INVESTING Asset allocation funds seek balance between stocks, bonds

Fund managers say they make it easier for investors to buy low and sell high.
NEW YORK (AP) -- The frustration of a three-year bear market has made stars once again of asset allocation funds, the safe, stodgy investments that many investors typically ignore.
Asset allocation funds attempt to give investors a diversified portfolio by purchasing a variety of securities in various classes of stocks and bonds.
"[These funds] wane and wax in popularity ... but they have become more popular recently because of the volatile market," said Phil Edwards, Standard & amp; Poor's Corp.'s managing director of funds research.
The theory behind diversification is to reduce risk by spreading assets over a variety of sectors, industries and asset classes. The need for diversification is particularly clear during volatile markets, but many investors shrug off the idea during bull markets.
In the late 1990s, investors seeking big returns loaded up on technology stocks and other high-growth sectors, and then suffered dramatic losses.
How funds work
Asset allocation fund managers maintain that their funds make it easier for investors to buy low and sell high, and to resist the temptation to buy stocks when the equity market is soaring or to load up on bonds when they become overpriced.
"It reacts as the thermostat in your house," said Ralph Wanger, a well-known value manager who helped create the Columbia Thermostat Fund, an asset allocation fund that opened in March.
"When the market goes up, it sells stocks and buys bonds. When the market goes down, it sells bonds and buys stocks."
Each asset allocation fund uses a particular quantitative model to determine how many stocks to buy versus how many bonds.
The Investment Company Institute, a mutual fund industry group, reported that investors put $813 million into asset allocation funds in March, a significant jump from the $113 million they invested in them in February.
Several asset allocation funds have recently opened. In March, Columbia Management Group launched the Columbia Thermostat Fund, while Gabelli Funds LLC and Ned Davis Research Inc. introduced the Ned Davis Research Asset Allocation Fund.
Including all fund share classes, S & amp;P tracks more than 300 other asset allocation funds, including Fidelity Advisor Asset Allocation, PIMCO Funds: Asset Allocation/A and Vanguard Asset Allocation/Inv.
What's recommeded
Before investors jump into asset allocation funds, or any fund, they should research them carefully. Each fund is different; some hold more stocks, others have more bonds. Some of these funds might change their holdings more frequently as well, depending on market conditions.
The Columbia Thermostat Fund, for example, has a fixed allocation. It is a fund of funds that holds five stock funds and three bond funds, all operated by Liberty Acorn.
But another asset allocation fund, the GE Strategic Investment Fund, is flexible and makes more frequent changes in allocating assets among equity, bond and cash investments, according to S & amp;P.
Investors should also keep in mind that asset allocation funds' returns tend to be more moderate. This is because the funds are a mix of stocks and bonds.