This is part one of a review of balanced mutual funds available in Bermuda.

Last week’s Moneywise column focused on that week’s volatility in capital markets, particularly in the United States where the daily swings to gains and losses were anywhere from 500 to 1,000 points. This week, through the end of Thursday, January 15, (when this article goes to press) that same volatility persisted with markets reacting to disappointing US bank earnings as well as the Swiss abandoning the exchange rate cap on their currency.

We pointed out that diversification of security assets across the investment spectrum helps in managing risk, due to the traditional non-correlation between stocks and bonds. While no return in investments is a guaranteed success, broad asset allocation in a small, or even large portfolio, tends to minimise volatility. Diversification is part comfort, part investment planning for an investor — rather than feeling utterly miserable watching one’s daily gut-wrenching security position fluctuations.

Remember the mantra. High return investments equal high risk (of loss). Conversely, the price to pay for diversification is lower overall returns, but generally, also lower risk of loss. Slow and steady wins the race, as an end result in investing is far preferable for those who simply cannot tolerate the high upside/downside swings in portfolio value.

What’s in a balanced mutual fund (BMF)? A certain diversified combination of stocks, bonds, and some cash pooled together in legally constructed entity. Utilising an investment recipe (formally called an investment policy statement), the BMF portfolio manager receives investors’ cash, then (on your behalf, as the investor) through a rigorous investment criteria process purchases the security positions that will make up the asset allocations within the fund. You, as one of the investors in the BMF, are now a shareholder in the fund.

Traditionally, the balanced mutual fund asset allocation is comprised of 50-60 per cent equities (stocks), 30-40 per cent bonds, and between 0-20 per cent cash to equal 100 per cent. The securities within may be comprised of individual positions in stocks and bonds, very low cost index funds or other segregated mutual funds, or exchange-traded funds, selected according to the experience, and performance preferences of the portfolio manager.

Whatever the ultimate selection, the asset allocation is a mandate to the portfolio manager to remain within the 60/40 percentage guidelines stipulated in the prospectus in order to be categorised as a balanced mutual fund. Attempts by portfolio managers to “ramp up” the rate of return by purchasing more aggressive investments, borrowing, and hedging not dictated within the IPS (investment policy statement) are not condoned within the industry, and may subject the fund to legal actions.

Experienced investors may feel that this introduction to BMFs is incredibly basic. You are absolutely correct.

Overwhelming a new or inexperienced investor with the very long list of stipulations, restrictions, asset criteria, leverage, use of derivatives / hedging, and other specified information pertinent to balanced mutual funds contained within the BMF prospectus is counterproductive and quite intimidating.

So, for the start of this particular subsection of the Bermuda investment series, simplicity keeps reader involvement. Those of you with an incessant curiosity to learn more are invited to read the fact sheets (links provided) and prospectuses of not just the balanced funds, but any mutual fund you own or are interested in owning.

The proverbial balanced fund is one of the most popular mutual funds available for purchase by small investors, as well as being used widely by pension fund managers. Most of the financial institutions (FIs) in Bermuda offer their proprietary balanced mutual funds for sale to the public. Versions of balanced mutual funds are also available within pension asset allocations from pension administrators.

Today, in alphabetical order, we provide an overview of these funds. Next week, we review in a detailed chart each FI’s balanced mutual fund offering criteria, including fees, performance, cost, asset allocation, and much more relative information.

NOTE: All information is taken directly from each FI’s website.

AFL Investments: Traditional Balanced Fund (US dollars). Asset Allocation: 52 per cent to equities, 48 per cent to bonds (fixed income) with geographical allocation to US, Europe Asia. Objective is to provide moderate growth of capital while outperforming traditional balanced mixes of equity and fixed income with similar volatility.

http://www.aflinvestments.bm/products/performance/AFL%20Balanced%20Portfolio.pdf

Barrington Investments. Various brand-name balanced mutual funds are available. We will choose a popular brand to feature next week.

BIAS Investment Managers: Winner of numerous Offshore Investment Management Excellence Awards (Captive and Global Dividend Fund 2014), and Morningstar “5” Five Star Ratings for various BIAS Funds.

BIAS Global Balanced Fund. This fund is suitable for conservative to moderate investors who seek medium to long-term real capital appreciation whilst minimising risk through asset class diversification. The fund is allocated 68.2 per cent to equities, 28.9 per cent to fixed income, and 2.9 per cent cash.

http://www.bias.bm/bias-global-balanced-fund.html#management-commentary

Butterfield Asset Management Services: Butterfield International Balanced Fund — US Dollar Class. The Objective is to achieve long-term capital growth while exposing the investor to a relatively low level of risk. The target asset allocation for the Fund is 60 per cent stocks and 40 per cent bonds.

http://www.bam.butterfieldgroup.com/ButtInvestProds/Funds/Balanced_Funds/Pages/International-Balanced-Fund.aspx

Clarien Bank: Managed Balance Class. The investment objective of this class is to provide long-term capital growth using strategic asset allocation based on an efficient portfolio. Clarien Investments Ltd designed the portfolio using a downside measure of risk versus return to minimise volatility and maximise capital appreciation through asset class diversification: equities (55 per cent), fixed income (35 per cent and alternative offshore mutual funds and securities (10 per cent).

http://clarienbank.com/wp-content/uploads/2014/07/Managed-Balance-FS-Clarien-Jun14.pdf

HSBC Bermuda: HSBC Managed Portfolios World Selection 3 Class AD. The principal objective of the company is total return over time attempting to limit risk through investment in a diversified portfolio of mutual funds. The company will primarily invest in HSBC funds, and will offer various classes of shares with one or more classes related to a separate portfolio within the company.

https://www.hsbc.bm/1/PA_ES_Content_Mgmt/content/bermuda/pdfs/MP-WSBalancedUSD.pdf

LOM Offshore Financial Services: LOM Balanced Fund. The Fund’s objective is to achieve long term capital growth while limiting investment risk. The Fund invests in a globally diversified portfolio of offshore funds and ETFs. Current allocations are 60 per cent equities, 20 per cent bonds, 19.5 per cent alternatives and 0.5 per cent cash.

http://www.lom.com/balanced-fund

Stay tuned for next week, readers.

Martha Harris Myron CPA CFP JSM Masters of Law: International Tax and Financial Services,

Appointed to the Professional Tax Advisory Council, American Citizens Abroad, Geneva, Switzerland; president of The Pondstraddler* Life™ Consultancy: international financial planning, publications, presentations for the challenging lifestyles of multinational individuals and their families residing, working, crossing borders, and straddling ponds in the North Atlantic Quadrangle. Specific focus for residents of Bermuda, the premier international finance centre. Contact: martha@pondstraddler.com