Just what is a balanced fund, anyway?
Once upon a time, the answer was simple. Balanced funds were portfolios that maintained about 60% of their assets in stocks and the remaining 40% in bonds. Sometimes the mix was closer to 50-50, but the basic idea was the same, and the portfolios didn't change much.
"Balanced funds are a lot more flexible than they once were," said John Markese, president of American Assn. of Individual Investors, based in Chicago. "The old classic balanced fund is hard to find," he said.
Indeed, some so-called balanced funds today invest more than 75% of their assets in stocks, while others have only a 25% exposure to equities. Still others will plow significant sums into convertible bonds, which are part stock and part fixed-income instrument. Some even own foreign stocks.
About three years ago, Fidelity Balanced fund was criticized for having as much as 40% of its holdings in foreign securities--unthinkable under the classic notion of a balanced fund.
Noted Morningstar equity analyst Russ Kinnel: "Today, there's not much difference between a balanced fund and an asset allocation fund."
"Asset allocation" funds, as defined by Morningstar, are portfolios that offer full diversification in a single fund. Depending on the circumstances, these funds will invest in a mix of stocks, bonds, cash and other asset classes.
Because some balanced fund managers at times act like asset allocation managers, Morningstar created an umbrella term, "domestic hybrid," to classify both types of portfolios.
"Back when we had it separated, I spent so much time switching back and forth," Kinnel said. "One month, I'd say this fund is a balanced fund. Then the next month, I'd figure, 'Nope, it's really an asset allocation fund.' "
So-called flexible portfolios can also look a lot like balanced funds, and vice versa.
A flexible fund, as defined by Lipper Analytical Services, Morningstar's rival, is a fund whose manager has the option to shift money among stocks, bonds, cash and other assets. Lipper spokeswoman Melissa Daly says her firm would consider a fund "balanced" if it stayed fairly true to a 50-50 or 60-40 split between stocks and bonds.
Flexible portfolios, on the other hand, can shift assets more wildly, according to Lipper's definition.
(Lipper also tracks a "global flexible portfolio" category, which consists of funds that must have at least 25% of assets invested in securities traded outside the U.S., and "balanced target maturity" funds, which invest in stocks and bonds and which provide a guaranteed return on the bond portion when the bonds mature.)
Does it matter whether a fund is called "balanced," "asset allocation" or some other term, if it gets the job done--that is, boosting diversification and (hopefully) lowering risk?
Probably not. What really matters, experts say, is that investors understand exactly what a fund manager can do in terms of moving money around.
Michelle Smith, of the Mutual Fund Education Alliance in Kansas City, Mo., said it's important for investors to read a fund's prospectus and be comfortable with the flexibility the manager has--and therefore the level of risk he or she can take.