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Mutual Fund News

Retail funds take cue from pensions

Actively managed fund portfolios adding low-fee index funds and ETFs to diversify


If you can't always beat them, it's time to join them.

Low-fee index mutual funds and ETFs (exchanged-traded funds) are creeping into fund of funds portfolios. And these offerings appear to mimic moves by pension managers, which invest in active and passive strategies as well as other assets like real estate whose values do not necessarily move in tandem with stock markets.

Manulife Mutual Funds recently launched three index funds - Manulife Canadian Equity Index, Manulife U.S. Equity Index and the Manulife International Equity Index - but they are not sold as standalone funds.

They are being incorporated into its existing Simplicity asset allocation program, which offers actively managed fund portfolios ranging from conservative to aggressive.

"We have value and growth [equity styles] because they perform differently at different times," said Jeff Ray, an assistant vice-president of mutual fund products at Manulife Mutual Funds. "We felt that adding a passive or index fund ... would be a good complement to those active styles."

But the management fees, which currently range from 1.6 per cent in the conservative portfolio to 2.35 per cent in the aggressive portfolio, are not expected to decline because of the index funds, Mr. Ray said.

The percentage of index products being added to the portfolios will not change the fee structure, he said. "We look at them to make up about 20 per cent of the overall equity weighting in the portfolios."

Last year, AGF Funds Inc. and Invesco Trimark Ltd. also began offering ETFs in some packaged-fund portfolios. The move also gives financial advisers at mutual fund dealers, which are not licensed to sell ETFs, a way to get access to these products for their clients.

In its Harmony fund-portfolio program, AGF uses a non-traditional asset pool of Claymore ETFs that invests in sectors like real estate, infrastructure, water, oil sands, and agriculture and mining.

AGF said yesterday that there was no one available who could comment on the Claymore ETF pool. But former AGF president Randy Ambrosie told last year that "advisers of all stripes understand the idea of non-correlated assets.

Invesco Trimark, whose sister company is U.S.-based Invesco PowerShares, now offers four target-date retirement income portfolios that include a group of "enhanced" PowerShares ETFs aimed at outperforming a passive index.

"It's all about making the overall package better from a diversification perspective," said John Ciampaglia, senior vice-president of product development at Invesco Trimark. "We put PowerShares into one of our wrap programs because they offer lower fees, tax efficiency and access to specialized mandates."

Stocks of traditional equity ETFs are based on the market value of companies. Enhanced ETFs, which also charge lower fees than actively managed funds, use different fundamental factors like cash flow and dividends for stock selection. Because both kinds of ETFs have low stock turnover there are tax advantages if held outside a registered retirement savings plan.

"Our management fees are lower because they reflect the fact there are underlying ETFs," Mr. Ciampaglia said. "When you compare the cost of active management to the PowerShares ETFs, there are some savings so when you net all that out, the overall package to investors will be lower."

The trend to using ETFs or index products with active managers is among "ideas that are moving from the institutional world into retail investor world," he said. "Most of the larger pension funds have a combination of passive indexing, enhanced indexing and active management working together."

While diversification is cited as a big reason to mix index-like products with active managers, fund analyst Peter Loach suggested another driver is to increase profit margins for fund companies. "Active mangers cost more than passive managers," he said. "If you put a passive manager in a product, you have lowered the cost."

Fund analyst Dan Hallett cautioned that there can be too much diversification in a portfolio that will "doom you to mediocrity." And adding passive index products can make a portfolio look more like an index fund, he suggested. "You are going to have a harder time standing apart from [the index] performance-wise."

It doesn't make sense to jump aboard fund portfolios using ETFs or index funds unless "the cost advantages of indexing are passed along to the end investors, Mr. Hallett said.

"Indexing's fat cost advantage is what makes it an attractive option," Mr. Hallett said. "But if you sell indexing as part of a pricey package, you've not done a thing to help investors if its cost advantage is eaten up by fund of fund fees."


Fund portfolios embrace ETFs, index mutual funds

Sample of an Invesco Trimark fund of funds portfolio using ETFs
Invesco Trimark Retirement Payout 2038 Portfolio (30-year investment horizon) (%) Invesco Trimark Retirement Payout 2023 Portfolio (15-year investment horizon) (%)
Money market mutual funds and short-term investments 2.5 15
Fixed-income mutual funds
Trimark Government Plus Income Fund2- -
Trimark Canadian Bond Fund24.532.5
Trimark Floating Rate Income Fund 45
Trimark Global High Yield Bond Fund 45
Fixed-income mutual funds total 32.5 42.5
PowerShares equity exchange-traded funds (ETFs)
PowerShares FTSE RAFI US 1000 Portfolio 6.54
PowerShares FTSE RAFI Emerging Markets Portfolio 42.5
PowerShares International Dividend Achievers Portfolio 74.5
PowerShares Buyback Achievers Portfolio 5.54
PowerShares Dividend Achievers Portfolio2 - -
PowerShares equity ETFs total 23 15
Equity mutual funds
Trimark Canadian Plus Dividend Class2 - -
Trimark Canadian Focus Class 1510
AIM Canadian Premier Fund 86
Trimark U.S. Small Companies Class 52
Trimark Global Dividend Class2 - -
Trimark International Companies Fund 53.5
AIM International Growth Class 53.5
Invesco Global Real Estate Fund 42.5
Equity mutual funds total 42 27.5
Total Portfolio allocation 100 100
Note: Invesco Trimark can change target asset allocations and/or underlying investments to meet objectives of portfolios.

© 2007 The Globe and Mail. All rights reserved.

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