Portfolio products continue to wrap up assets

Standalone mutual funds may be under attack—with billions in net redemptions over the past year—but the culprit is not necessarily the much-vaunted exchange traded fund. In fact, much of the money pulled out of individual funds may be finding its way into one of the best marketing tools the fund companies have: the portfolio solution.

In January alone, standalone funds were hit by $937 million in net redemptions, according to the Investment Funds Institute of Canada (IFIC). Meanwhile, $1.63 billion was invested in fund-of-fund products.

This was no blip. In the 12 months ending Jan. 31, 2010, standalone funds bled $9.3 billion in net redemptions, while funds of funds enjoyed nearly $10.3 billion in net sales.

One of the leaders in wrap portfolios is TD, which has three streams of product. In the first 60 days of 2010 alone, the bank’s Comfort Portfolios program — available through branch-based advisors only — attracted $667 million in net sales.

“What makes [wraps] attractive to investors — and therefore to advisors — is the simplicity of the underlying investment,” says Thomas Dyck, president ofTD Mutual Funds. “We find in the mass market, clients find the overwhelming array of investments quite daunting and difficult for them to understand. By significantly simplifying their investment, you can help them feel better about the underlying investment, without giving up on the quality of the investment expertise or diversification.”

He suggests that advisors can use a wrap to create the core of a portfolio and layer additional asset classes onto that base.

Early critics of portfolio products pointed out that this usually included an additional layer of expense, but Dyck says this is not necessarily true of today’s portfolio products. Because a portfolio solution helps the manager gather assets more quickly and efficiently, the economies of scale can reduce the cost of administration.

A lower fee on a portfolio product provides the investor with an incentive to invest all of their assets with one company.

“If you were to create the exact portfolio with the underlying funds, you would actually pay more than with one of our wraps,” says Dyck. The most aggressive of the portfolios has an MER of 1.98%. “You get economies of scale, and you also reduce the amount of transactions.”

He says that wrap products recognize the work that goes in on the advice side. In the less lucrative mass market, it is often more desirable for the advisor to identify the risk tolerance and needs of the client and invest their relatively low asset base in a wrap. Built-in rebalancing removes additional weight from the advisor’s shoulders.

“Whether the investor selects individual funds or a wrap, either way we end up managing the money,” he says. “A significant amount of value is created by those who are face-to-face with the client, building the portfolio and helping them to identify their needs.”

Return to risk There are signs that investors are returning to riskier assets, as preliminary estimates from IFIC suggest about $2 billion in net money market redemptions, while long-term funds attracted about $5 billion in net sales. During the two-month “RRSP season” TD saw $674 million in money market redemptions, suggesting investors are regaining their risk appetites.

“Pretty much from the beginning of the rebound in the markets, clients have tepidly put their toes back in the water. If you look at the VIX (volatility index) over the last six months, what you’ve seen is a significant decline in volatility. I think that is really giving investors more confidence to reach out beyond cash.”

The analogy of dipping their toes into the risk pool is apt. So far, Dyck says most of the money coming out of cash equivalents has found a new home in fixed income. Equity investments account for less than a quarter of the money coming off the sidelines.

“We are beginning to see, particularly in the last two months, an increase of flow into equity product,” Dyck says. “As they get more comfortable with the markets, as volatility settles down, they are beginning to go further up the risk curve.”

(03/10/10)