A fine balance

Zoomer | March 26th, 2009

It’s not surprising that Canadians have been bailing out of equity funds at an unprecedented rate, with almost $10 billion in net redemptions over the past 12 months (to Jan. 31) according to statistics compiled by the Investment Funds Institute of Canada (IFIC).

What is somewhat unexpected is the fact they are dumping balanced funds as well, to the tune of almost $1.9 billion in the three months to the end of January.

In the past, balanced funds have been regarded as relatively safe because their fixed-income assets provide something of a cushion when stock markets melt down. However, investors are discovered that not all balanced funds are created equal and some are much more vulnerable than others to economic downturns.

Most funds in the Canadian Equity Balanced category, which are weighted towards stocks, have posted big losses in the slide, with the average fund in the group giving back almost 25 per cent in the 12 months to the end of February.

However, there are other types of balanced funds that, while not immune to losses, are less risky. You’ll fund these in the Neutral Balanced and Fixed Income Balanced categories. Here’s a quick look at each, with my pick for the top choice at present. Check with your financial advisor to see if either fund is right for your needs.

Neutral balanced funds

To qualify for inclusion in this group, a fund must invest at least 70 per cent its assets in a Canadian stocks and Canadian dollar fixed-income securities. Between 40 per cent and 60 per cent of total assets must be in equities.

AGF Canadian Balanced Fund . This fund is about as balanced as they come in asset mix terms. Equities, bonds, and cash each account for about one-third of the portfolio. As a result, manager Christine Hughes was able to hold her clients’ losses to a very acceptable 6.2 per cent over the year to Feb. 28 during one of the worst market crashes in many years. Compare that to an average loss of 20.2 per cent for the category as a whole and this is clearly a major accomplishment.

The results weren’t a fluke. Ever since she took over the fund in 1999, Hughes has handily beaten the averages. Since 2006, the fund has finished in the top quartile every year. The five-year average annual compound rate of return is 4.9 per cent compared to 0.35 per cent for the peer group.

The fund offers a well-diversified portfolio that includes a 31.5 per cent weighting in federal and provincial bonds and some blue-chip stocks like Loblaw Companies. Especially interesting is the fact that Hughes is prepared to commit a small amount of money to leveraged ETFs (e.g. a 2.5 per cent position in ProShares Ultra Short S&P 500 ETF) and gold. The mountain of cash (almost $350 million as of the end of January) provides her with the flexibility she needs to take advantage of opportunities as they arise.

Technically, this fund currently falls a little short of the minimum equity requirement for the category but that will change as Hughes deploys her cash going forward. Right now this fund looks very attractive in the current investment climate.

Fixed-income balanced funds

These funds must invest at least 70 per cent of their money in Canadian stocks and fixed-income securities. The equity position may range from 5 per cent to 40 per cent of total assets, which means these funds will be more defensive in their approach.

National Bank Conservative Diversified Fund . If you choose a fund in this category you won’t get much stock market exposure – just enough to be able to say you have a toe in the water. This fund is an example. Only 19 per cent of the assets are in equities. Of that, 10.1 per cent is invested in Canadian stocks and 8.9 per cent in foreign equity. About two-thirds of the money is held in bonds with government issues having a slight edge over corporate bonds. There’s a large cash reserve (21.5 per cent of assets).

The fund lost 5.5 per cent in the year to Feb. 28, which was a much better result than the peer group average of -10.1 per cent. Three and five-year returns are also well ahead of the category norms. Distributions are paid monthly and are running at about 1.5c per unit. The minimum initial investment is $500 and it’s a no-load fund.

There’s nothing very exciting about this one but how much excitement do you want these days? It’s a steady performer and offers some limited stock market exposure that will pay off when things turn around.

Adapted from an article that originally appeared in Mutual Funds Update, a monthly newsletter that provides advice on fund selection and strategies. For subscription information, click here.