Year-end review for Bermuda balanced mutual funds. We are following on from part 1 of the original article dated January 17, 2015 on mutual funds options available in Bermuda from various investment firms and banks located here in Bermuda.

Yes, I know, you need an apology, dear readers, since I promised more the next week. But, the Bermuda budget just happened to take first place — you know the importance.

Why did we select the balanced mutual fund composition as opposed to say reporting on an equity fund, a bond fund, or an alternative strategy fund? It is a good question — one that I am asked all of the time.

To a certain extent, a balanced mutual fund resembles a mini-version of an exclusively managed investment portfolio. Available in much smaller increments for the beginning investor, the funds (comprised of many small and large investor’s cash) are generally managed and sold by recognisable independent name brand investment firms. Banks and investment houses also sell their own labelled proprietary balanced funds producing easy to obtain information directly from firm websites.

The traditional balanced mutual fund allocation of 60 per cent stocks and 40 per cent fixed income (bonds and bond-like securities) and cash has often been regarded as steady conservative performer in the long-term compared to other types of mutual fund choices.

This opinion is reinforced in the Fundamentals, Research Associates, January 2015 newsletter, featuring a study conducted on the traditional balanced fund allocation of 60 per cent stocks/40 per cent fixed income.

Over the last ten years, the results showed a respectable annual real return of 5 per cent, annually. Performance evident in spite of a horrific global recession, the US sub-prime market debacle, very low global interest rates, along with a housing market bubble, high unemployment in many countries along with much global market and economic volatility.

Balanced mutual funds. Not exciting, but stable and steady — an investment that can be considered for careful financial planning for the small investor with limited funds.

The concept of rebalancing. What do we mean by managing the funds? Portfolio managers keep the mandate of an actively managed mutual fund (or an individual portfolio) on even track.

Example. A balanced mutual fund portfolio avoids that chasing-returns scenario. When managed by qualified investment professionals, the portfolio managers actively monitor the percentage mandate of the balanced fund. Sticking to the 60/40 investment policy asset allocation, as stocks become overvalued, taking up a higher weighted allocation (say 75 per cent in value) those stock positions are trimmed off. The resultant profits are invested in the underperforming bond section to bring the portfolio back to investment equilibrium. The returns are not as high as an aggressive stock fund. But then again, the balance fund negative values are never as low in a down market as the plunges that aggressive stock funds can experience.

We as individual investors — cannot bring ourselves most of the time to trim off the winners and reinvest in a perceived loser. Consequently, when we self-manage — hanging onto the overvalued winners — when the tide turns, we suffer terribly. This is what you pay for (in fees) to the portfolio managers of mutual funds. Disciplined management.

What do we look for in a mutual fund? The fund evaluation criteria list is significant, so we will start with the most commonly reviewed points. Some mutual funds are far more detailed than others. In the investment world, the more information you get, the better choices your choices.

Performance. Everyone focuses on performance, and only performance. The rate of return is not the end all and be all of a mutual fund — there are many other criteria that can affect the return and risk of loss over investment cycles.

Expense ratio. Is the cost of running the fund lower than its peer group for the same return?

Risk Rating is low compared to other funds in the same peer group? This means your invested money has the least risk to earn the same return, where as another fund with an equal return may be extremely risky, volatile, and more expensive to manage.

Other comparison criteria include:

• Reputation of fund company.

• Fund size.

• Portfolio turnover rate.

• Ranking among peer group like-kind funds.

• Alpha performance.

• Types of companies and their stock attributes.

• Fund company’s tenure in business.

• Fund manager’s investment style.

• Composition of the fund by sector and by kind of investment.

• Fund manager’s reputation and professional background.

• Length of time the fund manager has been around.

• Fees to adjusted rate of return.

• Currency exchange risk.

• Net assets held in fund and more.

And of course, how compatible is the fund with your intended investment goals?

Experienced investment professionals will no doubt immediately realise that this article is not intended for you as it is intended to encourage beginning investors to plan for the future. I won’t be discussing tracking errors, how beta and alpha differ, what a Sharpe ratio means, how to calculate a risk-adjusted rate of return against fees, and so on in any depth.

Investment disclosure. Finally, Readers you know the information disclosure drill. This investment article is general information only and is not intended to be personal investment advice. I am not your adviser and your cannot rely upon the information provided in this article — for your personal investments. If you need help, work with a qualified investment professional.

That’s just for starters. We continue on with the evaluation of these funds next week and provide some tips on how to get the information you need.

Cross-border caution: US citizens, US green card holders, and US tax residents (foreign nationals who have overstayed in the US) cannot invest in Bermuda (foreign) mutual funds. Speak to your tax accountant as to the serious reasons why these are not appropriate. Or if enough readers request it, I will write an informational article on the “why these funds are prohibited”. Send me an e-mail!

References: * Research Associates Fundamentals January 2015. Yesterday’s Gone: Year-End Capital Markets Commentary and Expectations by Chris Brightman, CFA, and James Masturzo, CFA

Martha Harris Myron CPA PFS CFP JSM, Masters of Law: International Tax and Financial Services. Appointed to the Professional Tax Advisory Council, American Citizens Abroad, Geneva, Switzerland. The Pondstraddler* Life™ Consultancy provides cross border financial planning for internationally mobile individuals and their businesses residing, working, crossing borders, and straddling ponds in the North Atlantic Quadrangle. Specific focus on residents of Bermuda, the premier international finance centre.

Contact: martha@pondstraddler.com