Recent events have shown there can be more risk in an allocation fund's mix of strategies than it seems.
At first glance, Mawer Global Balanced and Manulife Global Balanced look very similar. They’re even both run by Mawer Investment Management. But take a closer look at the bond segment.
Manulife uses Manulife Global Unconstrained Bond Fund in the fixed income portion of its version of the strategy to increase diversification. And Mawer has no say in the fund’s inclusion nor how it’s run.
Did Manulife’s Bond Bet Pay Off?
Manulife’s bet, however, combined with the 2023 banking crisis, reminded investors that diversification can work both ways. Manulife Global Unconstrained Bond, which takes more risk and displays higher volatility than traditional balanced fund bond sleeves, dragged on performance instead of offsetting volatility.
Morningstar factored this possibility into the ratings of both funds earlier this year. They both received Above-Average People ratings, reflecting confidence in the equity sleeve, a copy of the Gold-rated Mawer Global Equity; but while Mawer Global Balanced earned an Above-Average Process rating, Manulife received an Average Process rating.
The lesson here is that two otherwise similar asset allocation funds can diverge in the short term due to differences in their underlying portfolios. Knowing those differences can help set expectations.
Mawer Global Balanced A (a Do-it-Yourself share class) and Manulife Global Balanced F (a fee-based share class for investors with advisors) charge slightly different management expense ratios, leaving a comparison of performance.
How Have They Done?
The equity sleeves, which are essentially the same, drove the results of the funds, leaving the bond sleeve to account for the small difference. The performance of the two strategies already differ just a few months into 2023, with Mawer Global Balanced A gaining 5.7% for the year through March 31, edging Manulife Global Balanced F’s 5.5%.
The difference in performance between the funds can be explained by Mawer Global Balanced using its own Mawer Canadian Bond for its fixed income sleeve, with Manulife Global Balanced splitting its bond portfolio between the mild-mannered Mawer strategy and its more adventurous Manulife Global Unconstrained Bond. The Manulife bond fund owns high-yield and emerging market debt which hampered it relative to other Canadian bond funds this year amid the global banking sector turmoil. Manulife Global Unconstrained Bond Fund produced a 2.1% gain this year through March 31 while Mawer Canadian Bond Fund gained 3.1%.
The short-term performance of the bond funds is consistent with the underlying fund’s risk profiles, and it’s a reliable preview of their influence on the performance of the parent fund over the long term. Market shocks should impact Manulife Global Balanced more than Mawer Global Balanced, even though the same manager runs most of both funds in a similar way.
Where it’s Happened Before
The two allocation funds with their same manager and equity sleeves responded differently to past crises:
In 2018, when concerns about trade, interest rates, and a possible recession roiled markets, Mawer Global Balanced outperformed its Manulife counterpart by 1.4 percent in the last three months of the year as high-yield bonds stumbled and hindered Manulife Global Unconstrained.
When governments shut down economies in response to the coronavirus pandemic in the first three months of 2020, investors flocked to safety. Mawer Global Balanced beat Manulife Global Balanced by more than 2 percent in that period, too.
Investors who have stuck with Manulife have been rewarded over the long term, however. From Sept. 1, 2013 to March 31, 2023, Manulife Global Balanced gained 8.8% annualized, while Mawer Global Balanced earned 8.1%. Manulife, whose 8.1% standard deviation of returns was higher than Mawer’s 7.7%, however, arguably took more risk, though.
Going Forward
Short-term fund performance does not predict future long-term results but can hint at how a strategy might behave in certain environments. The strong and similar equity sleeves of both Mawer Global Balanced and Manulife Global Balanced should drive performance over the long run, but differences in their bond portfolios will at least give Manulife Global Balanced investors a bumpier ride.
