Spooked by the subprime mortgage meltdown, clients are taking a much closer look at risk these days. So, it’s not surprising that balanced funds made the biggest gain in market share once again in August, accounting for 80% of total net sales of mutual funds.

And no wonder. A healthy tilt toward equities and not too much money outside the country has the better performers in the Canadian balanced fund category delivering double-digit annualized returns for the five years ended Aug. 31, 2007.

One such offering is Toronto-based AIM Funds Management Inc. ’s $831-million AIM Canadian Balanced Fund. After posting a first-quartile return of 11.7% in calendar 2004 and 17.7% in 2005, the fund more than held its own last year, registering a solid 11.4% increase and once again eclipsing its benchmark sharply. For the eight months ended Aug. 31, the fund is up roughly 2.4%, producing a five-year average annual compound return of 10.9% as of Aug. 31, vs the median fund’s 8.4% return.

Compare this with Toronto-based RBC Asset Management Inc. ’s $8.9-billion RBC Balanced Fund. Up 8.1% in calendar 2004 and 14.6% in 2005, it, too, has performed solidly, delivering an equally attractive 10.9% last year. Overall, that translates into a still attractive 9.9% five-year average annual compound return as of Aug. 31. So far this year, the fund is up 2.3%.

The AIM fund and the RBC fund have earned five- and four-star risk-adjusted rankings, respectively, from Morningstar Canada, with the AIM fund showing itself to be the stronger performer, outstripping the median fund in the category over a variety of periods.

Equity specialist Clas Olsson joined AIM Management Group Inc., AIM Funds’ Houston-based parent, in 1994, following a stint in the Swedish navy. He was promoted to his current position in 1997. Jan Friedli, the parent’s fixed-income specialist, looks after the bond portion of the portfolio. He joined AIM in 1999 after holding positions with Nicholas Applegate Capital Management and Strong Capital Management Inc.

Working on the principle that corporate earnings primarily drive stock prices, Olsson looks for price momentum — accelerating earnings, preferably — although he has been known to back earlier-stage companies that are posting losses but have accelerating revenue.

A 20-year veteran of various Royal Bank of Canada subsidiaries, Dan Chornous joined RBCAM almost five years ago as chief investment officer. Since then, he and the team responsible for the RBC fund — including fixed-income specialist Frank Gambino, previously with both Canada Life and Manulife Financial Corp. — have improved its relative performance after several consecutive years of submedian returns.

Big-picture analysts, Chornous and his team will make tactical shifts from time to time, but each regional equity weight must remain within 10% of the agreed–upon strategic mix. The managers use a proprietary tool that incorporates fundamental and technical indicators to screen the investment universe, selecting the top ranking ideas for further analysis.

Despite this, the RBC fund’s overall portfolio is rather index-like, earning a five-year R-squared measure of 94 (the closer to 100, the higher the correlation to the index), highlighting management’s ongoing difficulty of outperforming the benchmark, net of fees.

The RBC fund’s portfolio is tilted a bit more toward energy and financials, steering almost entirely clear of utilities and most consumer companies. Almost 33% of its assets are in Canadian equities, with a further 16% in the U.S. and 10% in Europe. Cash is roughly 4%. Of the 33% the fund holds in bonds, all of which have a minimum credit rating of AA-, less than 1% is outside Canada.

Likewise, the AIM fund has about 60% of its holdings in equities, with 23% in Canadian bonds and almost 4% in global bonds. Overall cash position is 9%. About 41% of the stock portfolio is invested in Canada, with the balance largely invested in Europe. Olsson is underweighted in financial stocks and technology and overweighted in consumer stocks.

Although there are a few common names among the two funds’ holdings, their bigger bets are quite different. As RBC fund holds roughly 265 stock positions, its top 10 holdings account for a scant 12% of its assets. However, management has indicated it intends to trim the number of holdings over time. The AIM fund’s top 10 represent roughly 27% of its total, which is only 80 stocks.

@page_break@One big difference between these funds is their use of non-Canadian holdings. Both travel much farther from Canadian borders than the median fund, making benchmark comparisons more difficult.

The RBC fund does not hedge currency, whereas the AIM fund has benefited from a U.S.-dollar hedge as the Canadian dollar continues to strengthen against the greenback. Given the AIM team’s view that Canadian equity markets will continue to shrink as more companies are merged or taken private, they believe maximizing the fund’s foreign content is increasingly important.

For the RBC fund, with the exception of a higher market cap, conventional valuation ratios are similar to the median Canadian balanced fund and the Morningstar benchmark. The AIM fund does, however, sport a lower price/earnings multiple but its 1.8% dividend yield is lower than that of most Canadian balanced funds.

Both funds have delivered slightly more volatile returns than their peers. The RBC fund has a five-year standard deviation of 6.05, barely higher than that of the AIM fund’s 5.9 and a bit higher than the benchmark’s 5.3. However, Olssen has significantly reduced the AIM fund’s volatility in recent years, Morningstar notes in a report. The two funds’ five-year Sharpe calculations are essentially the same — 1.3 for AIM and 1.1 for RBC.

Both funds are solid offerings for conservative investors, but the AIM fund comes out ahead based on recent performance. However, its MER of 2.37% makes it more expensive than many funds in its category. The RBC fund’s 2.28% MER, for example, while slightly less than the median, is the lowest it’s been in five years. IE