Balanced funds are extremely popular in Canada, but investors are moving away from higher-cost options.Yutthana Gaetgeaw/iStockPhoto / Getty Images
The lucrative balanced fund space in Canada is undergoing a significant shift as fee-conscious investors move away from bank-owned asset managers’ high-cost products and advisors shift to fee-based compensation. Vanguard Investments Canada Inc. is looking to take advantage by offering its popular portfolio exchange-traded funds (ETFs) as mutual funds.
Assets under management (AUM) in Canadian balanced funds (mutual funds and exchange-traded funds) total more than $790-billion, according to a report from Morningstar Inc. released last month, but the category has seen outflows for the past three years on the mutual fund side.
According to the Investment Funds Institute of Canada, redemptions from balanced mutual funds totalled almost $110-billion over the past three years. Still, balanced funds make up almost half (44 per cent) of mutual fund AUM in Canada.
The Morningstar report shows a clear distinction in the types of balanced funds investors buy and sell: for three straight years, investors have sold commissions-based share classes and bought fee-based share classes and ETFs. Last year, balanced mutual funds and ETFs in the four cheapest deciles took in $76-billion while the rest saw $89-billion in outflows.
Against this backdrop, Vanguard has introduced low-fee mutual fund versions of its popular asset-allocation ETFs.
Sal D’Angelo, head of product at Vanguard Canada, says the firm wanted to make the funds available to mutual fund-licensed advisors who can’t offer the ETFs and to securities-licensed advisors who prefer the mutual fund format.
Vanguard’s asset-allocation ETFs, introduced in 2018, popularized the category in Canada and took off with investors, bringing in more than $17-billion in AUM to date across the all-equity, growth, balanced and conservative portfolio funds.
But the Morningstar report notes Vanguard’s dominance in the asset-allocation ETF area is being challenged. The firm’s market share fell below 50 per cent last year “as cheaper and more innovative rivals emerged,” the report said.
Now, Vanguard sees an opportunity with investors looking for lower-cost balanced mutual funds.
Bank-owned asset managers still had more than half of the $790-billion in balanced mutual fund and ETF AUM in Canada as of December, 2024, according to the Morningstar report, with commissions-based mutual funds accounting for $310-billion, or 39 per cent of the total.
But the shift toward fee-based funds “has eroded the dominance,” the report said, and that could continue if investors keep moving money into fee-based share classes and ETFs, in which other fund companies have more AUM. “It’s a slow march of change that looks poised to continue moving forward.”
The client-focused reforms (CFRs), which took effect in 2021, brought in stricter know-your-client and know-your-product (KYP) requirements for advisors, and total cost reporting requirements set to take effect next year will provide investors with more information about investment fees, further pressuring fund companies.
A Morningstar report released last year noted the trend toward cheaper balanced funds coincides with the implementation of the CFRs. Most commissions-based mutual funds have fees of about 2 per cent, it said, while fee-based funds are closer to 1 per cent; ETFs can be closer to 0.20 per cent.
The four mutual fund versions of the Vanguard ETFs are offered only in the F-class, fee-based series with management fees of 0.22 per cent, the same as the ETFs. The management expense ratios, which haven’t been calculated yet, will likely be around 0.40 per cent, Mr. D’Angelo says, compared with 0.24 per cent for the ETFs, owing to higher operating expenses for mutual funds.
“We know that will be important for advisors to demonstrate their value [and] lower the overall cost,” Mr. D’Angelo says.
He adds some dealers have responded to the enhanced KYP requirements by shrinking their product shelves and working with fewer fund companies, which makes asset-allocation funds more valuable.
“If you can anchor a lot of your clients into this kind of global portfolio, that really alleviates the need to learn a lot of different products [and] worry about fees,” he says.
“It helps advisors focus on what they do best, which is really about the relationship management, the wealth management component of advice – not so much the portfolio construction and picking products or picking stocks.”