Thanks to higher interest rates, returns from fixed income assets have been elevated, especially compared to the past decade or so. For investors unsure of how to buy bonds, or how to adequately diversify their portfolios, allocation funds can be an instrument to obtain exposure to both bonds and stocks.
According to Sam Hui, a manager research analyst at Morningstar, there is no such thing as an ideal weight between equities and bonds. Hui elaborates: “Flexible allocation may allow you to better navigate the market environments. For example, having more equities in 2020 may have been helpful, while having more bonds in 2022 would have been beneficial. The point is you need to have the capabilities to make these allocation calls. Otherwise, you may end up suffering due to poor market timing.”
An additional advantage of investing in a pre-made stock-bond portfolio is the influence it has on the timing of purchases and sales.
Allocation funds are typically diversified core holdings for long-term investors. According to Morningstar’s Mind the Gap study, this broad category exhibits some of the smallest gaps between a fund’s returns and actual returns received by investors. This means that, in comparison to higher-risk categories like sector funds, investors in less-volatile products are less prone to bad timing and are thus better served.
Therefore, we have sourced a list of top-rated allocation funds that help investors express exposure to Global, the U.S., and Asia stocks and bonds. Here it is:
Capital Group American Balanced Fund (LUX) Class B USD Accumulation earns a Morningstar Medalist Rating of Bronze, driven by an Above Average rating in Process and People pillars. While this is a global fund, the majority of weightage is assigned to U.S. assets.
Greg Carlson, senior analyst at Morningstar, thinks the fund’s prudent focus on capital growth as well as income merits an Above Average Process rating.
As of November 2023, the equity portion takes up 61.6% of the fund’s assets. Fixed income securities amount to 32.5% of the whole portfolio, according to the November data. According to Carlson, the equity sleeve of this allocation strategy focuses on blue-chip, dividend-paying stocks such as top-five holdings Microsoft (MSFT) and Philip Morris International (PM). He says: “Such stocks predominate, in part because these managers strive for a yield in line with the S&P 500's, but 10% of assets may be invested in non-dividend-payers. That leaves room for some growth-oriented fare such as Alphabet (GOOG).” Over to the bond sleeve, it is primarily to offset equity volatility, with income secondary, says Carlson. The fund also avoids buying high-yield bonds. He adds: “If a security is downgraded to junk status, the managers are expected to sell it within one year.”
Despite recent turnover due to portfolio managers’ retirement, Carlson believes the fund’s current roster boasts a wealth of experience managing portfolios, including Jin Lee and Chit Purani, both disclosed as managers in March 2023.
Bronze-rated JPMorgan Investment Funds - Global Income Fund A (acc) - USD (hedged) is a highly flexible mandate.
As Emory Zink, Morningstar’s associate director says, up to 100% of the portfolio may be fixed income, though below-investment-grade debt won’t exceed 70%. Equities may reach 60%, and the team may hold up to 25% in a combination of convertible and preferred securities. Moreover, relative to the category, Zink thinks the profile here is more adventurous with junk bonds and emerging-markets exposures, characteristics that can fuel volatility during stressed markets.
Earning a Process rating of Above Average, the fund has compelling longer-term prospects for a patient investor willing to endure rough patches, as the approach to these portfolios is thoughtful, disciplined, and risk-aware within the context of their income-generating mandate, says Zink. With experienced and collaborative portfolio managers on the team, the strategy earns a rating of Above Average in the People pillar.
In terms of country, U.S. assets take up 34.4% of the overall exposure, with U.K. and France ranking second and third with a 9.7% and 5.4% weight, respectively.
For Asia exposure, the First Sentier Bridge Fund is a compelling option. The Bronzed-rated strategy has US$ 210 million under management. According to our analysts, the strategy seeks balanced exposure to Asia-Pacific ex-Japan equities and Asian fixed income.
This strategy targets a fixed 50/50 equity-to-bond allocation and asset allocation is not expected to generate alpha here, says Sam Hui, manager research analyst at Morningstar.
Hui says: “The bottom-up equity approach seeks to identify high-quality companies that deliver sustainable and predictable growth at reasonable valuations. Utmost attention is paid to management quality.”
Meanwhile, the bond sleeve executes a hard-currency, quality-focused approach.
He elaborates: “The Singapore-domiciled vehicle invests only in investment grade issuers and is benchmarked against the JPM Asia Credit Investment Grade Index (hedged to Singapore dollars) while the Hong Kong-domiciled vehicle can invest up to one-third in high-yield debt and is benchmarked against the JPM Asia Credit Index.”
Investors should note that, in this fund, the equity sleeve serves as the key performance driver. Hui says the conviction in the equity investment process underpins a Process rating of Above Average.
Over to the People side, Hui’s conviction centers on “a best-of-breed equity manager and a strong equity investment team” that continues to drive outperformance for the strategy. This supports a People rating of Above Average.
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