Canadians are well known for their conservatism when it comes to investing. That's apparent in the popularity of balanced funds, which combine fixed-income instruments that offer stability and income with equities that have greater growth potential.
The most conservative of the balanced categories is Canadian Fixed Income Balanced, whose assets rose to $64.7 billion in 2013, up 26.8% from a year earlier. The growth rate is consistent with the growth of balanced funds as a group. Through the end of March, the Canadian Fixed Income Balanced category grew another $4.9 billion to $69.6 billion, up 7% since the start of this year.
The growth of the category is likely to continue, says Stephen Fiorelli, managing director with Toronto-based CIBC Asset Management, a unit of CIBC. "There are three real needs for investors: income, stability and growth potential. These are not going away," says Fiorelli, adding that demographics play a key role in the demand for these funds.
"Retirees are still looking for consistent income, while still mitigating risk. That's not going away either," Fiorelli adds. "And in this extended low-interest-rate environment, people need to find more solutions to help diversify their investments." Through its CIBC and Renaissance fund families, CIBC Asset Management alone offers more than a dozen funds in the category, of which the largest is the $2.2-billion Renaissance Optimal Income Portfolio.
These funds are aimed at investors seeking a balanced investment approach, says Fiorelli, but they don't necessarily fit only the aging demographic. "We see it as a core holding in anyone's portfolio. If you are younger, and want to assume a little more risk, you can 'bolt' on equity positions, such as in emerging markets. If you are less risk-averse, but still need that growth potential, and don't want to be 100% in fixed income, you can increase your exposure in a balanced approach. I see it as a core anchor in a portfolio, which you can build on." That anchor can vary from 30% to 80% of the overall portfolio, adds Fiorelli, noting that it depends on factors such as one's risk profile and the size of the portfolio.
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| Stephen Fiorelli | |
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Fixed income tends to account for about 60% of funds in the Canadian Fixed Income Balanced category, and equities are often around 30% to 35%. "They're for more risk-averse clients who don't want the volatility in the equity market," says Craig Strachan, head of product at Toronto-based Fidelity Investments Canada. "You can also lose money in these funds -- on a short-term basis, particularly if interest rates go up, or equity markets decline. Are they a good substitute for GICs? That depends on each person. But there are people who recognize that there are trade-offs when you invest, and this is the first step of getting into a diversified portfolio. It's an easier way than jumping into an equity-heavy portfolio." Fidelity has six funds in this category, the largest being the $1.7-billion Fidelity Income Allocation Series.
If you are considering Canadian Fixed Income Balanced funds, here are some tips on what to look for to meet your needs:
Proven track record. "Bonds are a big part of these funds, so look for a firm that has a pedigree in bonds, and particularly credit and also has skills in selecting income equities or dividend-paying stocks," says Tom Bradley, CEO of Vancouver-based Steadyhand Investment Funds Inc. "You have to ask, 'Is this a firm that has proven itself in the income area?'" Steadyhand offers the $74-million Steadyhand Income, which is managed by veteran managers Connor Clark & Lunn Financial Group. "We had confidence it knew its way around the income landscape," says Bradley of the 2013 award-winning fund.
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| Tom Bradley | |
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In the same vein, Fidelity's Strachan recommends choosing funds that have a history of good performance. "But it's important to recognize that a lot of past performance came because interest rates declined," he adds. "A simple fixed-income strategy may not perform as well if rates were to rise. It may not be as beneficial as a strategy that has the flexibility to move money around."
Below-average fees. Because of their equity component, these funds cost more than Canadian Fixed Income funds, where the median management-expense ratio is 1.38%. The median MER for the Canadian Fixed Income Balanced category is more than a half a percentage point higher at 1.93%. Most funds pay trailer fees -- ongoing commissions to brokers and dealers that are paid out of the funds' management fees.
By comparison, Steadyhand Income's MER of 1.04% is way below the industry average. "We're hawks on fees," says Bradley, whose funds do not pay trailer commissions. "Fees for this category are too high in Canada. They should not be much north of 1.5%."
Sustainability of payouts. Some funds offer monthly payouts to attract investors seeking income. But it's important to determine what that payout is based on and if it is sustainable, says Steadyhand's Bradley, adding that some fund distributions include a portion of the investor's own capital to achieve a relatively high yield. "Look at that yield carefully and see if it's consistent with the fund's returns."
Holdings and asset mix. Some funds are very conservative and hold up to 70% fixed income, which tends to be investment grade. But other funds will include less traditional asset classes, such as non-investment-grade high-yield bonds, commercial mortgage-backed securities and floating-rate instruments. "They come with a higher potential return. But they also come with greater volatility," says Fidelity's Strachan. "You are moving slightly up the risk spectrum. It's important to understand what you are buying. Not all of these funds are structured in the same way."
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| Craig Strachan | |
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Your need for advice. It's challenging to sort through the hundreds of funds available. In the Canadian Fixed Income Balanced category, Morningstar currently lists 127 funds, including two exchange-traded funds, not including multiple purchase options of the same fund or segregated-fund versions sold by insurance agents.
If you have the time and inclination to research fund managers, holdings and performance and regulatory documents, you could save money on fund fees. But the majority of investors will seek advice, whether from a bank, brokerage or financial-planning company. "Some funds offer a higher equity weighting and meet the need for greater growth potential, while some offer a higher fixed-income weighting and meet the need for greater stability," says CIBC's Fiorelli. "It depends on your needs and wants. An advisor is the best person to help determine the best product."
