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Mutual Fund News

Let someone else do the driving

Tailored portfolios are catching on among ordinary investors, GAIL EL BAROUDI reports

Special to The Globe and Mail

Imagine a portfolio of mutual funds in a package -- designed just for you and monitored full time by financial experts -- so you can carry on with your life and not worry about your investments.

That's the appealing scenario that has driven demand for managed portfolios, or "managed accounts," and produced explosive sales in recent years.

Managed portfolios have grown at more than triple the overall rate of mutual funds during the last three years, says Larry Herscu, senior vice-president of Toronto-based AGF Management Ltd. and author of The Canadian Guide to Managed Accounts.

As of last June, $324-billion was invested in managed accounts, and the number is closing in fast on the $515-billion in individual mutual funds, he adds.

"Investors have lost their appetite for risk since the market collapse in 2002, and they're looking for vehicles to help them manage their money," Mr. Herscu says.

A decade ago there were only a few managed portfolios, most of them designed for wealthy clients, while today there are more than 150, many geared to small investors.

Typical of these are the managed accounts such as the BMO MatchMaker portfolios from BMO Mutual Funds, which have a minimum investment of $1,000. Others have higher minimums, including the RBC Select Portfolios from RBC Funds, at $5,000, and the TD Managed Asset Program (MAP) from TD Mutual Funds, with a minimum of $2,000 for registered accounts and $5,000 for non-registered accounts.

"Sorting through thousands of mutual funds takes time, effort and knowledge, so many investors would rather leave the task to experts who do it full time," says Linda Knight, vice-president of BMO Mutual Funds in Toronto.

Clients start with a questionnaire that identifies their goals, risk tolerance, time horizon, age, income level and investment knowledge, says Sandy Cimoroni, vice-president of TD Mutual Funds in Toronto.

"Following the questionnaire, the adviser will recommend the portfolio with the mix of equity and fixed income funds that best fills their needs," she says.

TD's Managed Portfolios program offers five portfolios, while BMO MatchMaker has seven and the RBC Select Portfolios, three. All the portfolios range from conservative -- typically consisting of money market funds, fixed income or bond funds and sometimes a few equity funds -- to riskier and more aggressive ones that include Canadian equity, international equity and possibly emerging markets funds.

All contain only the in-house funds of the three fund companies involved.

In addition, TD and RBC also offer managed portfolios that include funds from other companies. The TD FundSmart Managed Portfolios, with a minimum of $25,000 for both registered and non-registered accounts, has five portfolio versions, while the RBC Select Choices has a $5,000 minimum for both registered and non-registered accounts and includes four portfolios.

The main benefit of managed portfolios is that investors who own them become less prone to knee jerk reactions, says Dan Hallett, president of Dan Hallett & Associates Inc. in Windsor, Ont.

"People often make changes at the wrong time and for the wrong reasons, and these programs help to avoid that," he says.

But he adds that many of the managed portfolios charge a premium on the package, which he views as too high.

"Look at the difference between the management fee charged on the portfolio and the fees on the individual funds inside it, he says. "It shouldn't be too great, especially in the case of income portfolios, a category where the manager is least able to add value."

Diversification is a benefit of these portfolios, says mutual fund author Gordon Pape, but he suggests that investors may achieve the same diversification with a single balanced fund.

"A well-designed balance fund combining stocks, bonds and cash may do just as well, or better, over the long term and at a lower cost," he says.

Not surprisingly, investors who want portfolios that include third-party funds will pay higher expenses.

Management fees for the RBC Select Portfolios, which include only RBC funds, range from 1.75 per cent for the most conservative portfolio to 1.84 per cent for the growth portfolio.

Expenses for the four RBC Select Choices portfolios, containing both in-house and outside funds, run from 2.17 per cent for the most conservative portfolio to 2.52 for the three growth ones, says Michael Higgins, investment communications manager at RBC Asset Management.

Similarly, the expense ratios for the TD Managed Portfolios, containing only TD funds, run from 2.1 per cent for its income portfolio to 2.7 per cent for the equity growth portfolio, while management expense ratios for the FundSmart series, which also includes outside funds, range from 2.6 per cent for the income portfolio to 3.2 per cent for the growth portfolio, Ms. Cimoroni says.

The Scotia Partners Portfolios take a different approach by emphasizing funds from six outside fund companies and including their own Scotia Mutual Funds as just one of the seven partners.

Their four portfolios, from income to aggressive growth, are overseen by a team at Scotia Capital Inc., says Ian Filderman, director of mutual funds at Scotiabank Wealth Management in Toronto.

"Each portfolio includes mutual funds from between five and seven fund companies, so clients get geographic and style diversification, as well as professional management all in one portfolio, at one price and with one performance record to follow," Mr. Filderman says.

The minimum investment needed is $5,000, and management expense ratios, which are scheduled to decrease this year, run from 1.19 per cent for the income fund to 2.75 per cent for the aggressive growth fund, he adds.

The newest entrant in this group is CIBC's Axiom Portfolios, launched in April of last year, which has a $25,000 minimum and includes eight portfolios.

Axiom Portfolios are made up of CIBC's Frontiers pooled funds, which date back to 1999 and were originally designed for larger "wrap" accounts. They are separate and distinct from CIBC mutual funds, says Ginny Macdonald, vice-president of mutual funds and managed solutions at CIBC Asset Management in Toronto.

"Our own due diligence group hires the outside fund companies and monitors investment performance," Ms. Macdonald says.

The eight offerings range from two income portfolios to several Canadian and international growth portfolios, with management fees ranging from 2.17 to 2.52 per cent.

To ensure that the investor's original asset mix remains in place, all the portfolios are regularly rebalanced.

This involves selling funds that have risen and buying others that have not moved up.

Rebalancing typically takes place when weightings in any of the asset classes -- whether equity, fixed income or cash -- has shifted more than 2.5 per cent away from the original asset allocation.

Clients also receive quarterly or semi-annual reports that include investment commentary, asset-mix details and, in most cases, their own personal rate of return since they purchased the portfolio.

What to ask

If you are considering investing in a managed portfolio, here are questions to ask:

Performance: If you're buying a growth portfolio, ask the mutual fund representative to show you annual performance for both 2000 and 2001. Many growth portfolios suffered double digit losses during these years. Then ask yourself whether you're ready for that, because there's no guarantee it won't happen again.

Reports: Ask whether you will receive a quarterly or semi-annual report. Will it show your own personal rate of return since you purchased the portfolio, or just give the performance of the portfolio over the past year?

Costs: If an income portfolio, for example, has a management expense ratio (MER) of 1.75 per cent and holds only money market and bond funds with fees of 1.2 per cent and 1.3 per cent respectively, you're paying a hefty premium for the package.

Risk: If you are an ultra-conservative investor who is happiest holding money market and government bond funds, ask yourself: Do you really need a managed portfolio?

Source: Dan Hallett, Dan Hallett & Associates Inc.

© 2007 The Globe and Mail. All rights reserved.

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