In the short run, asset class and sector weightings generally tell the tale for allocation funds. But over the longer-term, it’s about manager skill, strategy, and expenses. You need a long-term view to separate the wheat from the chaff, explains Russel Kinnel in Morningstar FundInvestor.

Our moderate-allocation funds with Morningstar Ratings of Gold have outperformed over the past three years with one exception and even that one exception has strong five- and 10-year records.

Over the past three years, an allocation fund’s stake in US equities has been crucial, as they have trounced bonds and foreign stocks. (Moderate-allocation funds are classified as funds that have at least 10% in bonds and between 50% and 70% in equities over a three-year average.)

Dodge & Cox Balanced (DODBX)

It’s no surprise, then, that Dodge & Cox Balanced has top-percentile three-year returns, as it has 60% of assets in US stocks (compared with 47% for its typical peer) and another 6% in foreign equities.

Its overall equity stake exceeded 70% at times during that three-year period. But to get a top 3% 15-year return, you have to have great issue selection and low costs.

Manning & Napier Pro-Blend Extended Term (MNBAX)

Likewise, it is not a surprise that Manning & Napier Pro-Blend Extended Term was our one laggard. The fund’s US equity weighting of 46% (it averaged 44% over the period) was lower than the group norm.

But it was made worse by some wayward sector calls as it favored natural resources and other cyclical sectors at a time when healthcare and technology were better places. I’ll cut it some slack because no one gets those calls right all the time.

However, macroeconomic calls are supposed to be a strength for the firm, so it gets some demerits nonetheless. Its 15-year record, though, is in the top 11%, so we don’t want to read too much into a bad stretch.

T. Rowe Price Capital Appreciation (PRWCX)

T. Rowe Price Capital Appreciation joined Dodge & Cox Balanced at the top of the peer group rankings for three years despite a modest 56% in US equities.

A chunk of foreign equities (7%) helped as foreign stocks had higher returns than bonds. In addition, the fund has some of its bond portfolio in lower-quality debt, which has been a star performer the past three years.

Vanguard Wellington (VWELX)

Vanguard Wellington has 56% of assets in equities and solid top-quartile returns across the board. Ed Bousa’s preference for healthcare and wariness of basic materials kept the fund chugging along nicely.

This fund, along with Dodge & Cox Balanced, has a decided value tilt. The fund is open to those investing directly through Vanguard, but you can’t get it through outside fund supermarkets anymore.

Vanguard Balanced Index (VBIAX)

Vanguard Balanced Index has 58% in US equities. However, the equity exposure is via the S&P 500 and that gives it a bias toward the largest companies, which has been a winning play the past three years. Of course, the long-term appeal here is super-low costs of just 0.09%.

FPA Crescent (FPACX)

FPA Crescent shows three- and five-year returns in the top 30% for the category and that’s really quite good given its approach. The fund’s 40% US equity weighting is one of the lowest in the group and its massive 44% cash stake certainly slows returns in a rally.

Manager Steven Romick did have more in stocks in early 2013 but has gradually dialed that down as the stock market has rallied. Romick’s fondness for natural resources didn’t help, but some savvy healthcare and tech stocks saved the day. Color me impressed.

When a fund you own for its defense still produces a robust return in a market rally, you have to feel quite fortunate. Yes, the fund has a large asset base at nearly $20 billion, but Romick has done a remarkable job.

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