Last updated: May-24-2019

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Veteran business journalist and investigative reporter Olev Edur takes you behind the performance numbers for close-up look at the people, processes, and portfolios that make investment funds tick.

By Olev Edur  | Thursday, December 07, 2017

The Mawer Tax Effective Balanced Fund offers broad global diversification along with tax-efficient returns. In addition to Canadian bonds and equities, the fund holds various categories of U.S. and global bonds and equities. It has racked up a solid 5-year average annual compounded rate of return of 11.5% through Oct. 31, 2017. And it has achieved the FundGrade A+® Award every year since 2012.

While some of the portfolio holdings are chosen individually by Mawer’s in-house research teams, some choices are based on Mawer’s other fund portfolios, most notably the Mawer New Canada Fund, one of the best-performing Canadian equity funds – if not the best – over the long term (with an average annual compounded return of 14.0% since its inception in 1988 but, alas, now closed to further investment).

“Many individual securities are chosen by our analysts and held on a segregated basis, but we also use our own versions of internal funds,” says Travis Goldfeldt, Calgary-based co-manager (with Craig Senyk) of Mawer’s Tax Effective Balanced Fund. “Most of the weightings are in eight different asset classes, and we have long-term neutral weightings with guidelines for how much we can move those weightings.”

When it comes to dealing with taxation issues, the managers employ a combination of low turnover, astute asset selection, and “tax-loss harvesting.” “Our investment concerns always take priority over tax considerations,” says Goldfeldt. “First and foremost, we recognize that to get a high after-tax return, you need to get a high before-tax return.

“On the equity side, we buy wealth-generating companies with good management that are trading at a discount,” Goldfeldt explains. “But we listen to our researchers, and if they have concerns about a company not generating wealth, or concerns about the management team or the price, we will trim the holding even if it’s showing a gain.

“We take a long-term perspective and try to keep equity turnover below 20% annually; fixed income turnover is higher,” Goldfeldt adds. “We want to realize the longer-term value of assets, but there are situations where the value declines, so then we look for opportunities to sell at a loss and switch out to more promising stocks with high correlations – we call this tax-loss harvesting.”

On the fixed-income side, the fund’s aim is straightforward – maximize after-tax yields. “We will make trades in order to get the best after-tax yields,” says Goldfeldt. “We always ask ourselves, ‘Does it make sense from an after-tax perspective?’”

Goldfeldt admits that sometimes it’s hard to make long-term fixed-income decisions under uncertain conditions, as happened earlier this year when Ottawa hiked rates twice in a few months, then reversed itself on previously announced further hikes.

“Sometimes governments make it tough, but we try not to pick the direction of interest rates,” says Goldfeldt. “We try to maintain our bond holdings at the minimum [allocation] range, and that helps protect against yourself, because it stops you from making changes based on the moment rather than on the long-term perspective.

“For example, a few years back when rates started falling and people said they couldn’t go any lower, they kept going lower for several more years, and we even saw interest rates go negative,” Goldfeldt recalls, adding that the range limit restricted the fund’s ability to act on those early – and ultimately erroneous – predictions.

The net result is a portfolio that’s currently about one-third fixed-income investments (primarily Canadian corporate and government bonds), and two-thirds equities, loosely divided between Canada, the U.S., and international markets. And judging from the most recent returns – 3.5% for the month of October alone, 4.9% for the three months through Oct. 31 – this fund appears fully capable of continuing to generate handsome after-tax returns for its unitholders.

Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library.

Notes and Disclaimers

© 2017 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual 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. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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