The one fund you must own

They're overlooked and undersold but balanced funds deserve your attention

Kelly Rodgers, MoneySense September 2000

THIS SUMMER I DECIDED MY first mission was to relax and enjoy myself. lazy weekends on the beach; tall, cool drinks on hot days. Still, I didn't want my investments to suffer while I was perfecting my suntan. So I developed a lazy-days-of-summer investment strategy. The plan was so successful that I've decided to adopt it permanently

My strategy is simplicity itself. It consists of nothing more than putting most of my money into a balanced fund. As you may know, balanced funds are the Swiss army knife of the investing world. These funds invest in both stocks and bonds and are usually designed to produce reliable but not stellar returns.

Many investing know-it-alls consider balanced funds to be sound but rather unsophisticated-boring, even. I disagree. My objectives are to obtain a reasonable return, to be diversified across several markets and to be protected against the whiplash volatility of a pure stock portfolio. To accomplish that, I need a portfolio with some bonds and some stocks, spread across both Canadian and foreign markets. That's precisely what a balanced fund gives me.

If you're an investor with a small or moderate appetite for risk, a balanced fund may be all you need. In my own case, I start with a balanced fund then add a U.S. equity or global equity fund since I am more aggressive than most investors. But a maximum of two funds is all I require. I've never seen the need to split my money among a half-dozen or more specialty funds devoted to Latin American equities, emerging markets, U.S. mid-caps, yield bonds or any of the other possibilities that the mutual fund industry dangles in front of us.

In looking at fund possibilities, I avoid any fund that charges a front- or rear-end load. Paying a load doesn't buy you better management: its only purpose is to compensate a financial adviser for taking care of your portfolio. With a balanced fund most of those decisions (How much do I put into stocks? How much do I put into bonds? How do I divvy up my foreign investments?) are made for you by the fund manager. So I save some cash and stick with no-load funds.

If you want to do the same thing, it's important to spend some time and pick the right fund. Obviously, one thing you should look for is a history of good returns. Another thing you should insist upon is a history of stable returns. You don't want to put your life savings in a highly volatile investment.

To assess returns and stability, I recommend you look at a fund's record over the past five to 10 years. You can find most of this information in newspapers such as the Globe and Mail or the National Post, both of which regularly publish mutual fund reports, or at Web sites such as Globefund.com or Morningstar.ca.

The first thing you want is a fund that has performed at least as well as its peers over that five- to 10-year period. You also want a fund that has performed better than the median during most of the individual years within that period.

If you want to delve further, you may also want to check out how well a fund has done in each of its asset classes (e.g. Canadian stocks, bonds, U.S. stocks). While an asset class breakdown isn't generally available for most balanced funds, you can infer how well a fund has done in a specific area by looking at other funds offered by the same investment company. If a balanced fund is managed by a company. that has achieved better-than-average results with its specialty Canadian equity fund, its specialty U.S. fund, and its specialty bond fund, you know you are getting a wide basis of expertise.

So what's the upshot of all this analysis? Two funds that I particularly like are Phillips, Hager and North Balanced and McLean Budden Balanced Growth. The differences between these funds are minor. Both, for instance, are well diversified among a variety of stocks and bonds, although Phillips, Hager and North tends to hold more securities than McLean Budden, making the Phillips, Hager and North fund a tad more conservative. Both funds charge low fees (0.91% for Phillips, Hager and North versus 1.15% for McLean Budden). Both funds practise a GARP (Growth at a Reasonable Price) approach to investing, but McLean Budden tends to put more emphasis on the growth potential of its investments than Phillips, Hager and North.

These two funds aren't the only options, of course. You may want to look at other possibilities if you prefer a particularly conservative or aggressive approach. A very conservative fund will typically put 60% of its investments in bonds and the remainder into stocks. In contrast, a very aggressive fund will typically put only 35% of its money into bonds and keep the remainder in stocks.

While a funds asset mix policy isn't usually part of the marketing materials, you can often find out the policy by calling the fund company directly (most have 1-800 numbers) and asking. You should also inquire about the fund's rebalancing policy. Some funds allow the manager to alter the normal split between stocks and bonds by only 5% in either direction; others give a manager more discretion and allow changes in the asset mix of up to 15%. The higher the stock content of the portfolio, and the greater the discretion of the manager, the more aggressive the fund is likely to be.

My recommendation? Select a good balanced fund with a history of solid returns and a moderate risk profile. Then relax and enjoy life, knowing that a professional manager is looking after your money for you. Now that ski season is coming up, that's precisely what I plan to do.