Chet Currier

One of the oldest types of mutual funds often goes by a new name these days. Instead of “balanced,” call them “hybrid” stock-and-bond funds.

The term balanced fund goes back to the late 1920s, when the first funds appeared pursuing the dual missions of growth from stocks and income from bonds. In recent years, sheer variety has rendered it increasingly obsolete.

In addition to traditional balanced funds say, 50 percent stocks, 35 percent bonds and 15 percent money-market investments today’s hybrid funds include “asset allocation” funds that may vary the percentages more dramatically; convertible funds specializing in bonds and preferred stocks that can be exchanged for common stock; and international stock-bond funds.

Assets in all hybrid funds total $378 billion, according to the Investment Company Institute, the industry’s biggest trade group. That makes them barely one-tenth the size of straight stock funds, and less than half as big as straight bond funds.

They’ve grown mainly through asset appreciation in recent years, with a 50 percent increase in assets since the end of 1996.

“The domestic-hybrid group should not be ignored by those in the market for new funds, especially conservative investors,” said Bill Rocco, an analyst at the research firm of Morningstar Inc. in Chicago.

“I would recommend this to my mother-in-law,” said Roger DeBard, who manages the $100 million Hotchkis & Wiley Balanced Fund. “My mother-in-law does own it.”

Check these funds out carefully, though, to make sure you’re getting an investment as conservative as you want it to be. In the modern markets, what looks cautious can still produce surprises now and then.

A case in point is convertible funds, which averaged only a 4.45 percent return last year, according to Morningstar, underperforming both the average stock and the average bond fund.

Many convertible securities are issued by small companies, which were out of favor in the 1998 marketplace. In addition, convertibles have a close kinship with high-yield junk bonds, which also had a tough year.

Convertible funds have bounced back in 1999. The Bloomberg convertible-fund average returned 8.4 percent for the year-to-date while the Bloomberg average of straight bond funds dropped 1.7 percent. Lower-rated debt, including some issued by technology companies, has suffered less than top-rated bonds as interest rates have risen this year.

The more aggressive convertible funds have gotten a lift from Internet and other technology investments. For instance, the Class B shares of the $641 million Mainstay Convertible Fund, whose holdings include tech names like Amazon.com, Cypress Semiconductor and Amkor Technology, have gained 15.1 percent this year.

Among more traditional balanced funds, an intriguing example is the $9.2 billion Capital Income Builder Fund, managed by Capital Research & Management in Los Angeles, the quiet giant of the fund business.

If you’re out to beat the Standard & Poor’s 500 stock index, Capital Income Builder is no place for your money. It has trailed the 500 by wide margins in each of the past five years, and is lagging again this year. For the past five years, the fund had an average annual return of 13.7 percent, scarcely more than half the S & P; 500’s 25.3 percent annual payoff.

Yet Morningstar analysts give Capital Income Builder good marks for its results, when you adjust them for the degree of risk its team of managers takes. At last report, the fund had about 60 percent of its portfolio in conservative stocks banks, phone companies, utilities, and so forth. Almost 30 percent was stashed in the short-term money markets, and about 10 percent in bonds.

Capital Income Builder has set itself a mission that isn’t easy to achieve these days. It seeks to pay dividends at a rate higher than the yield of the S & P;, and to raise those dividends every quarter, while keeping its portfolio at least 50 percent in stocks.

Stock yields have shrunk drastically as stock prices rose all through the 1990s. Even so, Capital Income Builder has delivered the intended results so far, raising its income pay-out from $1.17 a share in its first full year of operation, 1988, to $1.95 last year. Its current yield is about 3.9 percent.

Whether you call it a balanced fund or not, that’s a pretty good balancing act.

Don’t procrastinate

Of all the errors that mutual-fund investors can fall prey to, the worst is procrastination.

It causes more trouble, sooner or later, than choosing the wrong fund manager, picking the wrong type of fund, or buying a fund at the wrong time. When you clear the hurdle of procrastination, you’ve made a big stride toward getting where you want to go.

These are sweeping statements. Here’s the argument to support them:

Every fund investor knows about procrastination. Among its many incarnations, it’s the devilish voice in your head that says, “Don’t buy now, wait for a better opportunity a lower price, not so much risk, a value that’s easier to believe in.”

Though it comes disguised as something else, procrastination is a choice. Doing nothing with money is a de facto decision to invest it in its local currency, the dollar for instance, at 0 percent interest.

That, historically, is by far the poorest performing of all asset classes. In a famous study, Jeremy Siegel, a professor of finance at the University of Pennsylvania’s Wharton School, used the example of $1 presumed to have been invested in 1802. If you bought stocks, that $1 would have been worth $682,794 by 1998, after subtracting the effects of inflation.

If you bought bonds, its inflation-adjusted value would have grown to $932. In short-term government securities, it would be worth $284 after inflation. In gold, 82 cents (isn’t that a disappointment!). Kept in currency, your 1802 dollar would now have 7 cents worth of spending power.

The clear theme Siegel derives from these numbers is stocks for the long run. His numbers also show all the other asset classes consistently trouncing plain currency over shorter sustained periods as well.

Despite the long-term returns, why do some people still fear investing in stocks?

Two writers in the fledgling field of behavioral finance, Profs. Shlomo Benartzi of UCLA and Richard Thaler of the University of Chicago, have coined the term “myopic loss aversion.”

According to Benartzi and Thaler, people “are distinctly more sensitive to losses than to gains.” Even if they are working toward a goal decades in the future, “investors appear to choose portfolios as if they were operating with a time horizon of about one year.”

For people who take on truly big risks for example, commodity traders and entrepreneurs who start businesses mistakes and losses are routine events. Success is always uncertain.

Though procrastination offers an escape from that uncertainty, they resist it. They see procrastination over time as a sure route to nowhere.

Chet Currier is a columnist for Bloomberg News.