By Keith Damsell
Investment Reporter
The Globe and Mail
Report on Business
Tuesday, August 16, 2005

If July was a strong month for mutual fund sales, it was a spectacular period for balanced funds in particular.

Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, "The composition changes all the time. If you are happy with a moving target, a balanced fund is not a bad approach.”

Canada's fund industry racked up $1.9-billion in net sales last month, its best July performance since 1998. And balanced funds were in the driver's seat, accounting for about $1.1-billion of net fund sales.

"It's startling," said Rudy Luukko, funds editor with investment website Morningstar.ca. "It's what people want to buy."

Canadian common share stocks remain the single largest fund class, holding $126.9-billion in assets under management as of July 31. That's up from $107.4-billion a year ago, the Investment Funds Institute of Canada reported yesterday.

But balanced funds, a conservative asset class, have rapidly become the destination for billions of dollars. By the end of last month, Canadians had sunk $113.7-billion into balanced funds, a 39-per-cent increase from $81.8-billion a year ago.

And the figures indicate balanced funds have momentum. In 2000, the asset class held $63.7-billion; in contrast, common share funds held $100.2-billion in assets five years ago.

Balanced funds are a broad catch-all of assets, investing a minimum of 70 per cent of the market value of the portfolio in a combination of Canadian equity and Canadian fixed income. In addition, many funds hold income trusts and foreign equities.

The asset class is meeting the heavy retail demand for "a mix of security and yield," said Peter Loach, an analyst at BMO Nesbitt Burns Inc.

About $7.4-billion was invested in balanced funds in the first seven months of this year, more than double the $3.5-billion invested during the same period in 2004, he said. Four of July's top five best-selling funds are in the balanced category, Mr. Loach said.

The success of the asset class taps in to a handful of themes that dominate the fund industry. Balanced funds promise a quarterly dividend, making them popular with older, retiring Canadians hungry for cash flow. They also offer exposure to the red hot income trust sector; for example, the $6.7-billion RBC Monthly Income Fund has a hefty 17-per-cent weighting in trusts.

And finally, the success of the fund class is a testament to the power of the Big Banks. Balanced funds managed by the banks held four spots in July's list of top 10 best-selling funds.

The fund class is ideal for small accounts of $25,000 or less, said adviser Michael Morrow of Morrow Financial and Insurance Services in Thunder Bay.

Balanced funds offer "middle of the road performance and middle of the road risk," and automatic monthly rebalancing "stops investors from taking a diversification vacation," he said.

But Adrian Mastracci of KCM Wealth Management Inc. advises clients to avoid balanced funds. The composition of funds within the class varies greatly and can change without warning, making asset allocation within a client's portfolio difficult, the Vancouver adviser said. For example, stock makes up about 63 per cent of the CI Signature Canadian Balanced Fund but only 49 per cent of the Fidelity Canadian Balanced Class Fund.

"The composition changes all the time," Mr. Mastracci said. "If you are happy with a moving target, a balanced fund is not a bad approach -- we like to have a static allocation that moves when price moves."

Net new sales for 2005 to July 31, excluding reinvested distributions, $'000

SOURCE: INVESTMENT FUNDS INSTITUTE OF CANADA

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.