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Markets soar. Time for some balance

Published on 07-15-2019

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FundGrade A+® Award-winning Mawer Balanced Fund offers it

The first six months of the year produced double-digit returns for the major indexes in Toronto and New York. The TSX was ahead 14.4% for the first half of 2019 while the S&P 500 gained 17.4% and the Dow advanced 14%. European equities also did well, with the Euro Stoxx 50 Index up more than 20%.

Those are great results. Enjoy them. I don’t think we’ll see a repeat in the second half of the year. There are too many uncertainties out there, with Donald Trump’s manipulative use of tariff threats heading the list. Second-quarter earnings, which are expected to be down from a year ago, could also be a drag on the markets.

All the major U.S. indexes and the TSX have hit record highs this year. Maybe they’ll keep moving up – momentum is a powerful force with investors. But I wouldn’t bet on it. This may be a good time to become more defensive with your money.

I have always advocated the value of a balanced portfolio. Given the uncertainty facing equities in the second half of the year, I consider it even more important than ever to allocate a reasonable percentage of your assets to bonds and cash right now.

Many people are reluctant to do that, given the continued strong bull market. But prudence suggests some rebalancing if your assets are more than 70% in equities.

It’s not like bonds are a wasteland. Yes, stocks have outperformed them so far this year, but bonds have produced some decent returns since the Federal Reserve Board indicated that rate cuts, not hikes, are coming. The iShares Core Canadian Universe Bond Index ETF (TSX: XBB), a recommendation of my Internet Wealth Builder newsletter, posted a gain of 7.5% in the first half of the year. Nothing shabby about that.

A well-balanced portfolio for someone under 60 at this time would be 60%-70% equities and 30%-40% bonds and cash. For older people, a 50-50 split would be more appropriate. You can do the rebalancing yourself, or you can buy units in a balanced mutual fund or ETF, where the managers do it all for you.

ETF providers have pretty much ignored balanced funds from the outset. Recently, several companies have jumped into this sector, including Vanguard, BlackRock, BMO, and Horizons. But the amount of money invested in balanced ETFs is very small and, in most cases, we have little history with which to evaluate their effectiveness.

At this stage, I prefer to use a mutual fund, where balanced products have been a staple for many years. I know many investors have soured on mutual funds in recent years because of the high fees, but here’s one that you should consider: Mawer Balanced Fund (MAW104). It has a management expense ratio that is only slightly higher than an ETF, at 0.91%.

This fund was first recommended in my Internet Wealth Builder newsletter in February 2012. It’s a fund of funds – the portfolio consists of units in seven underlying Mawer funds, all of which are respectable performers in their own right.

The track record is outstanding. Over the 10 years to the end of May, the average annual compounded rate of return was 10%, after fees. Any fund or ETF that can top 10% over such a long period deserves attention. The fund currently has a monthly FundGrade A grade for June and has won the prestigious annual FundGrade A+ Award every year since 2014.

This is a global fund. As of May 31, the asset mix was 24.5% international stocks, 18.6% U.S. stocks, 17.0% Canadian government bonds, 15.8% Canadian equities, 12.8% Canadian corporate bonds, and the rest in “other.” The asset allocation is about 60% stocks, 40% bonds and cash. That’s a very appropriate mix for the current market conditions.

This fund rarely loses money, and if it does, the losses are small. Over the decade from 2009 to 2018, the fund was only in the red once, dropping 0.3% in 2018.

The minimum initial investment for the Mawer funds is $5,000. They can be purchased through most investment advisors and discount brokerages, except RBC Direct Investing.

I am maintaining a buy rating for this top-quality fund.

Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.

For more information on subscriptions to Gordon Pape’s newsletters, check the Building Wealth website.

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The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.

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