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Dale Jackson

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Smoothing out the rough spots

Dale Jackson


March’s market volatility has a lot of investors craving a little harmony in their portfolios. You don’t need to study ancient Chinese philosophy to know harmony is about balance and your universe will not be in balance until your investments are...harmonious.

That’s easier said than done when so much that is happening on the markets just doesn’t make sense. For example, the broader equity markets can normally be balanced off against gold because the two tend to move in opposite directions. That didn’t happen in the late February sell-off when bullion tanked along with equities.

When it comes to investing it seems - now more than ever - balance is in a state of flux. In an attempt to identify that flux and maintain a balance, most mutual fund companies offer Canadian or global balanced funds. Naturally, Canadian funds are limited to achieving most of their harmony within our national borders. When a global fund is balanced, the investment universe is, at least in theory, in harmony.

Basically the yin in a balanced fund is stocks and yang is bonds -two opposing but complementary principles. The most defining aspect of a balanced fund is its stock to bond mix. Some balanced fund managers attempt to boost returns by tipping their portfolios toward stocks - especially income generating stocks that pay dividends much like bonds pay yields. Other balanced fund managers attempt to stabilize returns by favouring bonds. Returns are often smaller but the risk of loss is reduced.

Over 200 open-ended pure Canadian balanced funds are available on the market. The top performer over the past five years has been the Dynamic Power Balanced fund with an average annual return of 13.2 per cent. The split between stocks and bonds is currently about 55 per cent stock and 45 per cent bonds but managers at Goodman & Company, Investment Counsel Ltd. reserve the right to adjust that balance if one asset class is expected to outperform the other.

One example of a Canadian balanced fund that seems to have lost its balance is Lasalle Balanced. Managers at Corp Financiere LaSalle Inc. have only managed to grow the fund by an average 3.7 per cent annually over the past five years. The fund holds about 60 per cent of its assets in stock, 35 per cent in bonds and the rest in cash.

Management fees for balanced funds are normally higher than equity funds because they are basically two portfolios in one - fixed income and equities. The management expense ratio for the Dynamic Power Balanced fund is 2.64 per cent while the LaSalle Balanced fund MER is 3.53 per cent - proving that the fee to performance relationship in a balanced fund isn’t necessarily in balance.

But the best way to get in balance with the universe is through a global balanced fund. In that category Goodman & Company, Investment Counsel Ltd. once again tops the five-year performers with its Dynamic FocusPlus Balanced fund. With a five-year annual average return of 9.7 per cent it has not performed as well as Goodman’s Canadian balanced fund because Canadian equities have outperformed global equities.

However, as the fine print in the mutual fund advertisement says: past returns are not necessarily an indication of future returns. Over the past five years Canadian equities have been heavily weighted toward resource stocks - a cyclical sector that has had a strong run over that period. The sixty per cent equity weighting in the Dynamic FocusPlus Balanced fund is spread out evenly across several sectors such as materials, banks, retail, health care and technology. That sort of diversification usually, in the long run, reduces risk and leads to better returns.

The fund’s strong performance since 2002 can be attributed to its two-thirds weighting in Canadian stocks in 2006 but the global fund manager has the option to move to other parts of the world while choices for the Canadian balanced fund manager are limited.

The same logic applies to the fixed income portion of the fund: A global balanced fund can hold the safest and best yielding bonds from around the world while the Canadian fund must hold a large portion of Canadian bonds.

Global balanced funds are also available with an equity focus. In many cases, but not all, the equity portion is greater than a regular global bond fund. An equity focused balanced fund manager tends to target the equity portion of the fund for growth over capital preservation.

In most cases, risk is higher when it comes to equity focused global balanced funds, but so are returns. The top performer over the past five years is Chou Associates with an average annual return of 13.6 per cent.

On average, management fees for global balanced funds are slightly higher than Canadian balanced funds due to the extra cost of operating a fund on a global level.

Dale Jackson has been a producer at Report on Business Television since its launch in September 1999.

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