales charges or high fees.

Fidelity Global Balanced (FGBLX) is a solid no-load choice. Managers Derek Young and Ruben Calderon set the overall allocation to stocks and bonds while a group of managers, culled from large regional funds at Fidelity, picks the underlying investments using a variety of strategies. Young and Calderon took the helm in January 2006. From then to July 1, the fund has returned an annualized 10%. That's two percentage points per year better than the gains from the typical global balanced fund over that period. The fund has 28% of its portfolio in foreign stocks.

Pax World Balanced (PAXWX) gives you plenty of international flavor if you don't mind the social screens. The fund has 17% of its assets in foreign stocks. Manager Chris Brown, who has run the fund since April 1998, selects from a universe of more than 600 stocks of companies that have been vetted for their environmental track records and labor practices. Brown looks for growing companies with solid balance sheets, a lot of cash on hand and reasonably priced shares. Over the past decade, the fund has returned an annualized 5%, which beats the typical gain of balanced funds by an average of one percentage point per year. Pax World's low minimum of $250 makes it a good starter fund.


Our Picks for Your Portfolio

Each of these balanced funds offers a complete portfolio.

Fund name: Dodge & Cox Balanced
Symbol: DODBX
Investment mix: 69% stocks, 31% bonds and cash
Minimum investment: $2,500
Top three stock holdings: Comcast (CMCSA), Hewlett-Packard (HPQ) and Wachovia (WB)

Fund name: Fidelity Global Balanced
Symbol: FGBLX
Investment mix: 55% stocks, 36% bonds and cash, 9% other
Minimum investment: $2,500
Top three stock holdings: Norfolk Southern (NSC), Southwestern Energy (SWN) and Visa (V)

Fund name: Greenspring
Symbol: GRSPX
Investment mix: 62% stocks, 38% bonds and cash
Minimum investment: $2,000
Top three stock holdings: FTI Consulting (FCN), Suncor Energy (SU) and Emcor Group (EME)

Fund name: Pax World Balanced
Symbol: PAXWX
Investment mix: 71% stocks, 29% bonds and cash
Minimum investment: $250
Top three stock holdings: CVS Caremark (CVS), America Mobile ADR (AMX) and Cisco (CSCO)

Fund name: Vanguard Wellington
Symbol: VWELX
Investment mix: 65% stocks, 35% bonds and cash
Minimum investment: $10,000
Top three stock holdings: AT&T (T), General Electric (GE) and Chevron (CVX)