What are we looking for?
Tactical Balanced funds that have outperformed peers.
The screen
In a recent article covering the Bank of Canada’s interest rate direction, the Globe and Mail’s Mark Rendell reports that our central bank does indeed see it reasonable to assume a continued lowering of interest rates gradually, with caveats around incoming data and continued monitoring. This contrasts with the United States, where inflation seems to be more stubborn and interest rate cuts not expected until closer to September. When we factor how this divergence will affect the foreign exchange rate (with lower interest rates typically resulting in a relative devaluation of currency), we start to paint a complicated picture of considerations when thinking about how to tactically change your asset allocation (i.e. mix between stocks and bonds) and geographic allocations. Luckily, like most financial conundrums, there’s a fund for that.
For those that believe there is an opportunity to take advantage of shifting market dynamics but perhaps lack the time and know-how to navigate them, tactical allocation funds could be a worthwhile consideration. These “go anywhere” funds typically have generous allowable asset allocation ranges, allowing the portfolio manager the discretion to quickly pivot between asset classes and geographies, in the hopes that they can beat benchmark market returns by being in the right place at the right time (for example, during a shift in interest rates). Of course this is a tall order, but today there exist a handful of funds that have shown that they can do this effectively. To find these funds, I used Morningstar Direct to screen across the Tactical Balanced category (a universe of 77 unique funds and ETFs) for those that have received:
- A four- or five-star Morningstar Rating for Funds, indicating that the fund has historically outperformed respective category peers after fees, on risk-adjusted basis. Our data shows that although the star ratings are backward-looking, funds that have received five stars as a group, outperform those that have received four stars, three stars, etc. in periods after receiving the rating. In other words, it’s more likely that a fund manager with a track record of outperforming peers will continue to outperform in the future, as compared with those which have historically underperformed peers.
- A Morningstar Medalist Rating of gold, silver, or bronze, isolating funds that Morningstar believes will produce excess after-fee returns in the future, based on our analysis of people (quality of the management team), parent (stewardship of the fund company), and process (robustness of investment decision making).
For comparability, only fee-based share classes of mutual funds were included in the screen (alongside ETFs). Readers are reminded that the listed MER for fee-based share classes exclude the cost of advice and distribution, which is charged separately by the adviser.
What we found
The funds that qualified in the screen are listed in the table accompanying this article, alongside MERs, trailing performance, inception dates, broad asset class exposure, and ratings. Also included is a breakout of the funds’ recent asset allocations and the longest tenure within the portfolio management team. Though the category included five ETFs, none of them qualified under the above criteria. I note importantly that investors with lower risk tolerance or shorter investment horizons are unlikely a good fit for these types of funds given the potential for these funds to quickly shift toward stocks, which tend to be riskier and less suitable for conservative investors with imminent liquidity requirements.
This article does not constitute financial advice, it is always recommended to conduct one’s own independent research before buying or selling any of the funds or ETFs mentioned in this article.
Ian Tam, CFA, is director of investment research for Morningstar Canada.
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