Objective
The fund seeks current income and long-term capital appreciation. The managers invest in a combination of blue chip stocks, investment grade intermediate-term bonds, convertible securities and cash. In general, at least 25% of the portfolio will be bonds. In practice, the fund is generally 70% equities, though it dropped to 60% in 2008. The portfolio turnover rate is modest. Over the past five calendar years, it has ranged between 12 – 38%.
Adviser
Founded in 1979 Luther King Capital Management provides investment management services to investment companies, foundations, endowments, pension and profit sharing plans, trusts, estates, and high net worth individuals. Luther King Capital Management has seven shareholders, all of whom are employed by the firm, and 29 investment professionals on staff. As of December, 2011, the firm had about $9 billion in assets. They advise the five LKCM funds and the three LKCM Aquinas funds, which invest in ways consistent with Catholic values.
Manager
Scot Hollmann, J. Luther King and Mark Johnson. Mr. Hollman and Mr. King have managed the fund since its inception, while Mr. Johnson joined the team in 2010.
Management’s Stake in the Fund
Hollman has between $500,000 and $1,000,000 in the fund, Mr. King has over $1 million, and Mr. Johnson continues to have a pittance in the fund
Opening date
December 30, 1997.
Minimum investment
$2,000 across the board, down from $10,000 prior to October 2011.
Expense ratio
0.80%, after waivers, on an asset base of $111.3 million (as of July 17, 2023).
Comments
Our original, May 2011 profile of LKCM Balanced made two arguments. First, for individual investors, simple “balanced” fund make a lot more sense than we’re willing to admit. We like to think that we’re indifferent to the stock market’s volatility (we aren’t) and that we’ll reallocate our assets to maximize our prospects (we won’t). By capturing more of the stock market’s upside than its downside, balanced funds make it easier for us to hold on through rough patches. Morningstar’s analysis of investor return data substantiated the argument.
Second, there are no balanced funds with consistently better risk/return profiles than LKCM Balanced. We examined Morningstar data in April 2011, looking for balanced funds which could at least match LKBSX’s returns over the past three, five and ten years while taking on no more risk. There were three very fine no-load funds that could make its returns (Northern Income Equity, Price Capital Appreciation, Villere Balanced, and LKCM) but none that could do so with as little volatility.
We attributed that success to a handful of factors:
Quiet discipline, it seems. Portfolio turnover is quite low, in the mid-teens to mid-20s each year. Expenses, at 0.8%, are low, period, and remarkably low for such a small fund. The portfolio is filled with well-run global corporations (U.S. based multinationals) and shorter-duration, investment grade bonds.
In designating LKBAX a “Star in the Shadows,” we concluded:
This is a singularly fine fund for investors seeking equity exposure without the thrills and chills of a stock fund. The management team has been stable, both in tenure and in discipline. Their objective remains absolutely sensible: “Our investment strategy continues to focus on managing the overall risk level of the portfolio by emphasizing diversification and quality in a blend of asset classes.”
The developments of the past year are all positive. First, the fund yet again outperformed the vast majority of its peers. Its twelve month return, as of the end of April 2012, placed it in the top 5% of its peer group and its five year return is in the top 4%. Second, it was again less volatile than its peers – it held up about 25% better in downturns than did its peer group. Third, the advisor reduced the minimum initial purchase requirement by 80% – from $10,000 to $2,000. And the expense ratio dropped by one basis point.
We commissioned an analysis of the fund by the folks at Investment Risk Management Systems (a/k/a FundReveal), who looked at daily volatility and returns, and concluded :
LKBAX is a well managed Moderate Allocation fund. It has maintained “A-Best” rating over the last 5 and 1 years, and has recently moved to a “C-Less Risky” rating over the last 63 days. Its volatility is well below that of S&P 500 over these time periods.
Its Persistence Rating is 50, indicating that it has reasonable chance of producing higher than S&P 500 Average Daily Returns at lower risk. Over the last 20 rolling quarters it has moved between “A-Best” and “C-Less Risky” ratings.
Amongst the Moderate Allocation sector it stands out as a one of the best managed funds over the last year
Despite that, assets have barely budged – up from about $19 million at the end of 2010 to $21 million at the end of 2011. That’s attributable, at least in part, to the advisor’s modest marketing efforts. Their website is static and rudimentary, they don’t advertise, they’re not located in a financial center (Fort Worth), and even their annual reports offer one scant paragraph about each fund:
The LKCM Balanced Fund’s blend of equity and fixed income securities, along with stock selection, benefited the Fund during the year ended December 31, 2011. Our stock selection decisions in the Energy, Consumer Discretionary, Information Technology and Materials sectors benefited the Fund’s returns, while stock selection decisions in the Healthcare and Consumer Staples sectors detracted from the Fund’s returns. The Fund continued to focus its holdings of fixed income securities on investment grade corporate bonds, which generated income for the Fund and dampened the overall volatility of the Fund’s returns during the year.
Bottom Line
LKCM Balanced (with Tributary Balanced, Vanguard Balanced Index and Villere Balanced) is one of a small handful of consistently, reliably excellent balanced funds. Its conservative portfolio will lag its peers in some years, especially those favoring speculative securities. Even in those years, it has served its investors well: in the three years since 2001 where it ended up in the bottom quarter of its peer group, it still averaged an 11.3% annual return. This is really a first –rate choice.
