The main reasons why interest rates are predicted to decline are the slow down of the US and Canadian economies and ease of inflation that is underway right now. However, this decline may not last very long and rates could be raised again in 2008 and kept that way for some time.
Legal / political factors and outlook
A factor behind the growing popularity of global funds has been the elimination of the foreign content limit restriction for registered plans as of February, 2005. This means that registered portfolios can now hold up to 100 percent of their allocation in foreign mutual funds. With net sales of almost $2 billion, Global and International Equity came out on top as the best selling asset category for January, 2007 and this monthly trend will likely continue into and beyond the rest of RRSP season.
The recent biggest investment news making headlines in Canada was the government’s decision to start taxing income trusts in a manner similar to corporations, effective year 2011. Shortly after this October 31, 2006 announcement the income trust sector (a large part of which are income trust mutual funds) dropped in value by over 20 percent, or almost $40 billion. However, the selling frenzy resulted partly due to investors selling their units in order to claim capital loss for the 2006 taxation year. It is presently unclear whether income trusts will survive till 2011 as a class separate from high yield equity funds.
Social / environmental factors and outlook
Opinion polls conducted in Canada recently point to environment and Kyoto as being the number one issue in Canada. In spite of this, Canadians are lagging behind their American counterparts when it comes to green investing, with about 3 to 5 percent of total investing in socially responsible investing (SRI) funds as compared to 10 percent for the US. The main reasons for this are limited investor education regarding these funds and their availability through credit unions and small SRI investment advisers only. Interest in these green and ethical funds is increasing, however, and is expected to get stronger as bigger companies tap into this market.
Despite the eruption of scandals in the North American mutual funds industry over the past few years, Canadian investors are, overall, satisfied with their mutual fund experience. This has been concluded by the IFIC Survey Report released September 29, 2006. Of the investors surveyed, 83% were comfortable with their understanding of the mutual funds they owned, 95% were satisfied with the advice provided by their advisor, 84% were comfortable with the fees they paid for their mutual funds and 90% experience any problems with their investments. Bodies like the Investment Funds Institute of Canada are taking additional steps to educate investors and to help the government regulate the industry further.
Other current trends
Even though global markets are out faring the Canadian S&P/TSX and this trend is expected to continue throughout 2007, Morningstar Canada reports that Canadian demand for Canadian funds, especially balanced funds is very high, with three of the six top-selling categories (out of total mutual fund sales of $20.8 billion in 2006) featuring balanced funds. Canadian income balanced funds ranked second overall with $6.4 billion in new sales last year, Canadian balanced funds were fourth with $3.8 billion in sales and global balanced ended sixth overall with sales of $2.8 billion.
Investing, in general, is likely to be high in 2007 because of the optimism resulting from a four year moderate to bull market. However, going forward this year analysts are recommending caution in the form of risk minimization, well diversified portfolios and smart global diversification. This is good news for mutual funds because of their potential to offer all these traits to investors.
COMPANY KNOWLEDGE
PROFILE
The BMO Asset Allocation Fund is distributed by BMO Investment Inc., which is indirectly owned wholly by BMO Financial Group. The company was originally established as Bank of Montreal in 1817, making it Canada’s very first bank. It has consistently ranked among the top five banking institutions in Canada for decades, and was ranked as Canada’s Best Corporate Citizen in 2005 by Corporate Knights Magazine. In 2006, IR Global Rankings declared the company’s series of investor relation websites as number one worldwide in the category of financial services.
BMO Financial Group is comprised of three separate operating groups: Personal and Commercial Banking, Investment Banking Group and Private Client Group (under which BMO Investments Inc. operates). This group earned $360 million by the end of October, 2006, the company’s 4th fiscal quarter. This performance was up by $40 million or 13 percent from a year ago.
The PCG provides clients access to over 950 mutual funds. These include the well diversified family of over 47 different BMO Mutual Funds™ offered by BMO Investments Inc., whose assets under management are $22.88 billion. On January 9, 2007, DALBAR (one of the leading financial services research firms in North America) pronounced BMO Mutual Funds™ as the winner of its 2006 Mutual Fund Service Award for providing the best overall service to both English speaking and French speaking investors over the past year.
SELLING PRACTICES AND POLICIES
BMO Mutual Funds™ are offered in a way that minimizes the complexities and complications regarding investing. The funds are classified into the following four categories according to overall objectives and degree of risk:
- Security funds, which cater to conservative investors and hold the safest investments;
- Income funds, which are meant to provide regular income with the minimal risk;
- Growth funds, which bear higher risk but are designed to offer higher potential returns;
- and Aggressive Growth funds, which are best suited to experienced investors who are comfortable with higher short-term risk and price fluctuations in order to achieve returns that are well above average.
BMO Mutual Funds™ are diverse enough to suit every investment objective and offer clients the flexibility to switch to another BMO Mutual Fund at no charge, should their needs or objectives change. The funds are of the “no load” kind in that clients are not charged any commission / sales fees (whether initial or deferred) or transfer fees when they buy, sell or switch within the BMO family of funds,
The funds are an affordable option for investors, as investment can be made in a single mutual fund for as little as $500. The fund offers further affordability by letting clients participate in the Continuous Savings Plan, which requires as little as monthly contributions of just $50 dollars, instead. Depending on the plan, clients have the freedom to choose the frequency and amount of contributions and can even temporarily stop payments in between. Most of the funds are RRSP eligible.
In order to inhibit excessive trading that could be detrimental to the value of the fund and other investors’ holdings, a fund may charge a short term trading penalty of up to 2 percent of the amount that is redeemed or switched between funds if such actions are undertaken within 30 days of the original redemption or switch.
PRODUCT KNOWLEDGE
PRODUCT HIGHLIGHTS
Description
The BMO Asset Allocation Fund was incepted on May 2, 1988. It falls under the CIFSC category of Canadian Balanced funds and is an open-ended, 100 percent RRSP, RRIF and RESP eligible fund. Its total assets under administration are worth $802.64 million.
The fund has a “no load” type sales fee, a per year management fee of 1.75 percent of its net asset value and its management expense ratio is 2.04%. The required initial regular and RRSP minimum investment is $500, and any subsequent regular and RRSP minimum investment is $50. The investment manager operating the fund for BMO Investment Inc. is Jones Heward Investment Counsel Inc.
As of February 22, 2007, the fund recorded a closing price of $19.23 per unit and showed month to date returns of 1.41% and year to date returns of 2.50%. The following schedule and chart (Figures 1 and 2) show the most recent reported returns and asset allocation of the fund, respectively.
Figure 1
*Note: Index refers to Blend: 60% S&P/TSX, 40% Scotia Universe
Figure 2
Features and Benefits
The following table (Figure 3) outlines the key features of the fund and the resulting benefits to the customers.
Figure 3
SERVICE SUPPORT HIGHLIGHTS
Description
BMO Mutual Funds™ offer four different service support features along with the investment products.
- Aside from availing personal financial advisory services, investors are encouraged to fill out the BMO Investor Profiler, which gives them a better idea of the type of investor they are.
- BMO Matchmaker® is another time saving service that matches an investor’s goals and profile to come up with the right diversified mix of mutual funds.
- Continuous Savings Plan lets clients invest in the funds by making monthly payments as little as $50.
- BMO Online Access allows clients to access their BMO Mutual Funds™ from the internet.
Features and Benefits
Figure 4 is a table highlighting some key features and benefits of the service support features offered by BMO Mutual Funds™.
Figure 4
COMPETITIVE KNOWLEDGE
COMPETITOR PROFILE
In terms of product to product competition, BMO Asset Allocation Fund’s main competitor is the Canadian Balanced-B Fund offered by Fidelity Investments Canada. The company is part of Boston based Fidelity Investments, one of the biggest financial services companies worldwide, with total assets of $1.3 trillion US and over 22 million customers. The Canadian arm of the company was established in 1987, and now manages over $41 billion in mutual funds and assets of corporate pension plans in Canada. The company’s main product is mutual funds.
PRODUCT PROFILE
The Fidelity Canadian Balanced-B Fund was started on September 30, 1998 and now holds $755.43 million in net assets, with a current net average value per unit of $18.66. It is an open ended, RRSP eligible fund, with a 2.16% MER, 1.7% management fee and initial sales fees. The required regular and RRSP minimum initial and subsequent investments are $500 and $50 respectively.
As of February 22, 2007, the current price for the fund is $19.09 per unit, with month and year to date returns of 1.35% and 2.26% respectively. The fund has generated 3 month, 1 year and 5 year returns of 3.95%, 8.88% and 9.32% respectively as of January 31, 2007. Its most recent reported asset allocation is 44.78% stocks, 44.27% bonds, 7.41% cash and short term securities and 3.55% other securities.
FEATURES OF THE PRODUCT AND SERVICE SUPPORT OFFERED AND COMPARISON TO BMO ASSET ALLOCATION FUND
One of the key features of the Fidelity Canadian Balanced-B Fund is its use of fixed asset weightings. This ensures that all of the fund’s three main asset classes are always present in the allocation and risk to investors in the form of the fund management taking chances on any particular class is reduced. However, this could significantly limit the fund management’s ability to minimize losses in the event of extraordinary market volatility, a consequence BMO funds will not feel to as great a degree.
Another distinctive feature of the fund is its significant investment in US high-yield bonds. While this can have the advantage of producing potentially higher levels of income for the investors, the default risk associated with high yield bonds has the potential to impact the fund negatively. In this regard, the BMO fund might be better off.
T-SWP is a service offered by Fidelity Investments Canada that allows investors to withdraw from their original capital, hence providing them with tax free cash flows. However, this type of return on capital can be misleading as it still lowers an investor’s adjusted cost base, triggering capital gains taxation as soon as the ACB goes below zero (aside from when the units are sold). Also, the monthly cash flows from this service are not guaranteed in terms of dollar amount and could also include cash flows from income (which would be taxable to the investor).
The Fidelity Canadian Balanced-B Fund is slightly more equity focused as compared to the BMO Asset Allocation Fund which, in contrast, has primarily been a little more income focused over the years. Also, Fidelity charges an initial sales commission or fee for its fund, while the BMO Asset Allocation Fund (as with most BMO funds) does not. The rest of the product features belonging to the BMO fund are similar to those offered by Fidelity.
The same is true with regards to online portfolio builders offered by the two companies (Fidelity offers ClearPath™ Retirement and Custom Fund Portfolios). However, BMO offers more online financial advice and account management features than Fidelity.
CUSTOMER KNOWLEDGE
One group of potential customers is made of people who are new to savings and investments, since balanced mutual funds let them add small amounts to their holdings without the need to change or constantly adjust the portfolio. As they become more comfortable with investing and their knowledge and risk tolerance increases, they can graduate to higher yielding or longer term investments, such as growth/equity funds.
Another group consists of people who enter the investment market relatively late and have large amounts of money to invest. Balanced funds are a good way for these people to test the waters instead of diving headfirst into significantly riskier investments, such as stocks on the stock markets. As with the previous group, they can move on to other types of investments as time goes by.
People falling under Stage 2: The Family Commitment Years of the life-cycle hypothesis are potential customers of a balanced/asset allocation fund due to their decreased liquidity because of high mortgage and car payments, decline in disposable income (especially with the birth of children) and requirement of adequate life insurance. As in the case of the very first group, balanced funds provide these customers a chance to add small amounts to their holdings, resulting in this money being automatically dispersed through the different classes of assets without the constant readjustment of the portfolio. Ideally, the income that the debt holdings in the portfolio provide acts to increase their liquidity (especially beneficial for those in the early years of Stage 2, who have comparatively less income), while the equity holdings serve to increase their capital adequately for their medium term goals, such as saving for their children's education (beneficial for those in the liters years of Stage 2, with slightly higher incomes). Since individuals in Stage 2 of the life cycle tend to be more risk averse than those in Stage 1 (The Early Earning Years) and Stage 3 (The Mature Earning Years), the balance between equities, debt and money market components in the fund provides for the right mix in terms of risk, capital growth and capital preservation.
Pensioners or people who want pension like investments (usually in Stage 4: Nearing Retirement and Stage 5: Retired ) are a key demographic, as they do not prefer taking on a lot of risk and are looking for the kind of consistent returns that balanced mutual funds provide due to their balanced mix of equity and fixed income investments.
Moreover, personal disposable income for Canadians increased by 25%, an average of 5% per year between 2001 and 2006, outpacing inflation by a considerable margin, according to Statistics Canada. This has resulted in an increase in liquidity, which is a good news for mutual funds and other investments.
ANTICIPATED OBJECTIONS
- Does the high debt component expose the fund to higher interest rate risk?
Yes, but the fund manager has discretionary powers to shift the allocation of the fund to minimize this risk while still staying true to the objective of the fund.
- Can I lose my investment money?
Yes, this is called risk. However, risk can be a good thing because usually the higher the risk, the greater the potential returns.
- Does the high debt component expose the fund to default risk?
In the case of this fund, this risk is minimized since the fund invests in high quality government and corporate bonds.
- Does the fund face high derivatives risk?
Yes, but again this is minimal since derivatives are only used when needed and in a cautionary manner.
- How volatile is the fund (since it has a large equity component)?
The fund’s volatility rate is almost half that of normal equity funds. This is due to the diversification of asset classes in the fund.
References
Source:
- IFIC Statistics
- IFIC Mutual Fund Industry
- IFIC Press Releases
Source:
- BMO Asset Allocation Fund Profile
- 15 Year Mutual Fund Review
- “Back to Bonds” article
- “Going Global” article
- Outlook 2007
- Fidelity Canadian Balanced-B Fund Profile
Source:
- BMO Mutual Funds
- BMO Growth Funds
- BMO Asset Allocation Fund
- BMO Investment Centre Products and Services
Source:
- BMO Asset Allocation Fund Quicktakes
- Fidelity Canadian Balanced Fund Quicktakes
Source:
- The Changing Marketplace – Competition in the Canadian Financial Services Sector
Source:
- “January fund sales best in 10 years” article
Source:
- Rates and Statistics
Source:
- “Income Trust Taxation – Biggest 2006 Canadian Story” editorial
Source:
- Country Briefings – Canada
Source:
- Mutual funds
- Canadian Balanced Senior B Fund
- Mutual Fund Services
- Mutual Fund Downloads
Sources for the rest of the section: , and
Source for the entire section:
Sources for the section: , and
Source for entire section:
Source: Telephone interview with BMO Investorline representative on February 15, 2007.
Source for the rest of the section:
Source: ICB's "Investment Funds in Canada" book
