What are we looking for?
Top-rated tactical balanced funds and ETFs.
The screen
On Jan. 24, the Bank of Canada held interest rates at 5 per cent. Most market participants anticipated the pause, but that may be where their consensus ends. With inflation continuing to remain a concern, driven largely by high housing costs, the question of when the central bank will begin to cut rates remains a moving target.
The timing has an impact on how a portfolio should be positioned. In rising rate environments, investors tend to favour fixed income because bonds tend to do well with higher interest rates, resulting in higher yields. However, when higher rates are driven by inflation, bonds are less attractive because the yield you get is less valuable in an environment of higher costs for goods and services. This, coupled with equity markets reaching all-time highs in 2023 despite higher rates, presents a conundrum for investors looking to make the right asset allocation decision.
Considering this uncertainty, Canadians may wish to consider funds classified by the Canadian Investment Funds Standard Committee (CIFSC) as tactical balanced funds. These funds allow for a flexible approach to asset allocation, leaving the tough decision of choosing between stocks and bonds to professional portfolio managers and their teams. I used Morningstar Direct to screen the Canadian mutual fund and ETF universe, to highlight some good tactical balanced funds that meet the following criteria:
- a Morningstar Medalist Rating of bronze, silver or gold indicating a forward-looking view of the fund’s ability to outperform its peer group and/or relevant benchmark on a risk-adjusted basis over a full market cycle;
- a Morningstar Rating (a.k.a. “star rating”) of four or five stars. The star rating is an objective look back at a fund’s after-fee, risk-adjusted returns relative to the category to which the fund belongs. Though the measure is backward-looking, Morningstar’s research shows that over time and on aggregate, five-star funds continue to outperform four-star funds, three-star funds etc., after receiving the rating.
- Morningstar category – which is defined by the CIFSC – equals tactical balanced
What we found
The category allows funds to be flexible with their allocation to equity and fixed income, which is apparent in the screen’s results. With equity allocations ranging from a low of 30.82 per cent in the Fidelity Tactical High Income Fund to a high of 73.52 per cent in the CC&L Core Income and Growth Fund, it is clear investment managers have differing views on the market at this time. Similarly, we see a wide range of category rankings for these funds over longer terms, potentially stemming from different asset allocation decisions, but all rank in the top half of the category over the past five years. Only Dynamic Premium Balanced and Manulife Tactical Income have maintained top decile rankings over one, three and five years. Lastly, no ETFs made the screen. While notable, this is also not unexpected, as there are only four ETFs in the entire tactical balanced category.
Note that the MERs listed here are reflective of the fee-based share class. In the table, these shares exclude the cost of advice and are held in fee-based accounts, where the adviser charges separately for advice.
This article does not constitute financial advice. Investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.
Danielle LeClair, MFin, is director of manager research, Canada for Morningstar Research Inc.
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