Should you buy a balanced fund or a portfolio made of equity and bond funds?

The average balanced fund charges an MER in excess of 2.3%. That’s a hefty toll considering that most balanced funds have a bond component of 40% to 50%. Think about it: for that portion of your investment (i.e. the bond component of a balanced fund), you can hardly earn more than 3% in today's market. Take out 2.3% for management fees, and you are left with less than 1% of net returns.

This is rather paltry, but with a bit of creativity, you can improve your return by cutting on those hefty management fees. So what can you do to cut costs? One option would be to put 40% to 50% of your money in a Canadian equity fund, and the remaining portion in a low cost Canadian bond index fund or ETF. What you would get is the equivalent of a traditional balanced fund, but at much lower cost (and much better returns).

You might think that a balanced fund will provide the benefit of a managed portfolio, and that your fund manager will know when to buy equities and when to buy bonds. This is the theory. In many cases, however, this is just an excuse to charge you more fees. Historically, fund managers have not made big bets against the market. They rather play it safe, by maintaining stable asset allocations, from which they move by increments of 5-10%. Our research shows very clearly that, historically, a mixed portfolio of equity and bond funds has done much better than the typical balanced fund. The only situation in which an actively managed balanced fund would do better is during bear markets. If you think that the market is heading south, a balanced fund is probably a better option. Otherwise, a portfolio mix of a cheap bond index fund (or ETF) and equity funds is likely to out-perform most balanced funds.

That does not mean there are no exceptions. Many respectable companies offer balanced funds with cheap MERs of around 1% or so. In those cases, because the cost is more reasonable, you may possibly get some value-added from active asset allocation strategies. If you wish to take a closer look at some of those funds, click on this link to our search form, and choose the "Canadian Balanced" category for a identifying those with the lowest MER.