Shrewd Spender

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Should I Switch My Balanced Growth Portfolio Mutual Fund to Index Funds?

A friend asked me the other day:

I’m thinking of switching my CIBC Personal Portfolio Service Balanced Growth Fund into index funds. What are your thoughts?

Being a former active mutual fund investor myself and converting to an index investor after finding Couch Potato enlightenment, my answer was an emphatic, “Yes!”

But I didn’t just want him to take my word for it. I wanted to make a good case for him to switch to index funds. I decided to do a little research into the wrap mutual fund he invested in. I downloaded the performance report and did some digging.

What did I find out?

Asset Allocation

The actively managed balanced growth portfolio fund has an allocation of approximately 65% growth and 35% fixed income and is globally diversified. To achieve the asset allocation, the fund invests in 9 actively managed mutual funds and 3 index mutual funds. OK, this isn’t bad. At least it’s globally diversified.

Super High Fees

The MER on the wrap mutual fund is listed at 2.15%! To illustrate that in dollar terms, $100,000 invested in the balanced growth portfolio, with a 5% return over one year, charges a fee of $2257.50. Let’s just be honest here. This is brutally expensive.

Underperform the Benchmark

The balance growth portfolio fund consistently underperformed the blended benchmark used to measure the funds performance. Since inception, the balanced growth fund has returned 1.3% while the blended benchmark has returned 3.4%. This isn’t surprising since most actively managed mutual funds underperform stock market indices.

I could suggest switching to index funds just with the high MER and underperforming the benchmark alone, but one thing in the performance report popped out at me. The blended benchmark is comprised of the the 4 index funds that much up the global couch potato portfolio! The benchmark is based on:

  • 28% MSCI EAFE Index
  • 27% DEX Universe Bond Index
  • 25% S&P 500 Index
  • 20% S&P/TSX Composite Index

Wow! My friend could have bought the index mutual funds that made up the blended benchmark, got better performance than the fund he was holding, and saved a bunch of money in fees.

How much money could he save?

Investing in CIBC’s index mutual funds that made up the benchmark, his cost would be $1102.50. That’s 51% less than the MER charged by his wrap mutual fund. The cost would be even lower if he invested into the TD e-Series index funds, which are by far the cheapest index funds in Canada. The cost on the TD e-Series index funds would only be $452.76. That’s 80% less than the actively managed mutual fund he currently holds!

Needless to say, my friend decided to switch his existing funds, and instructed any new money to buy index funds mutual funds. He’s paying less fees, having more money work for him, and getting better returns out of his investments.

What about you? Are you considering a switch from actively managed mutual funds to a passive, couch potato strategy?

Image courtesy of Master isolated images / FreeDigitalPhotos.net

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