6 funds revisited
Investor Daily: A look at how several asset-allocation funds we recommended this spring have weathered the market storm.
NEW YORK (Fortune) -- Last spring, with the market's rumblings growing louder, we found six asset-allocation funds that seemed like safe bets for jittery investors ("6 funds that let you sleep at night"). As it turned out, the jitters were more than justified. So how have our picks held up?
They've taken a beating, but the S&P 500 has fared worse. Asset allocation funds, which mix stocks and bonds, are designed to buffer investors against rocky markets, and our picks were proven, steady performers. Over the last 15 years, the biggest annual decline in the group years was a 10% drop by Vanguard STAR in 2002, the same year the S&P 500 index fell 22%.
Of course, that kind of loss seems almost mild now that the S&P 500 has plunged 48% for the year. Since this financial crisis has affected all asset classes - including corporate bonds that serve as shock absorbers for balanced funds - all six of our picks are on their way to their steepest annual losses in over a decade. Here's a look at how they've performed. (All figures in this story are through the market close on Nov. 20.)
GAMCO Westwood Balanced (WEBAX)
In an annus horribilis this fund has held its own. It's down 28% for the year, well ahead of the major indexes. Much of the credit goes to lead manager Susan Byrne, a veteran stock picker who sold her stakes in troubled banks Lehman Brothers, Bear Stearns, and Morgan Stanley (MS, Fortune 500) in early 2007. On the fixed-income side, co-manager Mark Freeman runs a very conservative portfolio that has helped to cushion the stock drops. "They've taken very minimal credit risk, and over the past year and a half Mark has been rotating more and more of the portfolio into Treasuries," said Morningstar analyst Andrew Gogerty.
Meanwhile, seasoned value investor Byrne has been sifting through the rubble to pick up high-quality stocks on the cheap: she recently scooped up McDonald's (MCD, Fortune 500) when it dropped below $50. Investors interested in this fund can find a bargain too: WHG Balanced (WHGBX), a clone launched by Byrne's Westwood Holding Group, has a lower expense ratio of 1.0%.
Vanguard Wellington (VWELX)
Vanguard Wellington has weathered bigger storms. Its conservative style was forged in the Great Depression; the fund began operations just months before the 1929 stock market crash.
Still, this has been a rough year for the $38 billion fund, which is down 33%. With a bigger equity position than many of its peers, Wellington has taken substantial hits. One particularly painful blow: General Electric (GE, Fortune 500), the fund's third largest holding, has plunged more than 60% for the year. Meanwhile, Wellington's fixed income portfolio, which is concentrated in high-quality corporate bonds, has also been bruised.
Despite these strikes, Wellington has fared better than about 80% of its peers. Its long-term record continues to recommend it to patient investors: the fund still boasts a 15-year annualized return of 7%.
Vanguard STAR (VGSTX)
Broad diversification, one of the fund-of-fund's biggest selling points, hasn't shielded STAR from the current crisis. This fund bypasses individual securities with a slate of 11 actively managed Vanguard funds, but as equity portfolios got slammed this year STAR has slid 35%. Out of its holdings, only Vanguard GNMA (VFIIX), which owns government-backed Ginnie Mae securities and U.S. Treasuries, is in the black: it's up 4% while the rest of STAR's holdings have lost from 5% to more than 50%. Large-cap mainstays like the Windsor and Winsdor II are down about 50%, while growth funds like the Explorer and International Growth have plunged 52% and 57%, respectively.
Still, STAR has a strong record of navigating difficult climates, with 10-year and 15-year annualized returns that rank it in the top 20% of its peers. "This fund has always been pitched as a one-stop fund for a fairly aggressive long-term investor, and I think that ultimately it's still a good mix," said Morningstar analyst Dan Culloton. STAR also offers quality at a bargain: the expense ratio is only 0.32%.
Pax World Balanced (PAXWX)
Down 38% for the year, this socially responsible fund is firmly in the middle of the pack. The tilt towards energy has been a big drag on returns lately: top holdings, like Baker Hughes (BHI, Fortune 500) and XTO Energy (XTO, Fortune 500), are trading near their 52-week lows.
That said, Pax World Balanced's heavy weighting in this sector wasn't a speculative play. "A lot of these bets have been in place for years because of manager Chris Brown's belief that demand for oil and gas will stay strong," said Morningstar analyst Wenli Tan. For investors who think energy stocks will rebound with a vengeance, it's a bet that will pay off again.
Calamos Growth and Income (CVTRX)
This $3.5 billion fund is a bit of an odd fit in the asset-allocation crowd, since it modifies the traditional stock-and-bond mix with big stakes in convertible securities. That's helped the fund rack up gains in the past, but this year is lagging behind its asset allocation peers with a 41% decline through Nov. 20.
"Convertibles are often touted for having an asymmetrical risk-reward profile, where you get much of the upside and a lot less of the downside, but that hasn't proven to be the case in this latest downturn." said Morningstar analyst Miriam Sjoblom.
Still, Calamos is performing in line with other convertible funds, and Sjoblom points out that the fund's seasoned managers, John Calamos Sr. and his nephew Nick, are the right team. "They're two of the most experienced investors in convertibles, so we still like this fund's prospects," she said.
Despite the beating, the fund still boasts an annualized 15-year return of 9% and a 10-year return of 6% to outperform 98% of its peers.
Dodge & Cox Balanced (DODBX)
This venerable $15.6 billion fund has sunk 43% this year. A large stock position, about 70% of the overall portfolio, has made the fund particularly vulnerable. As of Sept. 30, the fund's top ten holdings included Time Warner (TWX, Fortune 500) and General Electric, both down more than 55% for the year. Meanwhile, corporate bonds haven't held up to provide a much-needed cushion from fixed-income.
Dodge & Cox Balanced was already lagging this spring, thanks in part to soured financial sector bets from 2007. The managers' early 2008 reentry into financial services proved disastrous too, says Morningstar's Culloton, though he adds that investors shouldn't count this fund out just yet. "If there's a firm and a management team that can take a dismal experience and turn it into a learning experience to come out of it stronger, it's Dodge & Cox," he said.
Looking for guidance in navigating these choppy markets? Let us know what topics you'd like us to cover and we'll try to address your questions in an upcoming Investor Daily. Please note: Fortune cannot give personalized advice on specific investments in your portfolio. 
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