These Canadian Balanced Funds Used Derivatives – Here’s How the Results Differ

This is what happened when four global balanced funds started using options, futures, and forwards in their strategies.

Michael Dobson 22 September, 2023 | 4:13AM
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Michael Dobson: The current prevalence of covered call ETFs in Canada and the past meme stock craze of 2021 put on display the use of derivatives, namely the buying and selling of options contracts that led to spectacular portfolio blow-ups and flameouts. Morningstar covers many different strategies that use derivatives for one reason or another and today we’ll go over four here in Canada that use them not to juice returns but to tackle risk. We’ll first start out with BMO Retirement Portfolios.

BMO Retirement Portfolios look to use derivatives to provide downside protection. The two largest holdings – BMO Risk Reduction Equity and BMO Risk Reduction Fixed Income – contain these instruments with the former employing a collar option strategy against broad market indexes and the latter holding bond derivatives like credit default swaps or hedges against fixed income indexes. By one metric, it’s worked as designed but at a slight cost.

The three-year rolling volatility of BMO Retirement Balanced F has been consistently lower than its Morningstar Category Benchmark. But with lower risk came some lower returns. Over the last five years to the end of August 2023, that fund underperformed its category benchmark by 0.4 percentage points annually.

Switching from options and swaps over to forwards, the next fund is the CI Global Income and Growth Fund.

Currency forwards are some of the most common derivatives used in balanced funds. CI Global Income and Growth, for example, holds different currency forwards against the US Dollar, the Euro, and many more. This strategy takes it one step further by actively taking views on currency and betting on exchange rates to add value. For example, at the beginning of the year, the strategy was bullish on the Canadian Dollar. It’s another lever for a fund that’s performed well over the last decade: CI Global Income & Growth Fund Class F’s 7.6% annualized return over the last ten years to the end of August 2023 ranks in the top decile among peers.

The third fund on this list has a go-anywhere vehicle to counteract unwanted risks.

Sun Life Granite benefits from actively managed subadvised funds but sometimes these subadvisors take active exposures that deviate the portfolios significantly from their prospectus benchmarks. The Sun Life Tactical Completion Fund was introduced in 2016 across Granite to keep tracking errors in check through futures, currency forwards, complex option strategies, and more.

It seems to have done its job.

Sun Life Granite Balanced F’s annualized tracking error against its prospectus benchmark fell from 3.7% between inception to March 2016 to 2.8% from April 2016 to the end of August 2023. Now, the Tactical Completion Fund isn’t publicly available and so there is very limited public data about how exactly manager Aly Somani manages the fund.

We finish with the Fidelity Managed Portfolios. 

Portfolio managers David Wolf and David Tulk lead these strategies and look to benefit not only from cheap passive ETFs but also from currency forwards and futures contracts. It fits well with the manager’s skillset and vast resources at Fidelity. The Global Asset Allocation team has one hundred members. Wolf and Tulk also used currency as a tool in 2022 and continue to do so in 2023 by being underweight the Canadian Dollar or benefitting from its depreciation.

It’s another lever for a strongly performing series. Since the introduction of tactical asset allocation in October 2013, Fidelity Global Balanced F has outperformed its category benchmark by 1.1 percentage points annualized through August 2023.


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Michael Dobson  Michael Dobson is an Associate Manager Research Analyst at Morningstar Canada

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