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PRINT EDITION
Balanced funds: A clear path to success
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We compare old-guard mutual funds with upstart ETFs so you can choose the one that's best for your portfolio
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By ROB CARRICK
  
  

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Saturday, May 18, 2019 – Page B7

PORTFOLIO STRATEGY A well-chosen balanced fund is the simplest path to investing success.

Nothing else comes close because balanced funds are welldiversified portfolios you access through a single purchase. The only way to fail with a balance fund is to (a) not invest regularly or (b) make a bad choice of fund.

Let's take a look at two excellent balanced-fund options for do-it-yourselfers who invest through an online broker - lowcost balanced mutual funds and balanced exchange-traded funds, which have been gaining popularity in the past year or so and are easily the best new investment product in ages.

Both offer a soundly constructed, cost-effective way to build wealth. For a successful investing outcome, choose one that makes sense and commit to it for a few decades or more.

MISSION Both balanced ETFs and mutual funds are more suited for longterm capital appreciation than income. If you mainly want dividend and interest income from a portfolio, consider a dividend or income fund instead. There is one new balanced ETF aimed at income investors - the Vanguard Conservative Income ETF Portfolio (VCIP), launched in January.

PLAYERS Balanced ETFs are new and thus unproven through a cycle of market ups and downs. They only took off as a category in January, 2018, when the low-cost investing giant Vanguard listed a conservative, a balanced and a growth fund on the Toronto Stock Exchange.

Bank of Montreal's ETF business and Horizons have added products of their own and BlackRock's iShares lineup has redesigned some older balanced-type ETF products that never quite clicked with investors.

Low-cost balanced mutual funds have been around for 10plus years through companies such as Beutel Goodman & Co., Leith Wheeler Investment Counsel, Mawer Investment Management and Phillips Hager & North (owned by Royal Bank of Canada). A somewhat newer company offering a low-cost balanced fund is Steadyhand Investment Funds.

What these companies have in common is that they sell funds, or versions of their funds, with fees that include little or no commissions for the adviser or dealer that sells them. These trailing commissions can account for as much as one percentage point of the management expense ratio (MER) of a traditional balanced mutual fund.

AVAILABILITY Advantage, balanced ETFs. ETFs are traded like stocks, which means you can invest in them through any online broker.

Low-cost balanced mutual funds can be tricky. Because they pay little or nothing to dealers that sell them, these funds are not uniformly available from all brokers. Example: RBC Direct Investing doesn't sell Mawer funds, but it does offer Beutel Goodman Balanced Series D (for DIY investors) and, of course, PH&N Balanced Series D. Steadyhand funds can easily be purchased directly from the company. For all these funds, minimum initial purchases of $5,000 to $10,000 may apply.

COST Balanced ETFs are much cheaper - MERs range in the low 0.2-percent range, compared with around 1 per cent or more for balanced mutual funds. Could the extra cost for balanced mutual funds possibly be worth it?

One thing to consider is that most online brokers charge as much as $10 for each buy or sell trade on ETFs. Questrade and Virtual Brokers charge zero commissions to buy, but the usual cost applies to selling. National Bank Direct Brokerage charges zero to buy or sell ETFs if you trade more than 100 shares.

Low-cost balanced mutual funds generally cost nothing to buy or sell (some brokers may apply a small purchase commission), and they also offer no-cost dividend reinvestment. With an ETF, dividends and bond interest are distributed as cash and must be reinvested by you via purchases that incur a brokerage commission (some brokers may offer a dividend reinvestment option).

Both balanced ETFs and mutual funds are typically fund-offund products, which means they hold stock and bond funds in the same corporate family. The posted MER for all of these funds should be your all-in cost, including the underlying funds. One reason why balanced ETFs are cheaper is that they're built with lowcost index-tracking ETFs, while balanced mutual funds are run by portfolio managers who choose securities.

An area where balanced mutual funds and ETFs are similar in cost is the trading expense ratio, or TER, which reflects the cost of buying and selling securities in the portfolio. Add the TER to the MER for a total cost of owning a fund. Both ETF and mutual fund returns are published on an afterfee basis.

DIVERSIFICATION Balanced funds are divided into categories that help investors understand how they're diversified: Fixed-income balanced: More than 5 per cent but less than 40 per cent of assets in stocks; Neutral balanced funds: 40 per cent to 60 per cent of assets in stocks; Equity fixed income funds: 60 per cent to 90 per cent of assets in stocks.

Balanced funds are further categorized as being Canadian, with at least 70 per cent of their holdings from Canada or denominated in Canadian dollars; or global, with less than 70 per cent of their assets from Canada. One other category is the tactical balanced fund, which allows some flexibility in mixing stocks and bonds.

Use these categories to make sure you're accurately comparing balanced ETFs and mutual funds.

As a global neutral balanced fund, Mawer Balanced is comparable with Vanguard Conservative ETF Portfolio (VCNS), Vanguard Balanced ETF Portfolio (VBAL) and iShares Core Balanced ETF Portfolio (XBAL).

TRANSPARENCY Advantage, balanced ETFs. They do a better job of clearly explaining their approach to mixing stocks and bonds. For example, the iShares Core Balanced ETF Portfolio (XBAL) will have about 60 per cent of its assets in stocks and 40 per cent in bonds. Same for VBAL.

Balanced mutual funds date back to a more paternalistic era of investing, where it was sufficient to simply label a fund as balanced.

The sense you get from these funds is that the managers operate within basic guidelines for diversification and have the latitude to fine-tune things as they go along.

RETURNS Most balanced ETFs have been around for a year or less, so return comparisons with mutual funds tell you very little. The two iShares balanced ETFs have been around longer, but they were recently revamped to make them more comparable with competing products.

Balanced ETFs give you a degree of return predictability - you will make what a fund's blended benchmark indexes make, minus fees. Balanced mutual funds are more dependent on managerial skill, which is unpredictable and prone to lapses. The rise of ETFs is based in large part on the failure of many fund managers to beat their benchmark indexes after fees.

And yet, there are low-cost balanced funds with consistently strong returns over the medium and long term. Two thoughts on why this is so: These funds have low fees and they're overseen by managers who also run pension funds and endowments. They use a steady, low-key style of management that has in the past produced the kind of results that you would ideally expect from a balanced fund.

VERDICT Balanced ETFs are for investors who are militant about low fees and want a transparent, precision-managed asset mix for their portfolio. Balanced mutual funds are for investors who want to tap the proven abilities of professional managers and are willing to pay fees that are pricey by ETF standards, yet a true bargain compared with the rest of the investing world. (Full disclosure: I have some money in Mawer Balanced.)

Associated Graphic

JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: ROB CARRICK; COMPANY WEBSITES; FUNDATA


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