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Scudder Balanced Target Maturity Funds

Zero-coupon bonds and stocks can equal a good mix

With so much uncertainty on Wall Street, investors are looking for investment guarantees and finding them, sort of.

As a stock broker in the 1980s, one of my favorite investment strategies ---for those with a lump sum of money to invest ----was to divvy up investment dollars into two piles; one for equities the other, zero- coupon bonds. The plan was, if someone had say $10,000 to invest, half would be invested in stocks or stock funds and the other $5000 invested in an insured, non-callable zero-coupon municipal bond that, when it matured, would have a face value of $10,000.

Given that markets are always uncertain, using this scheme meant that the worst that could happen was the investor's original $10,000 investment would be returned to them when the zero-coupon bond matured. And, the best return they could get was anybody's guess: If the stocks or stock fund they were invested in did well, their returns could be spectacular. If they did poorly, the return on their original investment could wind up being zero--- but their principal would be returned in full.

As in most investment schemes, not following the plan meant not realizing the dream. In this case, investors had to hold on to their insured, non-callable zero-coupon municipal bonds until they matured to guarantee that their initial $10,000 would come back to them.

Today, there are a number of mutual funds that do the same thing---combine stocks and zero-coupon bonds. Lipper calls these kinds of funds Balanced Target Maturity Funds. And, in their portfolios fund managers prefer zero-coupon Treasuries instead of zero-coupon municipal bonds; insist that all dividends the stocks kick-off are reinvested back into the fund; and, that shareholders stay invested in the fund until it reaches maturity.

"Shareholders can redeem out, but they will be giving up the guaranteed return, " says Scott Dolan, fixed-income portfolio manager on a number of Scudder Balanced Target Maturity funds, (800-621-1048) "Also, if they don't reinvest their dividends, the guarantee won't be involved."

If you like the idea of a fund that combines stocks with zero-coupon bonds, here are a couple of things to keep in mind:

  • Performance. Lipper's No. 1 performing Balanced Target Maturity Fund in 2002, was the Scudder Balanced Target Maturity 2010 fund. While the fund ended the year with a total return of plus 5.84 percent, during the fourth quarter of 2002, its performance was the worst. Dolan explained that happened because stocks in the fund did better during the last quarter of the year than the bonds held in it.

    Short-term performance, however, isn't really what these funds are all about. It's the end result ---when the fund matures---that matters most.

  • Expenses. Make sure to research the fund's sales charges. Selling shares before the fund matures could be costly. Also, some of these types of funds can be insured so in addition to the annual expenses there will be fees to cover that cost. Because target maturity funds are basically the kinds of funds you buy shares of and then forget about until the bonds in them mature, be mindful of paying too much for them.

  • Not all existing funds may be open to new investors. Scudder's 2010 fund, originally a Kemper Retirement Series product introduced in 1990, may be last year's top performer but it's closed to new investors. The only target maturity fund that family now has open to new shareholders is the Scudder 2013. That means, when researching balanced target maturity funds, the first question to ask is if it is open to new shareholders.

  • Not all balanced target maturity funds are created equally. The percentage of stocks and bonds held in a target maturity balanced fund portfolio will vary from fund to fund. Merrill, Smith Barney and Scudder all have balanced target maturity fund offerings.

    Bottom line, for those who want to play the market, have a long-term investment horizon and don't want to lose any of their principal investment, balanced target maturity funds are worth investigating.


    Dian Vujovich is a nationally syndicated mutual fund columnist, author of a number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.

    To read more articles, please visit the column archive.

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