GBC Growth & Income Fund

Analysis: Unlike a lot of 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 combines 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 November, the fund held 31% in bonds, 66% in Canadian equity and 3% in cash. It can invest up to 30% in non-Canadian securities.

For the fixed income exposure, the funds invests directly in the GBC Canadian Bond Fund. It is a well-diversified fund, with exposure to not only Canadian, but global corporations. It is currently overweight corporate bonds, with just over a quarter 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 to hold up better when yields move higher.

Within the equity portion of the fund, the focus is on small and mid-cap names. About half the names in the fund are also in the GBC Growth Fund, which would be considered, more high growth names. 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 November, Industrials, energy and financials were the biggest equity weights. It is a concentrated portfolio, holding 34 equity names, with the top ten making up about 30% of the fund.

Performance has been impressive. For the five years ending November 30, it has gained an average of 16.4% 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 balanced funds.

Portfolio turnover has been modest of late, averaging in the 25% to 35% range. They 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.

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.