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February 04, 2004
Meritas Launches First Canadian SRI Rebalancing Fund of Funds
    by Willliam Baue

The Meritas Balanced Portfolio Fund uses Modern Portfolio Theory to build a single fund that balances asset allocations between its five existing funds.

Today, Ontario-based Meritas Mutual Funds launched the Meritas Balanced Portfolio Fund, Canada's first socially responsible investing (SRI) "fund of funds" that automatically rebalances asset allocations to maintain prudent diversification. This strategy is rooted in Modern Portfolio Theory (MPT), which holds that broad diversification across the spectrum of asset classes insulates investors from markets' mood swings. Meritas achieves this diversification by amalgamating its five existing funds (Meritas Canadian Bond Fund, Meritas International Equity Fund, Meritas US Equity Fund, Meritas Jantzi Social Index Fund, and Meritas Money Market Fund) into one fund.

"Our fund takes some of the guess work out of determining how much to put in stocks and how much to put in fixed income," said Gary Hawton, CEO of Meritas, a joint venture of the Mennonite Savings and Credit Union (MSCU), the Mennonite Foundation of Canada, and Mennonite Mutual Aid (MMA). "Most balanced funds give managers the latitude to go overweight in stocks or bonds based on their view of which will outperform over a set period of time."

"The problem with this is that managers can be wrong as often as they are right," Mr. Hawton told "A rebalancing fund starts with a portfolio that is based on the best mix of different asset classes and then rebalances back to this mix on a specific timeframe."

The fund starts with its assets allocated to 45 percent in fixed income, 26 percent in Canadian equity, 14 percent in US equity, 10 percent in international equity, and 5 percent in money market. Any one of these allocations can drift 2.5 percent from its predetermined reference point before rebalancing.

"Let's say that the Canadian market is outperforming the rest of the asset classes and soon becomes 28.6 percent of the overall portfolio, or 2.6 percent over its original allocation," Mr. Hawton explained. "We will then effect a rebalancing transaction to bring it back within the 2.5 percent margin."

In essence, the fund's structure allows it to profit by straying from the predetermined allocations, but it also programs in a healthy dose of caution to keep allocations reigned within the bounds dictated by MPT.

"Too many people let the market and their emotions move them off of the MPT line," said Mr. Hawton. "The rebalancing forces us to buy undervalued asset classes and sell outperforming ones, but only once they have outperformed by a reasonable amount--in essence, it is a buy low and sell high strategy."

The diversification strategy also gives investors exposure to a diversity of highly-regarded SRI asset managers. Sub-advisors for the fund include Genus Capital Management, MMA Capital Management, State Street Global Advisers (SSgA), and Thornburg Investment Management. Thornburg Portfolio Manager Bill Freis was recently named the Morningstar International Manager of the Year.

While rebalancing funds are currently available to Canadian investors, the Meritas Balanced Portfolio Fund is the first one to practice socially responsible investing. And although the fund is available in every jurisdiction in Canada, it is not available outside the country.


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