Get the full Morningstar Canada Balanced Fund Landscape report here
Danielle LeClair: Hi, I’m Danielle LeClair, Director of Manager Research for Morningstar Canada.
Michael Dobson: And I’m Michael Dobson. I’m a Manager Research Analyst at Morningstar.
LeClair: Michael and I are co-authors of the Canadian Balanced Fund Landscape. Now this is a report that we’re super excited about. It’s an annual report that covers balanced funds in Canada. And we look at things like the size of the asset class, we look at performance and fees, flows, product development, and more.
Now Michael, I know you did an additional piece, an editorial piece that you called, what’s changed and what’s stayed the same. So why don’t we start the conversation with what has changed in your view?
Dobson: Yeah, certainly. And to understand what’s changed, you have to back up a few years. In 2020 and 2021, Canadians were pouring a lot of money into investments. And balanced funds were no exception to that. Now that quickly reversed in 2022 and 2023. Suddenly people were just pulling their money out of balanced funds overall. But what’s interesting is seeing what they’re selling. And if you look at it, almost all of the net outflows that we’ve seen in the last two years have come from commission-based share classes. These are share classes where the fees are bundled all together into one. Fee-based share classes where those fees are separate, negotiated, whatever you want to call it, that remained essentially flat. There was really no inflows or outflows significantly.
LeClair: So even within that, investors are preferring or showing a preference for cheaper products. We saw something totally different with ETFs, right?
Dobson: Yeah. In fact, if you look over the last five years, balanced ETFs overall have been relatively immune to the market conditions. Canadians were pouring money into them, no matter the market environment. Not one single month in the last five years had balance ETFs been in outflows. It makes logical sense. You’re going to sell the more expensive funds and keep the cheaper funds all else remaining equal. But an investor needs to know what’s the most expensive fee, what they’re paying, and where they’re paying it. So, we can’t quantify it. We didn’t really get into it much in the report, but it’s no coincidence to me that the Client Focused Reforms came out at the end of 2021, which were a set of regulations that were trying to better the investor experience. One of those objectives was fee transparency, having Canadians know what fees they’re paying. So, it kind of goes hand in hand with better knowledge: sell the more expensive share classes, keep the cheap share classes.
LeClair: Yeah. And I think the other thing that we noticed when we looked at this was – we looked at fees for different asset managers. So, the trends that you’re talking about impacted different asset managers in a different way. So, if you look at bank-owned asset managers, they tend to have a larger percentage of assets in commission-based share classes. So, when you’re talking about those being the share classes that had the outflows, what we saw as a result was a narrowing of market leadership. So, bank-owned asset managers lost money relative to the independents – small amounts, but it was still something that we saw.
Dobson: Yeah. You always want to look at the options that are available to you because you might have a fund, you might have it in commission-based share class, but you can get that very same fund perhaps for cheaper in a fee-based advice share class. And as we’re seeing now, this conversion over into ETF vehicles as well. Canadians have been doing very well with that the last few years, but there’s still a long way to go. Asset managers from the big six banks still control the majority of assets, 51%. Commission-based share classes still dominate the space. I think it’s over 70% of assets. So, there’s still a long way to go, but good first steps.
LeClair: Yeah. And I think we saw good first steps or trends – I would even call it innovation – outside of just fee-based or the trends and fees when it comes to these types of products as well.
Dobson: Yeah. Lots of new innovations. It’s really exciting seeing how the market has evolved in the last few years.
LeClair: Yeah. And one of the things that we’ve been watching and that we’re still watching is the development of alternative investments in balanced funds, right? So, you’re seeing that as an allocation within the funds, but you’re also seeing a lot of movement around asset managers when it comes to alternative investments. So, there are firms like BMO that recently partnered with Carlyle Group to get some alternative investment exposure. We’ve got Manulife that has in-house capabilities. And then you’ve got firms like CI Financial that has kind of gone out there and found sub-advisors to get that exposure in their funds. So really an area I think that we’re going to see a lot more growth is on the alternative side.
Dobson: Yeah. We’re really excited equally about how it’s going to better the investment outcome, how it’s going to, if it is, going to smoothen returns, how it’s going to impact fees. Those are things that we’re looking at moving forward as well in balanced funds. And this conversation was really highlighting a few of the key points in the report, but we encourage you to look through the report, tell us your thoughts, share with us some of the things that you took away or surprised you. We’d be very excited to hear it.
LeClair: Absolutely. Super excited to hear all the feedback on this report that we’re really excited about. For now, thank you so much. For Morningstar, I’m Danielle.
Dobson: And I’m Michael.
