Does Your Balanced Fund Have These Three Essentials?

Balanced investment strategies – typically a combination of stocks for capital appreciation and bonds for income – are back on the docket after a year of strong returns in 2023. Following a tough year in 2022, the Morningstar U.S. Moderate Target Allocation Index returned 16.75% in 2023.

As we look to 2024 and beyond, investors should consider whether their balanced strategies have the following three elements that we believe will be essential to achieving strong risk-adjusted returns.

  1. Equities with strong secular growth prospects

According to The Conference Board, U.S. real gross domestic product (GDP) growth is projected to slow from 3.1% in 2023 to around 1.2-1.4% in 2024 and 2025. If these forecasts prove accurate, the next couple of years will be the lowest-growth environment in the U.S. since the Global Financial Crisis (GFC), excluding the COVID-induced slowdown of 2020.

The slowdown in growth is to be expected as the effects of higher interest rates begin to be felt by consumers and corporations alike. There will be less of an economic tailwind for companies to grow earnings, so corporations that are too reliant on favorable economic conditions and a zero interest-rate policy are going to find the next 12-24 months challenging. Consequently, unmet expectations in the form of disappointing earnings announcements and soft revenue forecasts are likely to be punished.