The numbers are startling. During the month of May, most of the new money that was invested in mutual funds went into “wraps”, pre-packaged portfolios of individual funds.
According to the Investment Funds Institute of Canada (IFIC), we collectively poured $2.1 billion into these portfolios during the month, compared to only $1.4 billion invested in stand-alone funds. That gave wraps an astounding 60 per cent market share.
There’s no doubt that fund wraps have become the industry’s latest hot-ticket item. From a fringe product a few years ago, they now control over $106 billion in total assets. That’s about 15 per cent of IFIC’s total mutual fund universe, and it is growing.
Clearly, investors like the convenience of this kind of one-stop shopping and the ability to invest in a portfolio that is tailored to their specific needs and risk tolerance. The fact that wraps cost more in terms of a higher annual MER (on average from 0.2 per cent to 0.6 per cent) doesn’t seem to concern them.
But how good are these packages when it comes to your bottom line returns? Although there are some exceptions, as a general rule you’ll often do better by choosing a well-managed balanced fund and letting it go at that.
Unfortunately, making direct comparisons between the wraps offered by a company and its various balanced funds can be misleading because in most cases the asset mixes are different. For example, the AGF Elements Balanced Portfolio is made up of 13 separate AGF funds. The current asset mix is 73 per cent equities and 37 per cent fixed income with a geographic mix that is 55 per cent Canadian. Over the 12 months to May 31, it gained 13.3 per cent. The AGF Canadian Balanced Fund has a slightly lower bonds/cash weighting at 33 per cent and more domestic equity exposure. It was ahead 14.8 per cent over the past year.
The situation will differ from one company to the next, but the point to bear in mind is that wraps are not necessarily the best solution. If you like the concept, ask some hard questions before you decide to go ahead. Here are some of the most important ones.
What funds does it hold? A wrap is only as good as the funds it holds. If one of more of the funds in the portfolio is a chronic underperformer, it is likely that your overall return will be sub-par.
What is the portfolio composition? Sometimes the name can be misleading. For instance, you may think that Mackenzie Financial’s STAR Canadian Long-Term Growth Fund (now capped) is a pure domestic wrap on the basis of the name. Not so. Almost 30 per cent of the portfolio is devoted to U.S. and foreign equity funds, such as Mackenzie Cundill Value Class and Mackenzie Universal U.S. Blue Chip Class.
What does it cost? Wraps usually have a higher MER than a comparable stand-alone fund. Find out what the premium is.
How has it performed? Most wraps are quite new so they won’t have much of a track record. All things being equal, try to find one that has been around for a few years so that you can compare its returns to those of a comparable stand-alone fund. For reasons explained above, you’re unlikely to find a pure apples-to-apples comparison but at least you can get some idea.
Is this portfolio the right fit for me? Typically, your advisor will give you a questionnaire to complete which may contain questions ranging from your risk tolerance to your asset mix preference. Many people aren’t really knowledgeable enough to complete the form correctly and may therefore end up with a wrap that is unsuited to their needs. Your best bet is to deal with an advisor who knows you personally and who understands where you’re coming from. Otherwise, take time to properly assess your requirements before selecting a package.
The Bottom Line: Wraps are hot sellers but there is no evidence that they produce better results than ordinary balanced funds and selecting the right one could be tricky.
Adapted from an article that originally appeared in Mutual Funds Update, a monthly newsletter that provides advice on fund selection and strategies. For subscription information: http://www.buildingwealth.ca/promotion/50plusproducts.htm