The first quarter of 2008 is soon to be history, and global markets have been very volatile. Major indexes are down substantially year-to-date including the S&P 500, FTSE 100, Nikkei 225 and the DAX. It's grim indeed, but there are markets doing well in this skittish environment.
According to Bespoke Investment Group, 26 out of 75 countries are in the black, proving there's always a good buy somewhere in the world. That's where hybrid funds come into play. Often referred to as asset allocation or balanced funds, they give portfolio managers the freedom to invest where they please in order to produce the expected returns their fund mandates call for. With so many options available to investment professionals, they are both a blessing and a curse. (For more information on fund management style, read What is the difference between a blend fund and a balanced fund?)
What Are They?
Hybrid fund managers use a top-down approach to their investing, first selecting the asset allocation for a portfolio, then deciding on the countries/industries best suited for any particular point in time, and then finally making individual investments based on those decisions. No stone goes unturned in an effort to maximize return and reduce risk, providing investors with good returns without the volatility. Over extended periods, they are extremely effective.
Two Hybrid Funds Worth Considering
Global stock markets have been miserable in 2008, and only two categories have positive returns - Domestic Bear Market and International Precious Metal funds. Year-to-date they've returned 11.93% and 14.52% respectively. That's great; but it doesn't help those currently searching for safe havens. Where should they turn to invest? Well, for those who don't choose cash or fixed income, we'll examine two funds that may just be the ticket. (To find out more about risk in mutual funds, see Is Your Mutual Fund Safe?)
Waddell & Reed Advisers Asset Strategy Fund (UNASX)
Since its inception March 9, 1995, this fund has been superb, returning 13.01% annually to its investors (sales charge included). In the last three years, it's beaten the S&P 500 by 17.65% annually, 26.27% to the indexes 8.62%. The fund has been managed by industry veterans Michael Avery and Daniel Vrabac since 1997, and $10,000 invested in 1997 when the duo took over, is worth $39,904 today. The fund's $3.1 billion invests 36% of the portfolio in the United States, mostly in large cap growth stocks with a median cap of $20 billion. Lipper gives it a 10-year ranking in the top sixth percentile among flexible portfolio funds. Finally, in the last 40 quarters to the end of 2007, it's had 30 with positive returns. The last down year was in 2001; year-to-date it's up 0.79%; with an expense ratio of 1.20%. What more could you ask for? (To discover how expense ratios impact your mutual fund's performance, see Stop Paying High Fees.)
BlackRock Global Allocation A (MDLOX)
This fund has been managed by a team of professionals since October 21, 1994, several who came over in the merger with Merrill Lynch Investment Managers in 2006. It's been equally as successful as the Waddell & Reed fund, producing annual returns of 12.31% (sales charge included) and three-year annual returns of 12.26%. This is one huge fund with total assets of $23.5 billion and an average market cap of $75.3 billion. It holds a total of 652 stocks or bonds with 47.9% invested in the United States. While its 10-year annual return is only 11.09% compared to 14.16% for Waddell & Reed, in the last 40 quarters to the end of 2007, it's had 32 with positive returns. Year-to-date it's down 0.61% with an expense ratio of 1.03%. Most importantly, the fund has 9.4% of its holdings in cash, waiting to strike when the opportunity presents itself. (To learn how to find data for the mutual funds in your portfolio, see Read Your Mutual Fund's Annual Report.)
Both funds worst one-year return is less than 11% while each has a best one-year return greater than 35%. While the Waddell & Reed fund is clearly the superior performer, both would make excellent core holdings for any investment portfolio.
Learn to narrow down your list of mutual funds from thousands of choices by reading Picking The Right Mutual Fund.