Despite the market's slow and steady march this year, investors aren't exactly racing back into stocks, opting instead for a middle-of-the-road approach.
So-called balanced funds, which invest in a mixture of stocks and bonds -- and occasionally cash, commodities and other asset classes -- suddenly are back in style. So far this year, investors added $7.1 billion to these portfolios, according to Lipper, a research firm. That is a huge reversal from last year, when investors yanked $20 billion from these funds.
The turnaround also stands in contrast to pure stock funds, which had inflows of just $56 million this year through March 14. And some investing experts say demand for balanced strategies is likely to rise. "There's a little 'Goldilocks' appeal for investors," says Russel Kinnel, director of fund research for Morningstar, meaning the funds are "just right" in finding a spot between timid and risky.
Indeed, advisers say they are using the funds to bring clients who are still spooked by last year's extreme market volatility -- but tired of record-low yields in the bond market -- back into stocks. The pitch is that these funds offer most of the upside if the market surges but less of the downside if it tanks. The typical balanced fund looks to lock in about 85% of the stock market's return but only about 65% of its volatility, estimates Jonathan Hill, an investment-strategy specialist with Gibraltar Private Bank & Trust.
Given that kind of promise, Kate Warne, an investment strategist for brokerage firm Edward Jones, is recommending balanced funds to her clients. "The flows into balanced funds reflect investor confidence -- call it cautious confidence," she says.
Ms. Warne and other advisers say balanced funds are often a good fit with younger investors, or those looking for a set-it-and-forget investment. Some also use the funds as core holdings for clients, and supplement them with alternative assets and funds to get even broader diversification.
Other advisers, however, say the approach may be playing it too safe for many investors. Because of their lower volatility, balanced funds tend to trail their peers when stocks soar. This year, the average balanced fund is up 8%, compared with 11% for the Standard & Poor's 500-stock index. Those market-trailing returns during rallies can be particularly costly for investors still trying to rebuild nest eggs battered by the 2008 downturn, says John Manley, chief equity strategist for Wells Fargo (WFC)
On top of that, while most funds set certain parameters on what they can own -- a 60% stocks and 40% bonds split is a common one -- investors are still dependent on the manager picking smart times to buy and sell assets.
But while balanced funds may underperform over shorter periods, fans say their diversification helps them outpace pure stock funds over the long term. Over the past 10 years -- a period characterized by strong fixed-income returns -- the average moderate allocation balanced fund returned nearly 5% a year, while the S&P-500 gained 4% a year, according to Morningstar.