Seeking Balance at Fidelity

09/18/2014 8:00 am EST

Focus: FUNDS

Mark Salzinger

Editor and Publisher, The No-Load Fund Investor

Conventional balanced funds devote the vast majority of their assets to just two types of investments: US equities and US investment-grade bonds, notes fund expert Mark Salzinger, editor of The No-Load Fund Investor.

Fidelity has two such funds: Balanced (FBALX) and Puritan (FPURX). The good news for Fidelity investors is that both have been quite good, with competitive performance in up as well as down markets. And investors have responded, filling the funds’ coffers with billions of dollars.

The two funds have more similarities than differences. Case in point: while both have ‘neutral’ allocations of 60% equities/40% bonds, their managers have the ability to overweight equities by as much as 15 percentage points.

In each, the manager is currently taking 12 percentage points of the neutral fixed-income allocation and adding them to the allocation in equities, to 72%.

Both funds focus on large-cap growth stocks, though Balanced has a little more exposure to small and especially mid-size companies. Both funds also are diversified, with about 260 different stocks and thousands of bonds.

The funds are differentiated mostly by their investment processes and sector weightings. Though Fidelity veteran Bob Stansky oversees Balanced, the equity investment decisions really are made by equity sector specialists at the firm.

Each such analyst attempts to pick stocks that combine significantly faster earnings growth than the market, along with only slightly above-average valuations. Each sector gets approximately the same weighting as in the equity sector’s benchmark, the S&P 500 (SPX).

Fidelity’s fixed-income group picks the fund’s bonds. US bonds account for about 90% of these securities. Most of the fixed income assets (90%) also are investment grade. The duration of the fixed income portion was recently 4.77, versus 5.27 for the Barclays Aggregate Bond Index.

Puritan has a more conventional management structure. Its lead portfolio manager since 2007, Ramin Arani, has a greater hand in picking the stocks from among those the analysts recommend. Arani also has much more leeway in terms of sector allocations, which can differ markedly from those of the S&P 500.

Healthcare was the fund’s biggest equity overweight at the end of June: 16.9% of assets, versus 13.3% for the S&P 500. Information technology (mainly software and services), the largest equity sector within the fund and the index, was the next most outsized: 20.3%, versus 18.8%.

Arani and his two co-managers have been adding to the fund’s exposure to the energy sector, believing that it offers an increasingly rare combination of favorable growth prospects given the current phase of the economic cycle, along with reasonable valuations.

Meanwhile, they have been trimming exposure to the broad consumer-discretionary sector, believing that the best time of the economic cycle for these companies has passed. The fund is modestly underweight in the financial services and consumer staples sectors.

Compared to the fixed income portfolio within Balanced, Puritan’s is a little lower in credit quality. However, it is also a little shorter in duration (4.46 years), indicating slightly less sensitivity to fluctuations in interest rates but slightly more sensitivity to the economy.

Both funds have expense ratios of only 0.58%, which is very low for actively managed balanced funds. Each also has a low minimum investment requirement of $2,500.

And annual performance in recent years has been virtually the same, with a slight advantage to Puritan so far this year. (In fact, the year-to-date performances of both Puritan and Balanced are among the top five of all the funds we track in the Hybrid category.)

So, if you are a Fidelity investor in the market for a traditional balanced fund, you probably won’t go wrong with either.

In fact, given the similarities in cost and past performance, the decision probably should come down to whether or not you want to take on the risk of potentially outsized sector weightings (and high-yield corporate bonds) in the hunt for superior returns.

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