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Life-cycle funds make their way north

Higher-fee products allow you to plan your investments around key dates in your family's life

FUNDS REPORTER

Life-cycle fever is spreading.

Bank of Montreal yesterday became the latest player to launch a portfolio, or fund of funds, that matures on a date that coincides with an important event in an investor's life, such as his or her retirement or child's graduation.

Unlike other so-called life-cycle funds in Canada, BMO Investments Inc. - the bank's fund arm - has a slightly different twist with its BMO LifeStage Plus Funds. It is offering a guaranteed maturity amount tied to the highest daily unit value in the fund's history, if investors stay in until the target date.

"If, in the rare occurrence there happened to be a shortfall, then the bank has ensured that it would make up that difference so that the client would receive the fully guaranteed amount," said Scott Steele, chief investment officer for BMO mutual funds.

The BMO funds have target dates of 2015, 2020, 2025 and 2030. They are invested in up to four BMO stock and income-oriented funds as well as strip bonds. The mix is adjusted to become more conservative as the target date nears.

Life-cycle funds are in their infancy in Canada with assets currently around $1.5-billion, Mr. Steele said. Assets of similar funds in the United States climbed to $114-billion (U.S.) in 2006 from $44-billion in 2004, according to the Investment Companies Institute, which represents the U.S. industry.

IA Clarington Investments Inc. of Toronto, which began selling its life-cycle funds in 2005, also has a guaranteed amount at maturity. Unlike the BMO funds, the guarantee of the Clarington Target Click Funds are tied to the highest month-end value. If the highest net asset value for a fund occurs during the middle of a month, then investors would not get that guaranteed amount at the target date, said Eric Frape, senior vice-president of business development for IA Clarington.

The Clarington funds, which are run by European financial giant ABN Amro Bank NV, are only invested in a global equity fund, strip bonds and cash.

Royal Bank of Canada was the pioneer in Canada in 2004 when it launched the RBC Target Education 2010, 2015 and 2020 funds. They are invested in 10 to 12 of its own bank funds. It plans to offer a 2025 product on July 3.

The RBC funds don't offer any guaranteed amount at maturity. "Clients have to be aware that there are no free lunches," said Jonathan Hartman, vice-president of investment products at RBC Asset Management Inc. "The guarantee has a cost - either a [higher] fee or an opportunity cost because they are in a portfolio that is more conservative."

The management-fee portion of the management expense ratio (MER) for the BMO funds range from 2.15 to 2.35 per cent in the early years depending on the target date. But the MER will also depend on the added yearly expenses and GST.

The MER for the BMO funds could wind up in the range of 2.5 per cent to 2.8 per cent, and that is "high" although not too dissimilar from competing products, said Windsor, Ont.- based mutual fund analyst Dan Hallett

Mr. Hallett said he is not a fan of life-cycle funds because they focus on when an individual needs or wants the money. They don't consider other key factors such as required rate of return, risk tolerance or tax implications, he added.

But these funds are "fine for somebody getting started" or with a small portfolio under $50,000, he said. "You don't want to make things overly complex."

Morningstar Canada analyst Mark Chow said that life-cycle funds "could be a solution for individuals who don't want to put much work" into putting together a portfolio.

But he warned that their fees could be a "little bit higher" for investors than simply choosing their own portfolio of funds. "That's the tradeoff," Mr. Chow said.

*****

Life-cycle Funds, 10-year target date

The funds can be targeted to a child's education or retirement.

Fund NameTotal assets $millionMER1 Yr. to May 31Min. initial investmentMin. addi. investment
Scotia Vision
Conservative 201584.01.9310.2$2,500 $50
Scotia Vision
Aggressive 201527.02.1311.6$2,500 $50
RBC Target 2015
Education128.32.0110.5$1,000 $25
London Life 2015
Profile1.82.55n/a$300 $25
Fidelity ClearPath
2015 Port Series B60.82.1111.9$500 $50
Fidelity ClearPath
2015 Port Series A124.42.3111.7$500 $50
Ethical Advantage
201516.22.1010.2$500 $100
Clarington Target
Click 2015119.72.548.0$500 $50

SOURCE: MORNINGSTAR.CA

© 2007 The Globe and Mail. All rights reserved.

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