Balanced funds continued to be the fund category of choice for investors this summer, ac-counting for more than 67% of total sales in July. Year-to-date, one-decision funds are also the strongest category, with $6.8 billion in net sales. And what’s not to like? Funds in the category have, on average, posted double-digit annual returns for the past three years, driven largely by Canada’s resources boom. But not everyone can come out on top.

One laggard is Manulife Mutual Funds Ltd. ’s $90-million Elliott & Page Growth & Income Fund, a fairly young fund that has mustered only third- or fourth-quartile returns since its inception in 2001 under the care of Halifax-based Seamark Asset Management Ltd.

After producing a below-average 10.8% return in 2003, the fund dropped off further in 2004, with a 3% annual return. Last year, it generated 7.2%. For the seven months ended July 31, the fund was up roughly 1.6%, producing a five-year average annual compound rate of return of 3.7% — sharply underperforming its benchmark — for which it received just a two-star risk-adjusted ranking from Morningstar Canada.

Compare this with Phillips Hager & North Investment Man-agement Ltd. ’s $866-million PH&N Balanced Series A Fund, a somewhat stronger performer. Up 13.6% in 2003, this offering delivered a solid 9.2% in 2004, followed by 9.1% last year. Year-to-date, it is up an additional 1.7%, producing a second-quartile 5.3% average annual compound rate of return for the past five years — topping many balanced funds but still lagging the benchmark. As a result, the fund earned three stars from Morningstar.

Halifax-based Seamark, after losing a significant portion of its business when ClaringtonFunds Inc. shifted most of its subadvised fund-management business elsewhere, has recently undergone a major shakeup of its executive team, including the sudden resignation in August of George Loughery, previously the lead manager of this PH&N fund. At the moment, his duties are being filled by newly appointed chief investment officer Thomas MacLaren, who previously looked after the fixed-income side of things for this and other Seamark mandates.

A conservative pension fund manager, Seamark uses a bottom-up approach, focusing on mid- to large-cap companies with relatively low price-to-earnings and price-to-growth multiples and drawing from a spectrum of economic sectors. This is not likely to vary, despite the staff changes.

Currently, about 61.9% of the E&P fund’s holdings is in equities, with 34.8% in Canadian bonds, 1.8% in foreign bonds and virtually no income trusts. Cash is about 1%. Roughly half of the stock portfolio is invested in Canada and the other half is invested outside the country, primarily in the U.S. (22.9%) and Europe (6.9%). This foreign exposure is unhedged.

Duration on the fixed-income side is about six years, up somewhat from a year ago. Despite this, however, not holding more long bonds has hurt performance over the past few years.

Using an asset-allocation team that includes long-time CIBC World Markets Inc. economist Patti Croft and BMO Nesbitt Burns Inc. alumnus Dale Harrison, the PH&N group is led by chief investment officer Hanif Mandani, who worked for Salomon Brothers prior to his move to Vancouver. U.S. equities, long a disappointment within the PH&N family and a drag on this fund’s past performance, are now under the direction of Carl Lytollis, who managed U.S. equities at BonaVista Asset Management Ltd. prior to its purchase by PH&N last year.

While the Canadian portion of the PH&N portfolio leans toward growth companies, the foreign mandate has more of a value orientation, particularly now that BonaVista-schooled managers are in place. Management avoids large bets on fixed-income, with bond duration generally kept to within one year of the benchmark.

Two years ago, the equity portion of the fund was as high as 66%. More recently, however, that weight has drifted closer to the fund’s neutral weighting of 60%. Right now, stocks account for 58.7% of the portfolio, with 9.4% in cash. Bonds continue to hover at the fund’s lower range at 31.6% — 3.9% of which is outside the country. To gain its foreign exposure, which is unhedged, the fund purchases units of other PH&N funds. Currently, that translates into a 14.3% holding in PH&N’s U.S. Equity fund and a further 12.7% in its Overseas Equity fund.

@page_break@There are a few common names among the two funds’ holdings, but their bigger bets are quite different. The PH&N management team holds almost 200 stock positions, whereas the E&P team generally tracks less than half that. The PH&N fund’s top 10 holdings account for 22% of assets; the E&P fund’s represent more than 27%.

Both funds are underweighted in energy and material stocks compared with their peers. The E&P fund is tilted toward consumer and, to a lesser extent, technology stocks. The PH&N fund favours financial and telecom issues more than most Canadian balanced funds.

For the PH&N fund, the conventional valuation ratios are similar to the average Canadian balanced fund and the Morningstar benchmark. The E&P fund, however, has a lower P/E ratio. Both funds contain more large-cap stocks than the median fund.

On the risk side, both funds have delivered more volatile returns than many of their peers. The E&P fund profile is the less risky of the two. The PH&N fund has a five-year standard deviation of 7.3, slightly lower than the benchmark’s 6.5, but higher than the E&P fund’s 6.7.

Similarly, the E&P fund’s Sharpe calculation of 0.17 for five years lags the PH&N fund’s 0.37, although both trail the benchmark by a considerable margin.

Although neither fund has set the world on fire, the PH&N fund comes out ahead by most measures, particularly with enhancements made to its U.S. equity team. More important, however, the PH&N fund’s 0.88% MER makes it one of the least expensive in its category.

The E&P fund’s MER of 2.47%, on the other hand, is well above the median fund in what is generally considered an expensive category. In fact, pointing out that the E&P fund’s five-year return barely edges the average GIC return, Morningstar Canada politely suggests that there are more attractive choices for investors looking for a one-decision option. IE