By Tom Bradley

In her Mutual Fund column in the October MoneySense magazine, Suzane Abboud looked at what balanced funds did through the market crisis, specifically how they managed their asset mix. A big part of the reason for owning a balanced fund is the expectation that the manager will make changes to the mix to fit the market environment and opportunity set.

Suzane’s research focused on the largest 15 balanced funds, which account for $37 billion, or 44% of the category’s total assets. It revealed that on average the funds’ mix changed little from June, 2008 to March, 2009 – the weighting in cash (15%), government bonds (21%) and stocks (46%) were all about the same, while corporate bonds were higher (15% vs. 13%) and the ‘other’ category was lower. Her conclusion: “the data strongly suggest that balanced fund managers added hardly any value during the crisis. Contrary to public perception, those managers did not actively manage their asset allocation by moving from one investment category to another based on market factors.”

She goes on to say that most funds she looked at have a strategy of sticking to a stable asset allocation, which is OK except that investors don’t need to pay big fees for that.

I agree with Suzane’s view and would add just a few comments:

  • Balanced funds are one of the most bloated categories when it comes to fees. Too many of them have equity-like MERs, even though they hold a large component of fixed income securities. Anything over 2% is too high.
  • We also believe that a fixed asset mix is a good strategy for most clients. It brings a discipline to the investing process (i.e. regular re-balancing) and takes emotion out of the equation. If that is the approach a balanced fund is taking, however, it needs to be transparent about it.
  • As for the managers’ actions, the fact that the funds held the same amount of equities at the bottom, and more corporate bonds, means that they did do a substantial amount of buying. Obviously, clients would have preferred (in hindsight) that the funds had more risk at the bottom than the top, but the managers were taking action.
  • Indeed, I would contend that balanced funds managed through the crisis better than the average individual investor. The reality is, a vast majority of Canadians went up with a lot less risk than they went down with. I have come across very few investors that held more equities in March than they did the previous June.

At Steadyhand, we don’t have a balanced fund in our line-up. There were a number of reasons for that. First, a ‘one-size fits all’ fund fits some, but not most. Second, we wanted our clients to make a proactive choice as to what their strategic asset mix (read: long term) should be. We didn’t want any automatic defaults. And third, we wanted our clients to be engaged enough to monitor their mix occasionally and re-balance when necessary.