Canada’s benchmark stock index continues to advance on the back of commodity prices, sweeping the Canadian dollar along with it. But rising interest rates, high levels of household debt and sluggish earnings growth have some investors looking to diversify outside Canada’s borders.

Let’s take a look at two of the more popular global balanced funds on the market: AIM Funds Management Inc. ’s $818.5-million Trimark Global Balanced Fund and Mackenzie Financial Corp. ’s $564-million Mackenzie Cundill Global Balanced Fund.

Both funds have been recently lauded, named on different occasions as the Global Balanced and Asset Allocation Fund of the Year at the Canadian Investment Awards. On the strength of their excellent long-term records, the Trimark fund won in 2004 and 2005, and the Cundill fund won in 2003.

Returns on the Trimark fund have been remarkably consistent, producing first-quartile performance in five of the past six years. In fact, in all the three-year periods since its inception, the fund has never placed outside the first quartile, reports Morningstar Canada.

After posting a 23.5% return in 2003, and more than doubling the median performer in the category, the Trimark fund more than held its own in 2004, delivering an 11.2% return. Last year, however, it eked out a barely positive return of 0.17%, sharply lagging the median performer. As of mid-April, the fund had jumped roughly 6% for the year to date.

The Cundill fund has had a similar top-quartile ride over the past five years. Up 16.9% in 2003 and 9% in 2004, it also has struggled recently, gaining only 4.8% in 2005. So far this year, it is up about 3%.

Both funds receive solid risk-adjusted rankings from Morningstar, with the Trimark fund earning five stars and the Cundill fund four. With an average annual compound return of 8.8% for the five years ended March 31, the Trimark fund has been the stronger performer. The Cundill fund delivered only a slightly thinner return of 7.1% in the same period.

Bruce Harrop took over as lead manager of the Trimark fund in 2004, but he is no stranger to the firm’s traditional buy-and-hold approach. After working with Deloitte & Touche as a management consultant, he moved to the Ontario Teachers’ Pension Plan Board as an analyst, then joined Trimark in 1999, first as an analyst and then as an international portfolio manager. Rex Chong, who manages several bond portfolios for AIM, looks after this fund’s fixed-income portion, concentrating primarily on high-yield bonds.

Legendary Peter Cundill has more than 40 years of investment experience and holds the title of Canada’s best-known value manager. On this mandate, he’s assisted by Wade Burton, another distressed-debt specialist.

The Trimark fund maintains a fairly stable division among stocks, bonds and cash. But the Cundill fund has been much more active in adjusting its asset mix — so much so that, with almost half the portfolio in cash, it’s anything but balanced at the moment.

Generally, Cundill pays little attention to geographical or other macro weightings such as asset allocation, preferring to look for bargains wherever he can find them. Not only does the widely varying approach produce consistently strong returns, but it also generates lower volatility. On top of the Cundill fund’s historically high 48% cash weighting, only 13.5% is in bonds and 35% is in stocks (10% of latter are invested in Canada; only 3.4% of the stocks are invested in the U.S., with the balance split evenly between Europe and Asia).

Harrop employs less of an “all or nothing” approach in the Trimark fund. He takes a bottom-up view, using discounted cash-flow models to search for companies with records of steadily growing their operations profitably and trading at a fair value.

In terms of asset allocation, Harrop has 66.3% of his portfolio in stocks, none of which are in Canada, with about 18% in Canadian bonds, 11.3% in foreign bonds and about 3% in cash. Roughly 17% of the equity portfolio is invested in the U.S., followed by a 41% weighting in Europe and 6% in the Far East.

What is the reason for the recent decline in performance for the Trimark fund? Morningstar considers the drop in the European currency, which Harrop did not hedge, as a key element. As well, the fund was hurt by its lack of exposure to the strongly performing energy sector.

@page_break@In the Cundill fund’s case, its high cash balances have diluted performance, as has the duration of the fixed-income portion, as long bonds have outperformed the shorter-term maturities Cundill has favoured. Hedging the fund’s foreign currency exposure has boosted its returns, however, as the loonie rose against both the U.S. dollar and the euro in the past three years. But this practice will hinder its performance if the C$ should weaken against its counterparts.

Not surprising, given the broad scope of their mandates, there are few common names among the two funds’ bigger bets. Both hold as few as 30 stocks at a time, and are invested mostly in larger companies. In both instances, top holdings are limited to 3% of the portfolio.

Given the sharp differences in each fund’s equity allocations, the funds present sharply opposing risk profiles. With a five-year standard deviation of 14.1, the Trimark fund has delivered considerably more volatile returns than its peers.

The Cundill fund’s profile, on the other hand, is the less risky of the two by a significant margin, producing only a 5.9 five-year standard deviation — less than the 7.7 exhibited by the category median.

The Cundill fund’s five-year Sharpe calculation of 0.72 emphasizes its attractive, risk-adjusted returns. The Trimark fund’s ratio of 0.47 reflects the greater chances the fund has taken to make its money.

In a category largely filled by fee-heavy funds of funds, investors who are looking to diversify away from Canada’s borders would be very well served by either of these two offerings, both of which carry average MERs. In fact, with only a 32% correlation between the two and no constraints on sector and country allocations, there may even be room for both.

The Cundill fund does, however, pose a portfolio challenge because its sharply varying cash levels will trip up careful asset allocation. As a result, Morningstar suggests that would-be supporters may be better off adding a stronger bond offering to complement other solid equity mandates managed by the Cundill team. IE