It looks like the popularity of balanced funds are on the rise and this is a trend that may not have investors' best interests in mind. Balanced funds in our view can bring confusion and complexity to an individual’s investment portfolio in a time where simplicity is often best. So let’s look at some reasons why we do not like (hate is such a strong word) balanced funds:

Letting a stranger decide: Balanced funds are particularly interesting because it lets a stranger (the fund manager) decide on what the appropriate asset allocation is for an individual. Obviously, this manager has no idea who 99% of the individuals holding the funds are and yet is being given the responsibility of choosing the appropriate mix of stocks, bonds and sometimes even geographic allocations. This responsibility should really be in the hands of either the advisor/wealth manager or the individual who actually understands the personal situation of the end investor, not deferred to someone in a different city or country that has no idea who you are.

Lack of Flexibility: The lack of flexibility ties into letting a stranger decide on the appropriate allocations. In the event of a change in your personal situation, the allocation of the balanced fund may no longer be appropriate. This means that you either need to sell the whole fund to adjust the portfolio and risk incurring some sort of deferred service charge in many cases or tweak the holding and sell the appropriate percentage that brings the allocations within the balanced fund in-line with your overall allocation targets. As an example, lets say your 60/40 equity/fixed income allocation target has changed to a 40/60 allocation due to a life event occurring.  Do you sell ‘X%’ of the balanced fund to reduce the equity exposure within the fund while increasing other holdings; continue to hold the full position even though it no longer really aligns with your needs, or sell the whole thing and purchase a new, fancy 40/60 balanced fund? It becomes quickly clear that portfolios holding balanced funds can become inflexible and a burden to manage effectively. 

Lack of Transparency and increased complexity: In our view, balanced funds add unnecessary complexity to a portfolio. An investor cannot simply open a portfolio and have a general understanding of what types of assets are held.  The names are often confusing and misleading (we have seen a ‘global’ equity portfolio hold 75% US investments), and research needs to be done to determine what percentages of assets are held in each asset class within the balanced fund, then add that to the investors total portfolio to get a realistic idea of exposures. This process then needs to be carried out for industry exposures as well which leads to a time consuming and frustrating experience for investors. This is in contrast to holding various fixed income only and equity only ETFs (or mutual funds) where you can quickly add up the market values and determine what your general exposures are when looking at your portfolio. Going back to the previous points this type of structure is also much easier to implement changes with as well as to tailor to your specific situation.

Cash balances: This is not true for all balanced funds but a large amount of funds hold high cash balances, often in excess of 5%. Yes, you are still getting charged a high fee on that cash sitting within the fund that is doing nothing.  Typically the job of the manager is to invest according to their mandate and generate returns for the investor. Not make cash decisions and charge fees on it. This should be the responsibility of the individual investor to decide what the appropriate level of cash is not a distant fund manager. Quite simply, you are probably not intending to pay someone to sit on cash for you.

Fees: I left this more obvious point for last and it applies to mutual funds on the whole opposed to balanced funds specifically. It is a point that is repeated and well publicized but continually not heeded by Canadians as we continue to have some of the highest cost funds in the world. On average, mutual fund fees are well above our neighbors to the south while proof that they provide performance that could justify the fees is fleeting at best. In general, balanced funds are also able to charge a higher fee than their all equity or all fixed income competitors. While a higher fee on a balanced fund is not unreasonable (more effort/knowledge/considerations due to more assets classes), we would rather own the lower fee, more focused funds, and pay an average fee that is lower than that of the balanced fund while typically capturing the same returns.

These are the main reasons we do not like balanced funds and did not even touch on issues such as performance and difficulty in using an appropriate benchmark to compare performance. In the past, when there were fewer investment options, less access to markets and less access to resources, balanced funds probably made a lot of sense to some investors but now they just seem to be a relic of the past that continues to have a high-cost grasp on the investing public. If you have an advisor, should they not really be the one creating your balanced portfolio allocations opposed to deferring it to a third party? As a DIY investor, owning more concise or specifically allocated funds can reduce costs, complexity and time taken to monitor the portfolio while increasing the power you have in making investment decisions.