There are times when, as an individual investor, I have to shake my head at some of the bonehead positions that even the world’s best mutual fund managers take. Whether it is an equity fund, a bond fund or balanced fund, evne those people who are known as the world’s “greatest” mutual fund managers make trade decisions that would make even the world’s “most novice” investor look like Warren Buffett.

But here’s the thing. Bond funds demand full (or close to full) investment in income-producing securities. A Bond Fund manager cannot sit on the sidelines and not take a position. The same goes for the biggest growth funds (and perhaps it is more-true for these growth fund managers than any other type of mutual fund manager) because sitting on the sidelines often means missing out on growth… even in times of economic uncertainty.

Tactical In Nature

This leads us to the topic of this post: Balanced Mutual Funds. As a balanced fund junkie, I am always amazed at how many different configurations these balanced mutual funds take. Unlike other funds, balanced funds are almost always tactical in nature. Their ever churning asset allocation reminds me of the ocean waves. When the tide comes in, so do the returns. Then they dump their overbought holdings and move into something with greater opportunity, whether that is income in nature or something else with a great P/E ratio or some other promising technical or fundamental indicator. Rinse and repeat (Note: Hedge funds will actually take aggressive short positions, something mutual funds will not do).

Dynamic Response To Market Events

Balanced mutual funds admittedly have one advantage over straight growth and bond funds; they can respond dynamically to market events. This means that periods of high interest rates allow balanced fund managers to dump low-dividend yield stock and get in deep with bonds that they feel will increase in value as rates drop and will consequently provide higher regular income over the duration of their holdings. Hussman’s Strategic Total Return fund is a fine example of how some balanced funds can defy gravity… and with just 31 holdings (as of January 19, 2010) it just comes to prove my next pont!

In fact, the way balanced funds can respond to markets is such an exciting benefit that balanced funds have over other classes of mutual funds that it makes one wonder why everyone does not have a least 25% of their portfolio invested in balanced funds.

Top Level Management… At Cheap Prices

In the case of the Hussman fund noted above, you will pay just 0.75% according to the Prospectus to employ John Hussman as the manager of your investment. And your minimum investment in this case is just $1,000. Of course, Hussman is just an example. Most fund companies empower only their best and brightest (or teams of the best and brightest) to manage their balanced funds, and all at rates comparable to those seen at Hussman (many are even cheaper). Last I checked, it costs more to refinance a mortgage and let the bank make some real money.

As evidenced here, there are some great benefits to investing in balanced funds. In no way is this list even complete. In fact, it deals exclusively with tactical balanced funds… and these days, there has been a growing interest and investments in these strategic funds, many of which offer specific “target dates.” Well, that’s food for thought on another day because those balanced funds are equally attractive.