Cynthia Prince-Fox is a senior vice president with Ivy Investment Management Company and portfolio manager of the Ivy Balanced Fund (IBNAX), a 4-star fund seeking to provide income and long-term capital appreciation. Gregory Taggart, Quicken Blog writer, had a chance to sit down with Prince-Fox to discuss balanced investing. Here is what she had to say.
What is a balanced fund?
PRINCE-FOX: The basic objective of a balanced portfolio is to provide a level of current income and capital appreciation that over a given time produces competitive returns on a risk-adjusted basis. Obviously with exposure to bonds, equities, and cash, there are times when pure equity portfolios outperform a balanced fund and periods when pure bond portfolios outperform; but over the longer term, the objective of a balanced portfolio should be to provide competitive returns with all-equity or all-bond portfolios.
Should an individual investor have a balanced fund in his portfolio or should the portfolio be a balanced fund?
PRINCE-FOX:? The answer is ?yes? to both questions. I tell people that a balanced fund makes sense, given the level of volatility we?ve witnessed the last five years. A balanced fund can isolate an investor from volatile swings.
I?ve been in the business for 27 years and a portfolio manager for 18 years, and I?ve never seen volatility quite like this, both on the down side and the up side. A balanced fund lines up with the objectives of the more conservative investor. I think a balanced fund could also be part of some investors? larger portfolio, with the idea that they want to be in the market, but they want to dampen the level of volatility.
A balanced portfolio can serve that purpose.
What is the proper balance in a balanced portfolio?
PRINCE-FOX:? The balanced category is broad in its definition. Twenty years ago, a balanced portfolio would have been 50/50 in terms of its allocation, 50% equities and 50% fixed income. To be a balanced portfolio today, you need to have at least 25% of your assets in fixed-income-like securities.
Within that category, some managers only buy government-type securities, others only quality corporates. Some may invest primarily in high-yielding or junk bonds, others in international bonds.
It?s similar with equity portion ? you have managers with a small company mandate, others with a mid-cap or large-cap mandate, international, and so on.
How would you describe your fund?
PRINCE-FOX: I manage the equity portion more like a core mandate. I define the core mandate as basically large-cap stocks, kind of in the middle of the spectrum. It?s not a true value approach, and it?s not a true growth approach. It?s kind of in-between.
But it?s not deep value, and it?s not aggressive growth. I want to reduce volatility within the equity portfolio. Long term the fund is more of a 65/35 allocation.
Are there risks investors should be aware of in a balanced fund?
PRINCE-FOX:? Absolutely. There?s always risk. On the fixed-income side, there?s interest rate and credit risk.?In the environment we are in now, rates are at historically low levels, so if interest rates rise, the value of bonds could go down.
And there?s credit risk: By owning corporate bonds, if a corporation has problems with its balance sheet and the rating agencies lower the bond?s ratings, its bonds could react in a negative way.
The equity side is inherently more risky. But in my fund, most of the stocks are large-cap and high-quality, which eliminates some of the risk.
What is your benchmark, and how have you performed against it?
PRINCE-FOX: I?m classified in the target allocation growth, which means generally I stay in that 65 to 70 percent equity allocation, with the remainder in fixed-income type securities. Over? three, five, and 10 years, I?ve outperformed the benchmark.
[Editor: Over the last one, five, and 10 years periods as of March 31, 2012, Fox?s fund has earned average annual returns of 6.52%, 6.23%, and 6.33, respectively. In contrast, the Lipper Mixed-Target Allocation Growth Index has averaged 3.18%, 2.07%, and 4.63% over the same periods.]
How would you advise someone who wants to include a balanced fund in their portfolio?
PRINCE-FOX: I would look within the fund to see where the manager is investing. Is it a high-quality fixed-income portfolio? Is it a large-cap equity portfolio? Or is it more of a small-cap or lower-rated bond portfolio, so volatility might be a bit more than they want?
The experience and tenure on a portfolio is also important, so how many years has that particular portfolio manager managed this particular product?
I can create a balanced fund portfolio by myself. Why invest in a balanced fund instead?
PRINCE-FOX: You can accomplish exactly what I?m doing by buying an equity manager and a fixed-income manager, but many people forget to reallocate at the right times, or they might let one side of the portfolio get out of balance.
They are either not monitoring their investments that closely, or they might say, ?Hey, you know, I want to let it run. It?s doing so well, I don?t want to change anything right now.? A balanced portfolio manager?s job is to constantly be checking whether the allocation is right.
What about this approach attracted you?
PRINCE-FOX: I?m a pretty conservative investor. A large percentage of my own wealth is tied up in the portfolios I manage, so that probably tells you something. If you think about the tortoise and the hare, I?m the tortoise. That?s been the case for a long time.
I have had periods where I?ve underperformed -- during the dot-com days, I was underperforming -- but I didn?t deviate from my investment style, which paid off after the dot com world blew up. Then, in 2008 and 2009, again having a pretty conservative approach on both the fixed income and the equity side helped protect investors, which I think is so important because if you take somebody down 40, 50 percent, it?s hard to really regain that ground.
If you?re down 50, you?ve got to be up 100 percent just to get back to even.
Editor's Note: This article by Gregory Taggart was originally published on MintLife's Quicken.See more from Mint.com:
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Twitter: @mint
No positions in stocks mentioned.
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