Balanced Funds vs Asset Allocation

Your analysis is very interesting but I was not happy with the assumption that balanced funds would hold 50 bonds and 50 equity. This is the problem with balanced funds, they're black boxes, you never know what asset mix you have. Here are the results of my number crunching (hope the math is correct). Take your average returns for bonds and equity but rather than assume a holding of 50/50 assume:

Holding 40 bond and 60 equity: 15.18, 10.32, 11.44, 7.98.

Holding 30 bond and 70 equity: 16.01, 10.59. 11.83, 7.81

Holding 20 bond and 80 equity: 16.84, 10.86, 12.22, 7.64.

The scariest part of all this is that over 10 yrs we would have done better holding bonds.

Yes, on average, over the last ten years you would've been better off holding bonds. That is not a trend that can continue - interest rates are low now. Going back ten years gets you into the '80s - going back 15 years makes the numbers even worse!! The eighties were a time of abnormally high interest rates. Yes, bonds did well, but how are they going to do during a period of low or rising rates?? I've heard some argue strongly for continuing to hold a high percentage in bonds, I think this would be a mistake over the next ten years.

As for active vs buy and hold - I think everyone here already knows my postion on that....

Hi Bylo:

Hmm. I don't know of a balanced fund that has the asset mix that I'm interested in. I am a more agressive investor heavily into global equity funds, with small caps and emerging markets, etc. thrown in. In this way I can get away with a lower bond component, and benefit from hier returns. It all depends on your risk level.

Buying a balanced fund sort of cramps a persons style. You can't easily gradually change your asset allocation as your risk level changes with time.

You forgot to mention one of the most important aspects of long-term investing: Cost! You will find balanced funds have a tendency to charge hier MERs, and you can save by buying the components of your asset mix at a lower total cost. Of course that means you will have to do more of the work yourself. 8{)

If you are concerned about generating taxes from reallocation try: 1. take only the distributions from your hi fliers and buy more of your down funds with them. 2. readjusting your frequent purchase plan amounts (if DCAing) to give you the desired mix.

I used 50/50 for comparison purposes and to get the discussion going. Obviously for most folks a higher weighting in equities would be appropriate. Anyhow, most balanced funds have more than 50% in equities most of the time.

Brian, you are correct that no balanced fund can have the mix that is best for everyone, but my numbers would seem to suggest that even a balanced buy-and-hold strategy will do quite well over time -- perhaps even better than some active asset allocators. Like you, I would add some foreign content so that the Can bond weighting would be lower and the Can plus foreign equity would be higher.

Many people claim to rebalance their portfolio from time to time, but I suspect many do not. It intrigues me that a buy-and-hold balanced strategy ensures that the rebalancing happens, and although the asset mix may not be "ideal", it still generates decent returns. I wonder how many active rebalancers have done better than 10% a year over the past decade.

BTW, balanced funds do not necessarily have high MERs. In my list AGF (2.5%) and ABC (2%) are the highest, but Bissett (.44%) and PH&N (0.92%) are both under 1.0%.

Very interesting discussion. Thanks for starting the discussion Bylo.

I have 3 balanced funds

Royfund ROI=8.0% since purchase in 94

PH&N ROI=15.0% since purchase in 96

Trimark Sel Balanced=16.1% since 94

I also have Dynamic Partners which could be a balanced or asset all fund. Return=11.8% since purchase in 93

Finally I have AGF TAC AA which I have to do the math on to get the return but I would guess its return is 10% at best for the past 5 years.

If I include Dynamic Partners in the balanced funds then the returns are reasonable. except for the Bank fund.

I have Royfund balanced & AGF Tac AA on the endangered species list but thats another topic.

In active management the fact that the individual and the fund manager were both making changes without consulting each other always bothered me.

Another interesting question is assume the TSE dropped by 10% and within 1 month made it all back again. I'll bet the NAV of the funds never rebounded fully because the fund managers moved to cash after the first hit and probably missed the first spike of the rebound. In situations where there is a lot of market volitility would balanced funds perform better or worse than straight equity funds?

Just to keep the discussion going. I find it interesting that the balanced fund returns are so close to the average of 50 % bonds and 50% equities. You'd think the balanced fund managers would at times be able to see where the market is going and protect themselves. They are able to move back and fourth from bonds and equity. This gives them a significant advantage over the managers with stricter restrictions. With an advantage like that I'd expect their returns to be higher.

Onother opinion, I would like you to elaborate on the meaning of stricter disciplines.

As we have seen lately, some of the fund companies that invested in Bre-X strayed from their stated strategies.

I also remember the days when Dynamic Partners was the top performing fund for a calander year. I think they did it with gold stocks.

Bylo and Matador:

1. If you need to buy other funds in order to get your proper asset mix, why even bother with balanced funds? I realize that the 50/50 split was hypothetical, but what about those of us who have a long time frame, and have a MUCH lower bond component?

2. OK, I agree a lot of people find it hard to rebalance since it involves going against the grain, and maybe for them a balanced fund would do. Some banks like CT will automatically rebalance their Funds for you.

3. As a generalization, balanced funds have hier MERs. I can't be sure about PH&N, but Bissett charges .44% ABOVE the weighted mix of MERs that are components of their balanced fund. I think anything approaching 2% MER is usury, except in special international cases.

4. Different balanced funds have different mandates. Some are required to stay within a tight asset mix, and others have wider latitiude. Sometimes the fund description changes with time! I'm not very comfortable with a manager who is moving assets around trying to predict the future--market timing has an unimpressive record, and I would opt for a much more passive management style. The problem is, what are you buying into, and will it stay that way for long?

5. I don't like the fact that balanced funds have a money market component. That restricts my flexibility and reduces the fund's performance. I want a money market fund that I have easy access to, since I use it regularly, and I don't want to have to redeem some of my equity as well merely to get my hands on a little cash.

Matador,

Sorry about the delay, I was out of town. I'll explain what I meant when I said "stricter restrictions". When the market is expected to fall, equity fund managers have no alternative but to stay in the equity market. They can go to cash but not entirely. The same is true with bond fund managers. When interest rates rise they have to hold bonds. They too can go to cash but not entirely. These fund managers have to stay and take whatever their respective market throws at them. This is not true of balanced fund managers. They can move between bond and equities and since traditionally bond and equities have an inverse relationship to each other I'm surprised that the balanced fund managers can not give better returns than 50/50 bond/equity holdings as shown by Bylo's above messages.

Most balanced funds also have a stated criteria as far as how much they can swing one way or the other - it seems to be around 60/40. (that is, they can go as much as 60 or as little as 40 in the bond or equity component) So even balanced funds have their limitations imposed on the managers.

Bylo, as Mr. Bernstein argues in his on-line book, an asset allocation strategy should return more than the weighted average of the various assets returns. He calls this "a re-balancing bonus". Part of it could be eaten away by taxes; in my case it is not a concern; and in most cases re-balancing can be done with no supplementary taxes - either by adjusting what funds you buy in the accumulation phase, or what funds you sell in the distribution phase.

OK Adrian, I'll bite. This is about the fifth time you've mentioned the fact that you pay no taxes. Why don't you enlighten us all. Even I have to pay about 7%.

BTW, good to see you back. It was getting a little boring around here.

Hi Geoff, thanks for the welcome. For not paying taxes, the recipe is easy, if you have minor children: keep non-registered assets in trust for them. Separate the Child Tax Benefit money into a different account. There you can keep interest producing investments as well. For the rest of investments, try to generate capital gains only, either by the fund itself, or by trading. You'll pay taxes only if your total non-registered gains, per kid, are over the basic exemption ($6500 or so). If most of them are capital gains, assuming a 10% return, you can have about 86 grand, per child. (if you do not realize all gains every year, it's even better).

Adrian, hopefully you have kids for more reasons than just tax minimisation. Oh, and don't forget to educate them well so they'll earn lots of money, pay lots of tax and help fund our pensions! ;-)

Very interesting structure, and very useful. But one must be careful with some details:

Since the money is legally the childs property, and children have a tendency to grow, I'd wait for the perfect time to give them the news and redirect the bank correspondence regarding that account to a PO Box in the meantime.

And regarding attribution rules: even if we follow all the account setup details discussed here (donor different than trustee, SIN included, proper wording for the account name) the money MUST be used for the child's benefit.

So i guess if we take a vacation the child's ticket could be paid from there, and stuff like that. When money is eventually withdrawn from that account one must be able to prove how was it spent, or all efforts to set it up will be wasted.

I'm very interested by the strategies alluded to regarding trusts for the children. Can you suggest where I might get detailed information about how to set these up, what the restrictions are, how to maximize their use, etc. Could you recommend a good book, web site, etc.?

Thanks in advance,

Marcel

I'm very interested by the strategies alluded to regarding trusts for the children. Can you suggest where I might get detailed information about how to set these up, what the restrictions are, how to maximize their use, etc. Could you recommend a good book, web site, etc.?

Thanks in advance,

Marcel

Check the thread: "RESP or In-trust accounts?"

Not a bad little setup Adrian. There have been a few good concerns voiced here, but I'm sure you have gone over the negatives as well as the positives.

Myself, I like trusts as specific savings vehicles and as a way to get money OUT of investments without triggering taxes.

BTW, I thought you were talking about ALL income when you meant no tax. Got me a little excited. Oh well, I have to keep paying what I do. Maybe one of our leaders will roll in a talk cut, eh? Nah, that would mean an election promise kept.

Bringing up thread for lumberjack.

Well, since this is up again I might as well add my 1/1000 cents worth. More reasons I don't like balanced funds:

6. Balanced funds force you to concentrate your assetts in maybe 2 or 3 funds, and maybe 2 or 3 fund companies. If your portfolio is quite large there just isn't enuf safety here. The first rule of investing is to diversify. What if a fund goes bad? What if a whole fund company goes bad? If that affects 1/3 of your portfolio, that is a significant drag on performance. You often can't see a fund go bad until a few years pass, meanwhile......

7. Small caps and Emerging Markets are 2 areas that are responsible for a significant performance boost over the long term. What kind of Balanced fund include those areas? Often, balanced funds are managed conservatively, and you won't get these benefits.

Something that no one seems to have brought up on this thread is the fact that frequently it is less expensive to divide the holdings you have in a Balanced Fund between the Equity Fund and the Bond Fund of the company with which you deal.

Trimark is a good case in point. Assuming a 60 - 40 split between the equities and the bonds, -

MER on Balanced Fund 2.20 MER on Equity Fund 2.25 MER on Bond Fund 1.25 Do the math and you will find that using the same mix as the balanced fund should yield better returns in the long run.

Another FA,

You raise a very good point. I did the math for PH&N Balanced a few weeks ago. As I recall, its MER was only about 0.06% higher than the blended MERs of the constituent funds. That's a reasonable enough price to pay for letting them handle the rebalancing.

A related observation: people who think their equity fund manager is doing them a favour by having a significant weighting in cash in these days of market volatility should realise they are also paying a 2.2% (average Can equity fund) MER for managing the MMF component of the fund.

I know there has been a lot of Primerica bashing but let's not get into this here and now. They have an asset allocation series which are AGF funds only. This series allows an investor to diversify across 15 - 16 funds with a pac min of $50/ month. It also allows for maxing foreign content to 45% due to triple stacking. Would this format not be the best of all worlds. ie, maxing growth potential while reducing risk? A balanced portfolio would be far more restrictive? Comments!

CFP to BE. Can you expand on the term "triple-stacking".

Richard, re: triple stacking. I hope that I can explain it as it was explained to me. The concert series is a fund of funds each series ,the aggressive, high growth and growth have an international counterpart ie: Canadian Aggressive Growth---- International Aggressive Growth. If one invests $100.00 (RRSP) to an aggressive series, $80 would go to the Canadian portfolio and $20 to the International. However, the Canadian portfolio contains approx. 15% foreign content usually US, further to that, each individual fund also contains a % of foreign content. When this is all worked out, the foreign content is just under 46%. I don't have the pamplet showing the exact math illustration they use but this should be sufficient. If not I'll try to get the exact numbers. Let me know

The "stacking" idea also applies to the other asset allocation services available, such as MacKenzie's Star and not just to Primerica's offering through AGF. A self-directed RRSP can yield the same result with more flexibility in your choice of funds.

ANOTHER FA, The Star program is perhaps similar in appearance to the Concert Series but it does not offer the same advantages. Neither does a self directed portfolio. Remember, a novice, young investor can spread his/her investments across 15 or 16 different funds (yes they are AGF funds). These funds cover the globe and this can be done for as little as $50/month. But lets get back on track, my comment was not to plug Primerica Concert but to give an example of an asset allocation "fund" which I believe has less risk and a greater potential of long term returns than most Balanced Funds.

Only have 26k in my SDRSP; my planner has divided up as follows: 2 balanced, Fidelty Cdn assest allocation, Global Strat. income plus; and 2 Aic funds plus Industrial penison. Approx 20% in each, 5 funds in all. This seems suitable balance to me. Thank God I have a company and CPP pension....

Was reading this thread this am after watching business show where one guest said one good balance fund would do the money making job for a great number of investors.He felt it was a simple approach for average person but did warn MERs could be high in certain cases.