Looking beyond our borders

After investing most of their money at home in recent years, Canadians are once again discovering the world. For five months in a row, Global Neutral Balanced funds have been the number one choice for Canadian mutual fund investors according to figures released on April 15 by the Investment Funds Institute of Canada (IFIC).

This marks a sea change in investor attitudes. For the most part, Canadians have ignored global and international funds in recent years. The steady rise of the loonie has tended to erode profits from foreign funds while boosting returns from domestic entries.

But now investors are looking abroad once again. Global balanced funds outsold Canadian balanced funds during RRSP season and have a slight edge over the past 12 months. In terms of total assets, they still trail domestic balanced funds by slightly more than $35 billion ($126.3 billion vs. $161.7 billion) but the gap is closing. Global Neutral Balanced funds are the best-selling category in this group (there are also Global Equity Balanced funds and Global Fixed Income Balanced funds).

So what exactly are Global Neutral Balanced funds? The Canadian Investment Funds Standards Council (CIFSC) defines them as funds that “invest less than 70 per cent of total assets in a combination of equity securities domiciled in Canada and Canadian dollar-denominated fixed income securities. In addition, they must invest greater than or equal to 40 per cent but less than or equal to 60 per cent of their total assets in equity securities”.

This definition puts some funds into the category that you might not expect to find there, making their names rather misleading. Examples include Mackenzie Cundill Canadian Balanced Fund, Templeton Global Income Fund, and Transamerica IMS American Asset Allocation Fund.

I did a search for the best performers in this category over the past three years and here is one that I particularly like. Ask your financial advisor if it is suitable for your needs.

Dynamic Value Balanced Fund. The management team of David Taylor (equities) and Barry Allen (bonds) has combined to make this a first-rate fund, albeit one that is somewhat more volatile than you might expect. Taylor uses a value style to pick his stocks and he currently favours commodities with 19.8 per cent of the assets invested in the energy sector (up slightly from the start of the year) and 13.7 per cent in materials stocks, a big drop from an 18.4 per cent weighting at the beginning of January. Some of his top holdings will be familiar names, like Encana, Research in Motion, and Magna. But most investors will have never heard of Osisko Mining (which is up 64 per cent in the past year). Suffice to say, this is not your conventional balanced fund!

Barry Allen is an expert in the field of high-yield bonds. Some of his largest holdings are Newport Finance and HCA Inc, but it is important to note that the bond side of the portfolio is highly diversified with no one company comprising more than 0.7 per cent of total assets.

Slightly over half (53 per cent) of the portfolio is invested in Canadian securities with 36 per cent in the U.S. Other countries represented in the portfolio are New Zealand, Bermuda, Luxemburg, and Israel.

The latest 12-month return (to March 31) was 13.3 per cent, about four percentage points above the category average. Over the past decade, the fund shows a very good average annual compound rate of return of 8.7 per cent.

The fund pays monthly distributions of $0.035 a unit ($0.42 a year) so it’s a respectable choice if you need cash flow. The projected yield for the next 12 months is 2.1 per cent.Although risk is somewhat on the high side for a fund of this type, the rewards are worth it. I suggest buying the front-end load units at zero commission; the code is DYN9194. Rating: $$$$.

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Photo ©iStockphoto.com/ Rob Friedman