Can you bank on big bank balanced funds?
The big banks in Canada dominate the $1.8 trillion market of long-term mutual funds in Canada, with a 50% share of the funds outstanding. And within long-term mutual funds, balanced funds represent the largest portion at 50%[1]. Clearly Canadians have a lot of their money in the big bank balanced mutual funds. Given how important these funds are to the retirement plans of Canadians, let’s look at the performance of the Big 5’s big balanced mutual funds vs a passive portfolio of ETFs. Do the vast resources the big banks spend on research teams and portfolio management result in outperformance?
The Process
I used Morningstar Canada premium to screen for the biggest balanced mutual funds offered by BNS, BMO, CIBC, RBC and TD that have the following attributes: (1) fixed income assets are primarily or exclusively Canadian bonds; (2) equities are global; (3) there is at least 10 years of history; and (4) the funds offer a retail and wholesale fund series. The results are shown in table 1.
Table 1
I then exported the monthly returns (up to May 2023) for the funds from Morningstar to compare them to an investable ETF portfolio. Since the funds have similar asset mixes, they can be compared to a passive ETF portfolio which is 40% Canadian universe bonds (iShares XBB), 20% Canadian stocks (iShares XIC), and 40% global equities (iShares XWD). The average retail MER of the mutual funds is 2.1% and 0.24% for the ETF portfolio.
Average Returns After Fees
Chart 1 shows the average of the 3, 5, and 10 year annualized returns of the 5 mutual funds in table 1 vs the ETF portfolio. All returns are after fees. Unsurprisingly, the average return of the 5 big bank balanced funds (black bars) fell short of the ETF portfolio returns (green bars) by roughly the amount of extra fees charged or 2% (red bars). Judging by the after-fee return differences, It sure looks like the big banks don’t try to actively manage their funds to add value to a passive portfolio. Even if you are paying a lower high net worth client fee of 1% to hold the average fund, you would still have underperformed the ETF portfolio by 1%.
Chart 1
But is the poor performance dependent on the end date used? To test this, I took the average of the rolling 4 year returns for the big bank funds over the last 10 years. As chart 2 shows, the average of the returns consistently fell short of the ETF portfolio, with the gap increasing in more recent years.
Chart 2
Fund Returns After Fees
In chart 3 I look at the returns for each of the big bank balanced funds. RBC’s Select Balanced Portfolio was the best of a bad lot with returns at the top of the pack over 3, 5, and 10 years. This consistency was confirmed by looking at the 4 year rolling annualized returns (not shown) where the RBC fund was the best performing in every rolling 4 year period. Interestingly, table 1 shows that RBC is also the largest fund by far, so clearly size has not impeded the fund.
Chart 3
Fund Returns Before Fees
While the big balanced fund returns are unimpressive after fees, this isn’t unexpected given the fees charged are around 2% vs 0.24% for the ETF portfolio. To see how the big bank funds performed before fees, I compared them to the before fee performance for pooled balanced funds in the latest RBC Pooled Fund Survey for the quarter ended March 2023. The returns for all 5 funds ranked in the 3rd quartile. This means that 50% of the funds in the survey did better, 25% did about the same, and 25% did worse. Yet again a poor result given the resources at the disposal of the big banks.
Wealth Strategy Implications
Outperforming a low-cost passive ETF portfolio is hard. The 5 big bank balanced funds I looked at lagged the returns of the passive ETF portfolio significantly. The size of the fees is the issue. Even the average independent fund active manager who offers balanced mutual funds at retail fees of around 2% will likely underperform a passive ETF portfolio.
It is important to note that the average retail fee of 2% isn’t just a fee for managing the money, it is a fee for the advice you are receiving as well. However, retail investors don’t always get a lot of good advice or service for the high fees they are paying. Make sure you are getting value for the fees you pay through the advice and services you get from your advisor if you aren’t getting decent after-fee performance. Otherwise, you may want to consider a better advisor or a good mutual fund with a cheaper fee. You may also want to consider digital solutions such as doing it yourself through holding ETFs through an online broker or utilizing an online discretionay wealth advisory platform that uses ETF portfolios.
Invest Wisely,
Dave Schaffner, CFA
Principal, Wayfairer Capital Management Ltd.
[1] Industry statistics are from the Investment Funds Institute of Canada and the RBC Q2 2023 Investor Presentation.