Balanced funds may sound boring, but they warrant a closer look amid this year's roller-coaster markets.
The appeal of these hybrid funds is diversification. They combine stocks, for upside potential, and bonds, which can help dampen market volatility. Should the asset mix get out of whack, the money manager will rebalance the portfolio.
Balanced funds sometimes outperform equity funds, particularly in sharply falling markets. They can be an investor's sole investment in a registered retirement savings plan (RRSP), or a core holding for those who also want the excitement of dabbling in stocks or exchange-traded funds (ETFs).
We asked three analysts for picks among balanced funds:
Mawer Balanced Fund A
- Recommended by: Shehryar Khan, fund analyst at Morningstar Canada, Toronto, and Dave Paterson, fund analyst with D.A Paterson & Associates Inc., Toronto
- Type: Global neutral balanced
- Management expense ratio (MER): 0.96 per cent
- Minimum investment: $5,000
- Three- and five-year annualized returns to Dec. 31: 14.45 per cent, 11.44 per cent
This fund, which holds other Mawer-managed funds, is compelling because of its low fee and the strength of its equity investments, says Mr. Khan. Fees are important because they can eat into potential returns, while "the equity funds have also done remarkably well since 2008," he added.
Greg Peterson, a portfolio manager at Mawer Investment Management, oversees this fund, which is about 60 per cent invested in equities and 40 per cent in fixed income securities. It holds Mawer Canadian equity, Canadian small-cap, U.S. equity, global small-cap and international as well as Canadian and global bond funds. The returns on the bond portion are going to be more "index-like," while the equity funds are where Mawer managers are adding the most value, Mr. Khan said. "Fixed-income is not really their area of expertise."
Mr. Paterson calls Mawer Balanced "one of the best balanced funds available." Over the past decade, the fund has posted an annualized 8.01-per-cent return.
"It has a good asset mix for those looking for long-term capital growth," he said. "It is tilted toward equities, with most of the exposure to foreign stocks. Given the slowing Canadian economy, there appear to be more growth opportunities abroad."
The fund holds equity funds run by Mawer's stock pickers, who look for what they see as "wealth-creating companies that trade at a discount to what they believe they are worth," Mr. Paterson said. One-third of the fund is in bonds that should hold up in a flat- or falling-interest-rate environment, he said. "But there could be weakness in the future as rates start moving higher."
EdgePoint Global Growth & Income Portfolio A
- Recommended by: James Gauthier, head of investment fund research at HollisWealth, Toronto, and Shehryar Khan of Morningstar Canada
- Type: Global equity balanced
- MER: 2.02 per cent
- Minimum investment: $15,000
- Three- and five-year annualized returns to Dec. 31: 18.02 per cent, 12.27 per cent
This fund is managed by an investment team with strong stock-picking skills, says Mr. Gauthier. EdgePoint Wealth Management co-founders Tye Bousada and Geoff MacDonald, who oversee the fund, "see themselves as business people buying businesses," he said. They look for companies that have strong management, compete in an industry with barriers to entry and can grow their business in any economic environment.
"They want to own good businesses and be able to buy them at a price that will allow for a reasonable rate of return over time," he added.
Some of the fund's stocks include Wells Fargo & Co., Union Pacific Corp. and JPMorgan Chase & Co. The fund's fixed-income allocation has averaged around 30 per cent since inception in 2008, he added. "Most of that is in issues with short maturities at this time," Mr. Gauthier added.
Mr. Khan says a big attraction of this fund is the "investor friendly" focus at EdgePoint. The managers plan to close their funds to new investors when assets grow too high to be able to buy smaller-company names that can make an impact on returns, he said.
Of Mr. Bousada and Mr. MacDonald, "we like that they co-invest [in the fund] alongside their investors," Mr. Khan added, and that the managers look for quality names trading at a discount to their intrinsic value.
The fund recently held about 9 per cent in cash and 27 per cent in corporate bonds. It primarily holds bonds of companies that are already in the fund, he said.
CI Cambridge Asset Allocation Corp. Class A
- Recommended by: James Gauthier of HollisWealth
- Type: Tactical balanced
- MER: 2.45 per cent
- Minimum investment: $500
- Three- and five-year annualized returns: 10.81 per cent, 6.94 per cent
This fund has no asset-mix restrictions, allowing it to hold 37 per cent in cash at the end of 2015. It reflects manager concerns about earnings growth and high stock valuations, as well as low yields for fixed-income investments. "Year-to-date, it has been the right call," says Mr. Gauthier. "The markets have been difficult."
The fund is run by a team led by Robert Swanson and Brandon Snow at Cambridge Global Asset Management. Recently, the fund held 48 per cent in equities and 14 per cent in foreign corporate bonds. Among its stocks are U.S. Bancorp, Franco-Nevada Corp. and George Weston Ltd. Last year, the fund name was changed from CI Cambridge Canadian Asset Allocation, but the investment strategy remains the same. It can still hold only up to 49 per cent in foreign content.
Fidelity Monthly Income B
- Recommended by: Dave Paterson of D.A. Paterson & Associates
- Type: Canadian neutral balanced
- MER: 2.09 per cent (front-end load)
- Minimum investment: $500
- Three- and five-year annualized returns: 7.04 per cent, 6.89 per cent
This fund, which allocates half of its assets to fixed-income securities, is a conservative option, says Mr. Paterson. "This mix will provide reasonable potential for capital growth with strong downside protection."
The big concern would be the "relatively high level of interest-rate sensitivity," but Fidelity Investments managers are trying to mitigate that risk through high-yield, global bond and convertible bond exposure, he noted. "The fund also has a relatively high 10-per-cent weight in cash, which will provide a buffer should interest rates move up."
Fidelity managers Geoff Stein and David Wolf oversee the fund's asset mix. The fund is about 24 per cent invested in Canadian stocks and 16 per cent in foreign securities. Among its holdings are Metro Inc., Pepco Holdings Inc. and Silver Wheaton Corp.