Two global balanced funds with extremely broad mandates

Investors Tactical Asset Allocation C Fund and Fidelity Global Asset Allocation A Fund each show weak spots

Commodity markets may have steadied a bit, but sentiment toward the recently hot asset class remains fragile as investors worry about an economic slowdown. Canadian investors now may want to start moving a bit farther afield, looking for some diversification, and broadly based funds will be the order of the day for some.

Let’s take a look at two global balanced funds: IG Investment Management Ltd. ’s $1.25-billion Investors Tactical Asset Allocation C Fund; and Fidelity Investments Canada Ltd. ’s $160-million Fidelity Global Asset Allocation A Fund.

Returns on the IG fund have been quite consistent, producing first-quartile performance in three of the past five years. After posting a 13.9% return in 2003, the fund more than held its own in 2004, delivering an 8.1% return. Last year, its return of 11.5% almost doubled the median performer. Overall, this translates into a five-year compound return of 5.4% compared with the median fund’s 3.6% return. As of mid-September, the fund had jumped roughly 2.7% for the year-to-date.

The Fidelity fund has had a much bumpier ride in the past five years. Up 4.9% in 2003 and just 1.8% in 2004, it also has struggled recently, gaining only 4% in 2005. So far this year, it is up about 1.6% — all of which translates into a slightly negative five-year compound return of minus 0.3%

As a result, both funds receive middling risk-adjusted rankings from Morningstar Canada, with the IG fund earning four stars and the Fidelity fund three.

Both funds have undergone manager changes this year. Several years ago, Toronto-based YMG Capital Management Inc. and First Quad-rant Corp. of Pasadena, Calif., entered into a joint venture agreement to act as the IG fund’s subadvisors. The firms have recently been replaced, however, taking their proven track record with them.

The fund is now in the hands of first-time portfolio manager Frank Stadler, who oversees all derivative-related activities at Investors Group Inc. Prior to joining Investors, Stadler was managing director of commodity and equity structured products at CIBC World Markets Inc.

As for the Fidelity fund, Dick Habermann served as a lieutenant in the U.S. Navy for four years before joining Fidelity in 1968 as a research analyst.

He subsequently held several positions, including portfolio manager, until last May, of this global offering.

Responsibilities for the mandate now have passed to Michael Strong, who, prior to joining Fidelity, worked with Watson Wyatt in London and also served as manager for Ford Motor Co.’s pension plan in Britain. Security selection is handled by portfolio submanagers in each region.

The Fidelity fund maintains a fairly stable division among stocks, bonds and cash, with a neu-tral position of 71%, 23% and 4%, respectively. The fund is also committed to a global mandate. The median fund in the category has almost 55% of its assets invested in Canada, Fidelity notes, skewing results accordingly in recent years, due largely to currency movements.

In the past, the IG fund has been much more active in adjusting its asset mix. So much so that, with about half the portfolio in cash, it, too, seems almost too Canadian and too risk-adverse at the moment. But this is misleading, as Stadler uses derivatives to create his positions, using a combination of Canadian and foreign holdings.

Right now, the IG fund has 12% of assets in Canadian stocks and 35.4% in bonds. About 51% of the find is in cash and short-term securities.

In terms of asset allocation, Strong has 71% of the Fidelity fund’s portfolio in stocks, only roughly 3% of which are in Canada, with about 1% in Canadian bonds and income trusts, 22% in foreign bonds and about 4% in cash.

About 47% of the portfolio is invested in the U.S., followed by a 32% weighting in Europe, 8% in Japan and the balance in the Far East.

There are few common names among the two funds’ bigger bets. The Fidelity fund generally holds several hundred positions at a time, whereas the IG fund gains its exposure through derivatives.

In terms of weightings, the IG fund is light in health care but tilted toward financials and energy.

@page_break@Fidelity’s larger bets are in industrials, with an overall breakdown that is very similar to the median fund in the category.

Given the sharp differences in each fund’s equity allocations, the funds also present sharply opposing risk profiles. With a five-year standard deviation of 8.3, the IG fund has delivered considerably less volatile returns than its Fidelity counterpart, although it is roughly in line with its peers.

The Fidelity fund’s profile, on the other hand, is the riskier of the two, producing a 9.7 five-year standard deviation.

The IG fund’s five-year Sharpe calculation of 0.35 underscores the fact that it has outpaced the median global balanced fund 81% of the time over all five-year periods. Similarly, the Fidelity fund’s ratio of minus 0.27 reflects the poor results achieved in recent years.

In an expensive category that features many funds of funds, both funds carry above-average MERs. In fact, with an MER of 3.19%, the IG fund ranks as the second-most expensive in the category.

As the IG fund is clearly large enough to benefit from economies of scale and no longer has to negotiate fees with an outside manager, the fees should come down sharply, says Morningstar. If fees are cut and the new manager can deliver familiar returns, the fund may be an option for some. But probably not just yet.

Instead of either of these funds, investors probably would be better off with a fund that’s higher in the Morningstar rankings — such as Trimark Global Balanced Fund, a Canadian Investment Awards winner in both 2004 and 2005.

In all of the three-year periods since its inception, this fund has never placed outside the first quartile. IE