Almost two weeks ago, the technicians were out in force. We had tested and broken the intermediate market lows. Collapse seemed inevitable. But signs of a CIT Group (CIT) creditor-rescue and modest earnings have proven a boon to a shaky market. Even crude oil is rising with the tide.
It may be too soon to celebrate. The S&P 500 has yet to convincingly break above the intermediate trading range. If you bet the farm on stocks, you may need to mortgage it in the near future. With Obamacare in the works in Washington and mixed signals throughout the economy, we think it’s too soon to go long in force.
That’s why we’re opting for a more conservative pick this week. Reviewing less-aggressive options, we typically like lower risk ETFs. But every once in awhile an open-end mutual fund makes sense. We searched far and wide for a best of breed balanced fund. In this case, T. Rowe Price Capital Appreciation (PRWCX) fits the bill. Its unique allocation and low expense ratio make this a compelling fund for almost any environment. Here are a few reasons we like PRWCX:
First, it’s lighter on stocks than equity-only funds, and the primary reason it falls under the balanced category. At the end of June, the fund only held 61.1% in stocks. Although that’s not the best situation for a skyrocketing market, it makes for a steadier ride during uncertain times. Stocks can sway your results dramatically, but PRWCX would tend to hold up better if the market falls.
Second, PRWCX yields 2.37%. A steady payout is nice to have in shaky markets. Dividends come from both corporate earnings and bonds. Domestic bonds comprise 10% of PRWCX holdings. The fund also has a sizable position in convertibles – bonds with the option to turn into stock. This 12.7% convertible allocation tends to protect the portfolio in a down market but could give it an extra boost in an up market.
Third, PRWCX can move aggressively amongst asset classes, and has the leeway to hold large portions of cash. This is a substantial benefit in bear markets. For instance, as of June 30 PRWCX was holding almost 15% of the portfolio in cash. That protects the downside while also providing buying power when stocks or bonds get unusually cheap. The fund has a value bent, and seeks to buy stocks that are out of favor. A large pile of cash helps accomplish this goal when opportunity knocks.
The chart looks positive for PRWCX. Unlike the S&P 500, PRWCX recently broke above its June trading range. An uptrend is definitely in place. Although we expect it to continue rising, there could be a correction if the market doesn’t break out of its current trading range. Frankly, this fund shouldn’t be thought of as a trading vehicle anyway. It is best used as a core holding for investors seeking long-term capital appreciation.
A few caveats related to this mutual fund. To invest in PRWCX, you’ll need at least $2,500. In addition, management expenses will eat a small portion of your return (currently at 0.72%) – but it’s still reasonable. In addition, like all mutual funds, you can only trade with end-of-day pricing. To go with a conservative fund in an uncertain market, buy PRWCX.