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By Dave Paterson  | Wednesday, August 13, 2014

The GBC Growth and Income Fund proves that good things come in small packages. With just a little over $66 million in assets under management, this offering from Pembroke Private Wealth Management has managed itself into first-quartile performance over the past seven years, handily outperforming its peers in the Canadian Equity Balanced category, and earning it the Fundata FundGrade® A-Grade for June as well as two consecutive Fundata FundGrade A+ Ratings, in 2011 and again 2012.

Unlike many traditional balanced funds that usually invest in big blue-chip names, this one focuses more on small- and mid-cap companies for its equity exposure. The managers combine a top-down, macro analysis that is used to set the asset mix with a fundamentally driven, bottom-up security selection process. At the end of June, the fund held 31% in bonds, 67% in Canadian equity, and 1% in cash. It can invest up to 30% in non-Canadian securities.

For the fixed-income exposure, the fund invests directly in the GBC Canadian Bond Fund, a well-diversified fixed-income fund, with exposure not only to Canadian, but also global bonds. The GBC Canadian Bond Fund is currently overweight corporate bonds, with approximately 40% of the bond allocation in governments. Still, investment quality is high, with all the bonds rated A or better. Its duration is lower than the DEX Universe Bond Index, which should allow this fund to hold up better when yields move higher.

Small- and mid-cap equity focus

Within the equity portion of the fund, the focus is on small- and mid-cap companies. About half the holdings of the fund are also found in the GBC Canadian Growth Fund. The balance is invested in very high yielding equities that pay a substantial dividend and are expected to grow their earnings at a more moderate rate. At the end of June, industrials, energy, and technology were the biggest equity weights. The fund has a concentrated portfolio, holding 36 equity names, with the top 10 making up about 30% of the fund.

Performance has been impressive. For the five years ending June 30, GBC Growth and Income Fund has gained an average of 16.6% a year, outpacing the overwhelming majority of other balanced funds in the country. With the exception of 2008 and 2009, it has been in the top 5% of all balanced funds.

Portfolio turnover has been modest of late, averaging in the 25% to 35% range. The managers don’t appear to be afraid to use market volatility to better position the portfolio. In 2008 and 2009 portfolio turnover was about two to three times what it has been lately. Volatility, particularly for a fund that is so heavily exposed to small- and mid-cap names, has been rather modest.

Bottom line

I really like this fund. However, I am a little leery of recommending it as a core holding. With the focus on small- and mid-cap names, I’m worried that we may see periods of higher volatility, at least higher than you would see in a more traditional large-cap focused fund. Still, if you’re comfortable with this risk, it’s a good option to consider, particularly if you have a longer-term time horizon.

Fund company: Pembroke Private Wealth Management
Fund type: Canadian Equity Balanced Fund
Fundata FundGrade® Rating: A
Style: Growth
Risk level: Medium
Load status: No load
RRSP/RRIF suitability: Good
TFSA suitability: Good
Manager: Pembroke Management Ltd.
MER: 1.86%
Code: GBC410 (no load)
Minimum investment: $10,000

See the Fundata FundCard™ for more details.

Dave Paterson, CFA, is the Director of Research, Investment Funds for D.A. Paterson & Associates Inc., a consulting firm specializing in providing research and due diligence on a variety of investment products. He is also the publisher of Dave Paterson's Top Funds Report and Mutual Fund and ETF Update offering regular commentary and in-depth analysis of Canada’s top investment funds. He uses a unique analytical approach to identify funds with strong, risk-adjusted returns, and regularly publishes his insights and analyses in Fund Library.

Notes and Disclaimer

© 2014 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. This article is for information purposes only and is not intended as personalized investment advice.

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