This is a somewhat unique balanced fund in that the equity sleeve is highly focused on small and mid-cap funds. It invests in primarily in the Manulife Global Small Cap Fund, and the Manulife Strategic Income Fund, two very excellent funds in their own right. The target mix is set at 75% in equities, 25% in fixed income. At the end of December, it was overweight equities, holding nearly 80% stocks and just over 20% in fixed income.
The equities are selected using a highly disciplined, research focused, bottom up investment process that looks for companies with strong business models that earn a high return on capital, largely because of a sustainable competitive advantage. They also spend a great deal of time focusing on the company’s management. Once they have identified a potential investment candidate, they build out and stress test financial models under a number of different scenarios. They are also careful to make sure that they are buying a company at a level that is well below their estimate of its true worth.
The fixed income exposure is tactically managed that looks to manage four key risks for investors; interest rate risk, credit risk, currency risk, and liquidity risk. The duration is in the 3.25 to 3.75 year range, which is significantly below the broader bond market.
Combined, this mix provides investors with excellent risk adjusted returns, with a portfolio that will look nothing like a more traditional balanced fund.
Since its launch in August 2011, it has finished in the upper half of the category in every calendar year, and has a three year annualized return of 19.0%, handily outpacing the benchmark and its peer group.
Volatility has been below average, and it has provided nearly all the upside of the benchmark, with just over a third of the downside.
I don’t expect the absolute return numbers to be repeated, but I would expect it to deliver above average risk adjusted returns going forward. Unfortunately for investors, the fund is capped, so if you don’t own it, you’re out of luck at the moment.