Mutual funds: Weathering dips

NEW YORK – After an uninspiring start to 2007 on Wall Street, investors unnerved by the market’s apparent lack of direction might consider investing in mutual funds that straddle both the stock and bond markets as a way to help weather dips in performance.

So-called balanced funds do just as they imply: They keep one hand in the stock market and the other in the bond market to help mitigate losses should one asset class lose ground. Typically, balanced funds are made of 60 percent stocks and 40 percent bonds and some have more leeway than others to shift the balance to pursue better-performing markets.

While the limited discretion many portfolio mangers are given for asset allocation might seem restrictive, that discipline is a source of strength, backers say. Such funds essentially force investors to sell high and buy low, said Fran Kinniry, a principal in Vanguard’s Investment Counseling & Research group.

The stalwartness these funds can display in changing market conditions could draw renewed interest from some corners of Wall Street as stocks have sputtered after showing enormous gains in 2006.

Though 2007 has barely begun, the early days could raise concern among some investors. The first five days of the year are regarded by some on Wall Street as a proxy for how the full year will unfold. Of the last 35 times in which stocks carved out gains in the first five days of January, stocks ended the year higher 30 times, or 85.7 percent of the time, according to the Stock Trader’s Almanac.

So after a lackluster start to 2007 in which blue chip stocks fell during the first five days and the technology-laden Nasdaq composite index was up moderately, investors mindful of the ever-present possibility of a pullback might be willing to sacrifice some returns to lower their risk. Such investors, for example, could be those nearing retirement who have less time to make up losses from soured investments.

Though balanced funds are often viewed as a simple means of diversification, they can be tools of diligent investors and even force professional money managers to hew to a more disciplined approach, Kinniry said.

“It’s a very sophisticated strategy,” he said. “I haven’t come across that many institutions that have the discipline to do what these things do mechanically and not get caught in the emotion.”

Kinniry contends investors who might have a hard time resisting the urge to chase performance or who might hesitate to sell after reaching an investment objective should consider balanced funds.

Larry Rakers, portfolio manager of the Fidelity Balanced Fund, said the funds most often appeal to investors concerned about risk.

“The concept is that when equities are underperforming, the bonds offer a balance or ballast. You sacrifice potentially some return in exchange for a more stable return.”