Cundill Canadian Balanced Fund

Analysis: Manager Lawrence Chin use the same deep value style that has become synonymous with the Cundill name. The approach is almost contrarian, buying stocks when they are most hated by the markets. Over the long term, this has provided strong returns for investors with modest levels of risk. However, during shorter periods of time, it has the potential to experience higher levels of volatility, which can lead to periods of underperformance.

Like other Cundill funds, this one is very concentrated, holding less than 30 equity names and less than 30 fixed-income investments. The top 10 holdings make up nearly 50% of the fund. In constructing the portfolio, the manager use a bottom up approach that looks to invest when the security is trading at a significant discount to their estimate of its intrinsic value.

The asset mix of the fund is actively managed, but it does have a neutral mix of 60% equities and 40% fixed income. As of June 30, it was roughly 65% equity, 28% bonds with the balance in cash.

The fixed-income portion of the fund can invest in government bonds, corporate bonds, and high yield bonds. Managers will focus the portfolio on the sectors that are offering the most attractive risk reward characteristic. Currently, they are conservatively positioned, holding short-duration bonds to protect against rising rates. They believe that long-term rates offer very little incentive to take on the additional duration risk.

Within the equity side of the fund, a bottom-up, deep value, contrarian stock selection process is used. As with other Cundill funds, the managers are not afraid to hold significant cash balances if no suitable investment opportunities are found. True to their style, the managers have begun to kick the tires on some opportunities in the materials sector. Currently the portfolio is underweight the sector, with no direct holdings in any mining companies. With many names in the sectors off more than 80% from their highs, they believe it warrants some serious consideration. Making any move into this sector has the potential to increase the volatility of the fund even higher.

While the longer-term performance has been strong, volatility has been high compared with other funds in the category. The volatility is comparable to a well-managed Canadian dividend fund. This higher volatility can come from two main sources: the managers’ deep value style and their high-conviction, concentrated portfolios.

It has had a particularly good run in the past few years, and if you have held it, I would suggest that you consider rebalancing your portfolio to take some profits. Over the long term, I expect that it can deliver above average returns with above average risk. Any investor considering this fund should have a long-term time horizon and at least a medium risk-tolerance.