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Packaged funds a trend best avoided

You know packaging is an irresistible trend in the mutual fund industry when the mavericks at ING Direct get involved.

ING is trying to do with mutual funds what it did with savings accounts, which is to build something high in utility and low in cost and thereby do an end run around the established players in the sector. The new Streetwise fund does have some appeal, but it's a lot more conventional than the people at ING may realize.

Streetwise is a packaged product - a blend of index funds that track Canadian, U.S. and international stocks, as well as Canadian bonds. In the fund industry these days, packaging is the new wave.

The mutual fund industry has traditionally used new fund categories as a growth engine and we've seen this in areas like China, commodities, income trusts and technology. Today, the growth is in bundling existing funds together into products that can serve as an entire portfolio.

These packaged products are often called wrap programs, or wraps, and they're selling like crazy. Fund industry numbers show they represented 17 per cent of the $611-billion or so invested in non-money market funds at Jan. 31, but accounted for 91 per cent of net sales in the past 12 months (new purchases minus redemptions).

What's more, packaged products are proving to be an easy sale. The Investment Funds Institute of Canada says fund-of-fund sales totalled $787-million last August, when the stock markets were tanking, while stand-alone funds faced $1.4-billion in redemptions.

Beware of this trend, investors, because you're being played. Packaged products are mostly a waste and can be safely avoided without a moment's hesitation.

This is admittedly a rather harsh lead-in to ING Bank of Canada's Streetwise fund, which is far from the worst of its breed. The fee to own this fund is 1 per cent (that's its management expense ratio, or MER), which is less than half of what you'd expect to pay for a typical mutual fund wrap that does the same job of giving you an entire portfolio in a single product.

The issue with Streetwise is that it's kind of pricey for an index product, which gives you the return of a major stock or bond index in a single fund. You can go the mutual fund route here or, better, use exchange-traded funds, which are index funds that trade like a stock.

ING's Streetwise Balanced Growth Fund has its assets split evenly between Canadian, U.S. and international stock markets and Canadian bonds and, again, the MER is 1 per cent. You could build the identical portfolio with ETFs listed on the Toronto Stock Exchange and have a vastly lower MER of 0.32 per cent.

You don't have a brokerage account, you say? All right, then your next best indexing bet is the e-series of index mutual funds from TD Asset Management. Duplicate the Streetwise Balanced Growth Fund with e-funds and your MER tops out at 0.44 per cent.

TD's e-funds are only available online. If that's a problem, then maybe RBC Asset Management's index funds can help. You could duplicate Streetwise Balanced Growth using RBC funds with an MER of 0.7 per cent at the most.

Streetwise funds rebalance your portfolio automatically so that one component doesn't get out of sync with another, but you can easily do that yourself on an annual or semi-annual basis (total time required: um, about 10 minutes). So that's one aspect of packaged products - they offer convenience, but you pay for it.

Here's another issue. Let's say you discovered that the fund company Altamira has some low-cost index funds in the Canadian, U.S. and international equity categories. You could use those three and mix in a bond index fund from someone else (Altamira doesn't have one), and reduce the overall cost of your portfolio.

With Streetwise, all your business goes to ING. There's no way to use a best-of-breed approach, which is what investors should always strive to do because no fund company is good at everything.

Fund companies know this, and that's a big reason why they're pushing wraps, as well as life-cycle, or target-date, funds, where you own a portfolio that automatically gets more conservative as you get older. Think of groceries - it's far more lucrative to sell investors a whole bag of funds than just a can or two.

To be fair, some wraps do use funds from multiple companies. But, again, you have to watch in case the fund industry rigs the game. In some cases, you'll find that the MER for your bundle of funds from multiple families is higher than if you bought the funds individually.

There's a saying in the mutual fund industry that funds are sold, not bought. This has never been truer than with wraps and other packaged funds. Avoid.

Sales trends for wraps versus stand-alone mutual funds

Mutual fund net sales

Long-term funds only

Over the last 12 months

As at Jan. 31, 2008





mutual funds

($1.7-billion) 9%

Mutual fund industry assets

Long-term funds only

As at Jan. 31, 2008


mutual funds




($106.7-billion) 17%


© 2007 The Globe and Mail. All rights reserved.

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