During 2013's rising stock market, allocation funds with an equity-heavy tilt tended to do well, but that wasn't necessarily the main feature leading to the success of this year's Allocation Fund Manager of the Year nominees. True, two of this year's candidates kept a relatively sizable stake in stocks compared with their peers, but it took more than that to earn a nomination. The teams that made the list plied thoughtful asset-class allocations alongside solid security selection.
The teams and managers nominated this year manage funds that are diversified across multiple asset classes--such as stocks, bonds, commodities, and real estate--and earn Morningstar Analyst Ratings of Gold or Silver, reflecting the analysts' conviction that the funds will be able to outperform their peers on a risk-adjusted basis over a full market cycle. The nominees have navigated multiple asset classes with aplomb, helping investors earn large returns in 2013, as well as over the long term.
Here are the allocation nominees:
Team From American Funds American Balanced (ABALX)
2013 Return: 21.7%
Morningstar Category Rank (Percentile): 7
The team at American Funds American Balanced is a seasoned bunch and follows American Funds' well-honed multisleeve approach to putting this fund's portfolio together. The equity sleeve has taken a larger share of the fund's assets in recent years, as the managers have found better valuations in stocks compared with bonds. A nearly 70% stake in equities throughout 2013 helped drive this fund's top-decile result for the year. The fund's stock managers search for large-cap companies with proven competitive advantages, and selective stock-picking in the industrials and consumer discretionary sectors further pushed this fund's return past the competition. The fund's fixed-income team also searches for high-quality securities and keeps an eye on capital preservation by mainly investing in Treasuries and agency mortgages.
The long-tenured team has delivered in strong markets such as 2013, and it has also offered compelling downside protection in more-volatile markets such as 2008 and 2011. Over the long haul, the team has created an impressive record, with the fund's returns placing in the moderate-allocation category's top-quartile over the trailing five-, 10-, and 15-year periods. This competitive core offering earns a Morningstar Analyst Rating of Silver.
Team From Dodge & Cox Balanced(DODBX)
2013 Return: 28.4%
Morningstar Category Rank (Percentile): 1
This fund continues to deliver. Its long-tenured team of managers (most have worked on the fund for more than a decade) has shepherded this fund to another peer-beating return in 2013 as several moves paid off handsomely. First, the fund's above-average stock stake created tailwinds in an equity market that posted strong returns. The fund has the flexibility to invest between 25% and 75% of its assets in stocks and has stayed near that maximum in recent years, as relative valuations made stocks look more appealing than bonds. (The managers recently trimmed equities back under 70%.) In addition, patient stock-picking by the investment policy committee that also runs Dodge & Cox Stock (DODGX), a nominee for Morningstar's Domestic-Stock Fund Manager of the Year for 2013, paid off: A number of longtime holdings, including several contrarian plays such as Hewlett-Packard (HPQ) and Sprint (S), had stellar gains in 2013. Moreover, the fund's bond stake, which is managed by the fixed-income committee that runs Dodge & Cox Income (DODIX) (also a nominee for Morningstar's Fixed-Income Fund Manager of the Year for 2013), held its own this year as an emphasis on both corporate bonds and a shorter-than-average duration worked well.
The fund's top-decile return in 2012 also earned its team a nomination for Fund Manager of the Year that year, although management's deep-value, against-the-grain approach hasn't always shone. A stock-heavy portfolio with an emphasis on financials and a hefty stake in corporate bonds contributed to steep losses during the 2008 financial crisis, driving many investors to abandon the fund. Those that stuck it out were well rewarded, though. The team's long-term record continues to impress, and along with seasoned management and a thoughtful, disciplined process, earns the fund an Analyst Rating of Gold.
Steve Romick, Mark Landecker, and Brian Selmo, FPA Crescent (FPACX)
2013 Return: 22.0%
Morningstar Category Rank (Percentile): 6
Unlike several nominees that benefited from a large stock stake in 2013, the team at FPA Crescent, led by veteran manager Steve Romick, outperformed its peers despite allocating a smaller amount to stocks. Although the portfolio started 2013 with 58% in stocks, roughly the same amount as its typical moderate-allocation peer, Romick cut the allocation to 53% by the end of 2013's first quarter and held steady for the rest of the year. Indeed, the team was cautious of recent high equity prices and low bond yields and had roughly 35% in cash during the year, keeping an arsenal ready for when its requisite margin of safety--the cushion formed when a security's price falls below the team's estimate of its intrinsic value--appears again.
Despite the fund's hefty cash stake, the team members didn't have the fund on autopilot. They made the most of their arguably smaller opportunity set, and attribution data indicates that strong stock picks, such as industrials firm ITT Corp (ITT), helped the fund earn an advantage this year. The fund has delivered over the long term by matching its goal of providing equitylike returns with below-average volatility; this has provided a helpful buffer during downturns, yet has still allowed for participation in up markets, such as 2013. The fund earns an Analyst Rating of Gold as a result of its notable risk-adjusted results and top-rate management team.
David Giroux, T. Rowe Price Capital Appreciation (PRWCX)
2013 Return: 22.4%
Category Rank (Percentile): 4
David Giroux, winner of Morningstar's Allocation Fund Manager of the Year for 2012, continued to impress in 2013. This Gold-rated fund far outpaced its typical moderate-allocation peer, ending the year in its category's top quartile for the fifth-straight year. Giroux has risen to the top so often because of his uncanny ability to select securities in a variety of forms, including stocks, bonds, leveraged loans, preferred securities, and convertible bonds. Both newer and longer-term stock holdings advanced the fund's results in 2013, and he also presciently avoided Treasuries in the bond portion of the portfolio last summer, which protected the fund better than many peers during the midyear interest-rate spike.
Giroux took over the fund in July 2006, and during his tenure, it has far surpassed its typical peer on both an absolute and risk-adjusted basis. Investors have noticed this strong record, and the fund received more than $2 billion in new assets during 2013. T. Rowe Price has given Giroux additional resources to handle the increasing asset base, including an associate portfolio manager and two dedicated research associates. He is also well-supported by the firm's extensive roster of equity and fixed-income analysts. There's much to like here.
Kathryn Spica, CFA does not own shares in any of the securities mentioned above.