As savers nearing or in retirement, we are likely to be more concerned about doing the things we would like to do and to spend less time managing our investments. Let the fund managers do the heavy lifting. Mixed-Asset Funds suitable for retirees come in flavors of Retirement Income, Today, Conservative, Moderate, Aggressive, and Target Date Funds. Retirees may want to spread assets over several classifications to match their withdrawal needs. In this article, I look at what I consider to be the best "Moderate Mixed-Asset" Funds.
I used Mutual Fund Observer to extract 48 funds from the Lipper Database that are no-load, have inception dates over 7 years or more old, expenses under one percent, assets more than $100M, and are available to individual investors. These 45 mutual funds and three exchange traded funds have $122B in assets representing a sizeable pool of funds.
Large drawdowns can be devastating to the savings of retirees, especially when they occur early in retirement. The price to earnings ratio of the S&P 500 is currently very high, and valuations are one of the best long term measures of future returns. Numerous articles have projected returns over the next decade or so will be near zero. For this reason, I search for the funds with the best risk-adjusted returns as opposed to total returns. In this article, I use the Ulcer Index which measures the depth and duration of drawdowns to measure risk. I use the Martin Ratio which is the annualized return divided by the Ulcer Index to measure risk-adjusted return.
Figure #1 shows the range of annualized returns versus the Ulcer Index for a period covering the past three years. The Ulcer Index of the S&P 500 during this time was 5.2. Six Moderate funds had an Ulcer Index almost as high as the S&P 500 or higher and are excluded from consideration as the "Best Moderate Mixed-Asset Funds". The labels show representative risk-adjusted returns. To understand the chart, on the line representing 10% annualized return, one fund has a Ulcer Index of 2 and a risk adjusted return of 4.9, compared to another fund with an Ulcer Index of 7 and risk adjusted return of 1.3. This shows that some funds take a lot more risk to achieve comparable returns. Four of the remaining funds have Martin Ratios less than one for this time period and are also excluded from the "Best Moderate Mixed-Asset Funds".
Figure #1: Range of Return vs. Risk (Ulcer Index) for Three Years
Source: Author Using Mutual Fund Observer
Eliminating the poorer performing funds, the riskier funds and those with less than 10 years of life allows us to start to see the funds with better risk-adjusted performance. The ellipsoid in Figure #2 shows funds with higher returns for the level of risk taken.
Figure #2: Returns versus Ulcer Index (risk) without Outliers
Source: Author Using Mutual Fund Observer
I refined the list down further using five-and-ten-year performance for consistency, returns, and capital preservation. The remaining eight funds are loaded into Portfolio Visualizer Optimization and the link is provided here. Funds are identified to "maximize return at 10% volatility" and to "maximize the Sharpe Ratio" since 2004. The final funds are T. Rowe Price Spectrum Moderate Allocation (TRPBX), Janus Henderson Balanced (JABAX), and Vanguard Tax Managed Balanced (VTMFX). Yes, future returns are guaranteed to be different than past results, but there are some benefits to looking at the best performers of the past.
Figure #3: Portfolio Visualizer Optimized Returns - 17 Years
Figure #4: Growth of Optimized Portfolios - 17 Years
Source: Author Using Portfolio Visualizer
The same exercise is done since January 2018 to catch more recent trends and Weitz Balanced Fund (WBALX) makes the list as a candidate to maximum return for the level of volatility (Sharpe Ratio).
As a final comparison before leaving Portfolio Visualizer, Backtest is used to compare VSCGX, TRPBX, VTMFX, and JABAX and the link is provided here. On a risk adjusted basis, JABAX and VTMFX are the clear winners. On a total return basis JABAX and TRPBX are clear winners. VSCGX is notable for its low drawdown, but also had lower total return.
Figure #6: Backtest of Best Moderate Fund Contenders
Source: Author Using Portfolio Visualizer
Table #1 contains the Best Five Moderate Mixed Asset Funds and some of the metrics and ratings from Mutual Fund Observer that I used to make the final decision.
Table #1: Best Five Moderate Mixed-Asset Funds - 15 Years
For more information, I provide these additional sources.
Damian Mark wrote in 2019 about the Weitz Balanced Fund (WBALX) in Sleep Well At Night With The Weitz Balanced Fund. Mr. Mark describes WBALX as a value oriented fund. He was correct that WBALX would hold up well as it has since he wrote the article:
WBALX is a solid mutual fund with experienced management. It is probably most suitable for investors nearing retirement, for risk adverse investors and for investors like me who think the current bull market is long in the tooth (and are looking for investments that will hold up well in a market drawdown, but still do ok if the bull market should continue).
From Seeking Alpha for T. Rowe Price Spectrum Moderate Allocation (TRPBX):
The investment seeks the highest total return over time consistent with an emphasis on both capital growth and income. The fund invests in a diversified portfolio typically consisting of approximately 60% stocks; 35% bonds, money market securities, and cash reserves; and 5% alternative investments, including through hedge funds. Under normal conditions, its allocation to the broad asset classes will be within the following ranges: stocks (50-70%), bonds, money markets securities, and cash reserves (25-45%), and alternative investments (0-10%).
The Vanguard LifeStrategy Conservative Growth Fund (VSCGX) has made my screens in numerous articles such as Best Funds For Retirees To Own In 2021. I have identified the Vanguard Tax Managed Balanced Fund (VTMFX) in previous articles such as Developing A Low-Risk Vanguard Portfolio For This High-Risk Environment.
Finally, there is the Janus Balanced Fund (JABAX) which I wrote about in the May newsletter of Mutual Fund Observer in One Stop Mutual Funds with Good Multi-Year Metrics (CTFAX, FMSDX, JABAX, PRSIX, RBBAX, TRRIX, VTINX, VWINX).
I have read many articles where the author predicts that mutual funds will largely be replaced by exchange traded funds in the next decade or two. ETFs do have some advantages over mutual funds. However, when using the same criteria, including risk-adjusted performance, to evaluate mutual funds and ETFs, mutual funds still have a dominance in actively managed, mixed-asset, and multi-strategy funds. I don't see this changing for a long time. As described in Dancing With The Trend, I use mutual funds more for "buy and hold" and ETFs more for the tactical sleeve.
The next decade is likely to have more volatility and lower returns than the past. I like to find funds where the managers do the heavy lifting for me.
Vanguard LifeStrategy Conservative Growth Fund is one of my larger holdings. After writing this article, Vanguard Tax Managed Balanced Fund (VTMFX) has made my list to buy on dips.
From my perspective, and judging from assets under management, JABAX is the best "Overall" Moderate Mixed Asset Fund. I have owned Janus Balanced Fund (JABAX) in the past, but sold it when changing employer plans. It is again on my list to buy on the dips.
T. Rowe Price Spectrum Moderate Allocation (TRPBX) may be of interest to retirees or the conservative version, T. Rowe Price Spectrum Conservative Allocation (PRSIX) that I identified in One Stop Mutual Funds with Good Multi-Year Metrics. The conservative version has made my list to buy during the dips.
Best Wishes and Stay Safe!
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Disclosure: I am/we are long VSCGX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am an engineer with an MBA nearing retirement and not an economist nor an investment professional. The information provided is for educational purposes and should not be considered as advice. Investors should do their due diligence research and/or use an investment professional. In September 2019, I began contributing to the Mutual Fund Observer monthly newsletter.