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This article appears in the May 2021 issue of Investment ExecutiveSubscribe to the print edition, read the digital edition or read the articles online.

Canadian equity balanced funds offer diversified exposure to equities and fixed-income markets, with a bias toward equities. They invest 60%–90% of their assets under management (AUM) in equities, and the remaining portion in fixed-income securities.

Canadian equities performed well during the first quarter of this year, with the S&P/TSX capped composite index returning 8.1%. Cyclical and value stocks had stronger gains in Q1 than their growth-oriented counterparts. Health care, energy and financials were the top-performing sectors in the S&P/TSX composite index, while materials and IT were laggards.

The rollout of Covid-19 vaccines and optimism about the global economic recovery have boosted investor sentiment, as has the Bank of Canada’s pledge to continue its quantitative easing program. Although signs of an economic recovery are promising, investors must consider “how much of this expected recovery is baked into equities valuations,” said Les Stelmach, senior vice-president and portfolio manager with Franklin Bissett Investment Management.

“In our opinion, markets in general are very ‘glass half full’ on the recovery, so to justify broader market valuations, we are going to need to see this growth story play out — hopefully, sooner than later,” Stelmach said.

Stelmach and Ryan Crowther, vice-president and portfolio manager with Franklin Bissett, are co-lead managers of the $358.4-million (as of May 3) Franklin Bissett Dividend Income Fund. The fund was up by 19.4% for the year ended April 30, 2021, compared with the 23.3% returned by the Morningstar Canadian equity target allocation NR index over the same period.

“We want to own the businesses that are best situated with the best fundamentals [and] strong growth prospects, but we also recognize the danger in overpaying, given the multitude of risks,” Stelmach said. “What worked in 2020 might not necessarily be the right playbook for 2021, as certain stocks simply went to unreasonable valuations and we think the market is in the process of digesting this.”

As of the end of March, the Franklin Bissett fund’s asset mix was 60.9% Canadian equities, 20.4% U.S. equities, 13.2% bonds and 4.6% preferred shares.

The Canadian equities portion of the portfolio has 26.6% allocated to financials, 15.7% to utilities, 13.8% to energy, 11.4% each to communication services and consumer staples, 6.9% to real estate, 6.8% to materials, 4.5% to industrials and 2.8% to IT.

The U.S. equities component of the portfolio has sector weightings of 23.7% in IT, 15.9% in consumer staples, 15.8% in health care, 12.2% in industrials, 10.7% in financials, 5.7% each in energy and communication services, 5.4% in utilities and 4.9% in consumer discretionary.

In fixed income, the Franklin Bissett fund “continues to be concentrated in corporate issues, most of which are investment-grade,” Stelmach said.

One of the fund’s largest holdings is Enbridge Inc., which Stelmach described as “attractively valued.” Enbridge’s “existing pipelines remain very valuable,” he said, and the company generates significant cash flow via client contracts, in addition to having a healthy balance sheet and an attractive dividend.

The Franklin Bissett fund counts Nutrien Ltd., a Saskatoon-based provider of fertilizers to the agriculture industry, as a major holding. Although Nutrien’s wholesale business is exposed to cyclical swings in fertilizer prices, consistent cash flow from the retail side of the business provides stability through market cycles, Stelmach said.

The Franklin Bissett fund recently added to its position in Canadian Natural Resources Ltd., which successfully navigated extreme oil price volatility in 2020 while maintaining its dividend and acquiring assets from distressed parties.

Stelmach said he sees opportunity in Laval, Que.-based Alimentation Couche-Tard Inc., an independent operator of convenience stores and gas stations with a leading market position in North America and a growing presence in Europe, Central and South America, Asia and the Middle East. “We believe shares are attractively priced at current levels,” Stelmach said.

The Franklin Bissett fund has been reducing its holdings in Bermuda-based Brookfield Property Partners LP, which is the subject of a privatization bid from Toronto-based Brookfield Asset Management Inc. “The value of the bid is largely reflected in the stock price today, and so we have been redeploying this capital into other investments,” Stelmach said.

The Franklin Bissett fund also sold its common shares of Brookfield Renewable Corp., which were issued to unitholders of Brookfield Renewable Partners LP in 2020. “The common share performance outpaced that of the LP, to the point where the shares traded at a substantial premium,” Stelmach said. “We sold our common share position but remain a significant investor in the LP units.”

Geoff Stein and David Wolf, portfolio managers with Fidelity Investments Canada ULC, are the lead managers of the $4.1-billion (as of May 3) Fidelity Asset Allocation Fund.

The Fidelity fund uses a team approach: Stein and Wolf are responsible for asset allocation; Hugo Lavallée, Don Newman and Darren Lekkerkerker oversee equities securities; and Sri Tella and Lee Ormiston oversee fixed-income securities.

The Fidelity fund was up by 19.3% for the year ended April 30, compared with the 23.3% returned by the Morningstar Canadian equity target allocation NR index over the same period.

An index-neutral asset mix would be 70% equities and 30% fixed income, but Stein and Wolf have the flexibility to deviate +/-15% from that mix if they believe they can get an optimal return without straying from the fund’s investment objective. Their strategy is to provide diversification and resilience while positioning the fund for downside protection during periods of market uncertainty.

As of March 31, the Fidelity fund was overweighted in equities at 78.6%, including a 24.4% exposure to foreign equities. The remaining 21.4% of the portfolio was invested in fixed income and money market securities.

Within the equities component of the Fidelity fund, 30.4% is allocated to financials, 13% to materials, 12.7% to consumer discretionary, 9.1% to information technology, 8.7% each to energy and industrials, 5% to consumer staples and 4.5% to communication services. The remainder is allocated to utilities, real estate and health care.

The fixed-income portion of the portfolio consists primarily of Canadian corporate, provincial and federal bonds, with smaller allocations to Canadian agency and municipal bonds, Canadian and U.S. high-yield bonds, and foreign bonds.

One of the Fidelity fund’s major holdings is the iShares Gold Trust, a non-benchmark position. Wolf said he views gold “as a hedge against the potential risk of inflation, as well as against a litany of other uncertainty, such as the growing level of debt outstanding.”

Another major holding is discount retail chain Dollarama Inc. Wolf said he believes Dollarama can be “a strong compounder, as it is led by a strong management team and has the potential for increased foot traffic in their stores, as well as increased spending per basket.”

Over the past six months, Stein and Wolf increased the Fidelity fund’s exposure to Canadian Pacific Railway, which they view as a strong company led by a capable management team that will participate in the economic recovery.

The Fidelity fund also has a position in Nutrien. Stein and Wolf said they believe there will be increased demand for agriculture products due to strong farm economics.

The Fidelity fund’s co-managers recently reduced exposure to Barrick Gold Corp. Although they said Barrick is a high-quality company, they find other commodities, such as copper and those pertaining to agriculture, more attractive, given more favourable supply/demand factors.