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In today’s environment, there’s a question whether balanced funds still make sense: Higher interest rates coupled with higher levels of inflation could deliver low inflation-adjusted returns going forward.

We believe balanced funds can still be a prudent approach for risk-conscious investors. Fixed-income investments have historically helped to limit the impact of drawdowns, while equities provide the growth potential investors need to help achieve their long-term goals. A balanced strategy combines both the relative safety of fixed income with the increased return profile offered by equities, which has historically provided a better investor experience (FIGURE 1).

 

FIGURE 1

Balanced Investing Has Offered an Attractive Trade-off Between an All-Equity and All Fixed-Income Portfolio 
Average Annual Returns (2001–2021)

Past performance does not guarantee future results. Equities are represented by the S&P 500 Index. Bonds are represented by the Bloomberg US Aggregate Bond Index. Balanced Strategy is represented by 50% S&P 500 Index and 50% Bloomberg US Aggregate Bond Index and does not reflect the performance of any particular fund. Volatility is measured by standard deviation, which measures the spread of the data about the mean value. Indices are unmanaged and not available for direct investment. For illustrative purposes only. Please see page 5 for index definitions. Data Sources: Morningstar and Hartford Funds, 4/22.

 

2020 provided an interesting case study for balanced investing. When the COVID-19 drawdown rocked markets, a balanced strategy didn’t experience the level of losses that an all-equity portfolio experienced. What’s more, the balanced strategy recovered its losses in 51 days—much faster than the S&P 500 Index (FIGURE 2).

At the onset of the pandemic, the yield on the 10-year Treasury was approximately 1.90%. Even in a low-rate environment, fixed income was able to help dampen equity-market risk and reduce the impact of a severe drawdown.

 

Balanced portfolios lost less and recovered more quickly than an all-equity portfolio during the COVID-19 drawdown. 

FIGURE 2

2020 COVID-19 Drawdown and Recovery
Balanced Strategy vs. S&P 500 Index (2/20/20–6/5/20) 

Past performance does not guarantee future results. Data Sources: Morningstar and Hartford Funds, 4/22.

 

Balanced Funds Have Helped Cushion Drawdowns

If we look at the past five drawdowns of 10% or more for the S&P 500 Index, the Bloomberg US Aggregate Bond Index averaged modestly positive returns during those periods, while the average equity drawdown was nearly 19% (FIGURE 3). Even in periods in which rate increases or extreme panic caused credit sectors to underperform, the magnitude of fixed-income losses was far less than that of equities.

 

FIGURE 3

Fixed Income Held Up Well in the Past Five Equity Drawdowns
Equity and Fixed-Income Returns During Equity Corrections >10%

Date Equity Drawdown Fixed-Income Returns
Feb 2020–Mar 2020 -33.80% -0.90%
Sep 2018–Dec 2018 -19.40% 1.60%
Jan 2018–Feb 2018  -10.10% -1.00%
Jul 2015–Feb 2016 -12.90% 3.00%
Jul 2011–Oct 2011 -17.80% 3.60%
Average -18.80% 1.26%

Past performance does not guarantee future results. Data Sources: Morningstar and Hartford Funds, 4/22.

 

Do Balanced Funds Make Sense When Rates Are Rising?

Another objection to balanced investing today is rising rates and their impact on fixed income. We examined the last five periods in which the yield on the 10-year Treasury spiked significantly (FIGURE 4).

The S&P 500 Index averaged 21.30% over these time periods despite an average yield increase of 1.86% on the 10-year Treasury. While equities should do the heavy lifting and provide the bulk of returns in a balanced strategy, the fixed-income allocation helps to dampen overall risk and smooth out the return profile over time.

 

FIGURE 4

Stocks Performed Well When Rates Were Rising
Stock Returns When the 10-Year Treasury Spiked Significantly (6/13/03–3/31/22)

Date Starting
Yield
Ending
Yield
Yield
Change
S&P 500
Index
6/13/03–6/12/07 3.13% 5.33% 2.20% 12.60%
12/31/08–4/2/10 2.06% 3.99% 1.93% 27.92%
7/24/12–1/22/14 1.39% 2.87% 1.48% 25.83%
7/3/16–11/8/18 1.36% 3.23% 1.87% 15.52%
3/9/20–3/31/22 0.50% 2.32% 1.82% 24.63%
Average 1.69% 3.55% 1.86% 21.30%

Past performance does not guarantee future results. Data Sources: Morningstar and Hartford Funds, 4/22.

If there are any policy missteps by the Fed, a fixed-income allocation could help limit downside and mitigate losses. 

 

Moving forward, bond returns could be negatively affected by a more active Federal Reserve (Fed) and further inflationary pressures. However, this same backdrop should be a favorable environment for the equity portion of a balanced strategy. If there are any policy missteps along the way that could jolt the economy and equity markets, the fixed-income allocation may help to limit downside and mitigate losses.

 

A Balanced Fund With a Quality Focus

If the idea of using a balanced strategy makes sense to you, the Hartford Balanced Income Fund may be a good choice. We believe the Fund is a compelling strategy in an environment of rising interest rates and higher inflation, and holds several advantages over a traditional balanced approach.

The Fund has a 45% equity/55% fixed-income mix with the flexibility to change allocations by + or - 5%. A strategic approach to asset allocation has helped keep risk in check and puts a premium on security selection, a strength of the Fund’s sub-adviser, Wellington Management.

 

Equity Sleeve

Domestic investing has been outstanding over the past decade relative to international investing. Propelled by the Fed and corporate tax cuts, US companies delivered record-setting corporate profits. As their balance sheets swelled, companies put that cash to work through research and development, new products, stock buybacks, and dividends—a key ingredient of the Hartford Balanced Income Fund.

The Fund’s equity sleeve is comprised of high-quality, dividend-paying stocks that have the potential to grow their dividends over time (FIGURE 5). You’ll recognize the Fund’s top-10 holdings because many of them are among America’s best companies—names you know and trust—that have been paying dividends for decades.

We believe the Fund’s focus on dividend-paying equities and its value tilt distinguish it from the S&P 500 Index. Value strategies tend to have more exposure to banks and insurance companies, which have historically benefitted from higher interest rates.

 

Value strategies could benefit from higher interest rates due to their exposure to banks and insurance companies. 

 

Value strategies also tend to have more exposure to commodity-focused businesses, such as energy companies, and mining and metals companies, which have historically benefitted from periods of inflation.

Consumer staples are another area that could perform well in an inflationary environment. Relatively inelastic demand for these products (e.g., food, beverages, and other household items) means companies in this sector have more pricing power than in many other sectors.

 

FIGURE 5

A Heritage of Paying Dividends
Dividend History: Hartford Balanced Income Fund’s Top-10 Equity Holdings (as of 3/31/22)

Company Name Year Began Paying Dividends Portfolio Weighting (%)
Johnson & Johnson 1973 1.70
MetLife, Inc. 2000 1.44
Chubb Ltd.  1993 1.43
JP Morgan Chase & Co. 2000 1.43
Cisco Systems, Inc. 2011 1.39
ConocoPhillips 2002 1.32
Medtronic plc 1977 1.27
Morgan Stanley 1995 1.26
Pfizer, Inc. 1980 1.24
Bank of America Corp.  1977 1.22
Total   13.70

Holdings are subject to change. Data Sources: Bloomberg and Hartford Funds, 4/22.

 

Fixed-Income Sleeve

The Fund’s fixed-income sleeve is primarily comprised of investment-grade corporate bonds, with small allocations to high-yield and emerging-market bonds to diversify the fixed-income exposure and help with overall income generation (FIGURE 6). A focus on corporate debt also has a yield advantage over US Treasuries or Agency mortgage-backed securities. The spread1 component could provide a buffer in a rising-rate scenario, as the additional income could help cushion losses, while spread tightening could help to dampen the impact of rising rates on bond prices.

 

FIGURE 6

Hartford Balanced Income Fund: Fixed-Income Sector Exposure (3/31/22)

 

Strike Your Proper Balance

In one of the most complex investment environments in decades, using a balanced strategy rather than going all in on either stocks or bonds might be a prudent approach. The Hartford Balanced Income Fund may be appropriate for investors who want a conservative core holding for their portfolio—one that could provide a better investor experience whether inflation and interest rates move up or down.

 

Morningstar ratings for selected Mutual Fund Shares

OVERALL
(as of 4/30/2022)
Overall, 5 stars, 3-Year, 4 stars, 5-Year, 5 stars, and 10-Year, 5 stars, rated against 426, 426, 393 and 262 products, respectively. Morningstar RatingTM is calculated for products with at least a 3-year history, based on a risk-adjusted return measure (excluding any applicable sale charges) and accounts for variations in a product's monthly performance. 5 stars are assigned to the top 10%; 4 stars to the next 22.5%, 3 stars to the next 35%, 2 stars to the next 22.5% and 1 star to the bottom 10%. ETFs and mutual funds are considered a single population. The Overall Rating is derived from a weighted average of the performance figures associated with its 3-, 5-, and 10-year (if applicable) Morningstar Rating metrics. For more information about these ratings, including their methodology, please go to global.morningstar.com/managerdisclosures . Ratings for other share classes may vary and are subject to change monthly. Past performance is no guarantee of future performance.
©2022 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/ or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

426 Products | Allocation--30% to 50% Equity Category
Based on Risk-Adjusted Returns
OVERALL
(as of 4/30/2022)
Overall, 5 stars, 3-Year, 4 stars, 5-Year, 5 stars, and 10-Year, 5 stars, rated against 426, 426, 393 and 262 products, respectively. Morningstar RatingTM is calculated for products with at least a 3-year history, based on a risk-adjusted return measure (excluding any applicable sale charges) and accounts for variations in a product's monthly performance. 5 stars are assigned to the top 10%; 4 stars to the next 22.5%, 3 stars to the next 35%, 2 stars to the next 22.5% and 1 star to the bottom 10%. ETFs and mutual funds are considered a single population. The Overall Rating is derived from a weighted average of the performance figures associated with its 3-, 5-, and 10-year (if applicable) Morningstar Rating metrics. For more information about these ratings, including their methodology, please go to global.morningstar.com/managerdisclosures . Ratings for other share classes may vary and are subject to change monthly. Past performance is no guarantee of future performance.
©2022 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/ or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

426 Products | Allocation--30% to 50% Equity Category
Based on Risk-Adjusted Returns

Talk to your financial professional to learn more about balanced investing and the Hartford Balanced Income Fund

 

1 Spreads are the difference in yields between two fixed-income securities with the same maturity, but originating from different investment sectors.

S&P 500 Index is a market capitalization-weighted price index composed of 500 widely held common stocks.

Bloomberg US Aggregate Bond Index is composed of securities that covers the US investment-grade fixed-rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.

Important Risks: Investing involves risk, including the possible loss of principal. Security prices fluctuate in value depending on general market and economic conditions and the prospects of individual companies. The Fund may allocate a portion of its assets to specialist portfolio managers, which may not work as intended. • Fixed income security risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall. • For dividend-paying stocks, dividends are not guaranteed and may decrease without notice. • Different investment styles may go in and out of favor, which may cause the Fund to underperform the broader stock market. • Foreign investments may be more volatile and less liquid than US investments and are subject to the risk of currency fluctuations and adverse political, economic, and regulatory developments.

This content is provided as general information about Hartford Funds’ products and is not intended to constitute a recommendation or investment advice.

The views expressed here are those of the author. They should not be construed as investment advice. They are based on available information and are subject to change without notice. Portfolio positioning is at the discretion of the individual portfolio management teams; individual portfolio management teams, and different fund sub-advisers, may hold different views and may make different investment decisions for different clients or portfolios. This material and/or its contents are current as of the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Hartford Funds.

BLOOMBERG® and any Bloomberg Index are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the indices (collectively, “Bloomberg”) and have been licensed for use for certain purposes by Hartford Funds. Bloomberg is not affiliated with Hartford Funds, and Bloomberg does not approve, endorse, review, or recommend any Hartford Funds product. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to Hartford Fund products.

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About The Author
Author Headshot
Neil Patton, CFA, CAIA
Investment Specialist – US Equity Hartford Funds

The material on this site is for informational and educational purposes only. The material should not be considered tax or legal advice and is not to be relied on as a forecast. The material is also not a recommendation or advice regarding any particular security, strategy or product. Hartford Funds does not represent that any products or strategies discussed are appropriate for any particular investor so investors should seek their own professional advice before investing. Hartford Funds does not serve as a fiduciary. Content is current as of the publication date or date indicated, and may be superseded by subsequent market and economic conditions.

Investing involves risk, including the possible loss of principal. Investors should carefully consider a fund's investment objectives, risks, charges and expenses. This and other important information is contained in the mutual fund, or ETF summary prospectus and/or prospectus, which can be obtained from a financial professional and should be read carefully before investing.

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