What are Portfolio Funds?
The following discussion applies to Portfolio Funds offered though the major banks. Independent mutual fund companies seem to apply higher standards in regard to the contents of this type of fund, if they offer them at all!
Years ago, before I joined the Financial Services industry, I approached my branch to make an RRSP deposit, as my income had risen significantly. I was now in a higher marginal tax bracket. (If you don’t know about tax brackets, check out this post!) At the time, my net worth was over $250k, which entitled me to speak to the second level sales team for mutual funds.
The advisor asked me about 10 questions. The last of these was “Do you know where you want to invest your money, or would you like our help?” I indicated that I knew where I wanted to be invested, and gave him my selections. He returned a list of 5 mutual funds recommended for me, based on my wealth and risk profile.
Now, being a curious person, I asked to change my mind for the last question. I was given a list of 5 different funds, each with the word “Portfolio” in them. I knew nothing about portfolio funds. Time for a bit of research, starting with the Fund Facts sheets the branch provided. Here’s what emerged…
Buyer Beware!
Portfolios are funds which invest only in other funds. At my bank, these funds do no independent research. That’s the role of the funds in which the portfolio invests. What was interesting was the Management Expense Ration (MER) of the funds were over 3%. This seemed high for a fund with no actual research costs.
The branch person said that the portfolio contained only 3 and 4 star funds. The rating system is from 1 to 5, with 5 being the best, so this seemed to be reasonable, although I did want to be in 5 star funds. One of the 4 star funds in one of the portfolios was familiar. I had researched the fund prior to going into the branch, and had rejected it, as the fund only had a 3 star rating. Why had the Fund Facts identified this same fund as 4 star rated?
Mutual funds are sold in several “series”, each with it’s own terms of offer. The fund used “P” series. I had researched “F” series, which was the series used by my previous financial advisor. He charged an annual fee for managing my account. The MER for the F series was 1.72%, while the MER for the “P” series was 0.04%. The 1.68% difference per year was enough to raise the fund from 3 to 4 stars on the rating site!
I wasn’t happy with the portfolios – there were too many over-diversified funds As a result, I would never get good performance. (See What is Diversification?) Returning to the bank, I asked to invest in the P Series of the funds they had offered me. The response? “You can’t! They are not for sale to the public.”
Sleight of Hand?
Many Mutual Fund companies have a series which is reserved for purchase only be other fund managers. At my bank it was “P” series. At RBC, for example, it’s the “O” Series. The different designations have no effect on the points which follow.
As stated earlier, each series can have it’s own terms and conditions. One of the terms of purchasing “P” series is that the purchasing fund must absorb much of the per unit MER of the fund being purchased! This has huge implications to the average investor!
The biggest one is the example given above! The fund can say that it contains 3 and 4 star funds, when those funds can only be purchased separately as 2 and 3 star funds. This is deceptive marketing, at best.
We wonder why the industry regulator (see this article on CIRO) allows this to happen, as it defies their goals of industry transparency and full disclosure.
Investors are not receiving what they believe they are getting when they buy these portfolios.
Surely it Can’t Get Worse?
If only we could say no!
Almost all the mutual funds in which the portfolios invest are run by managers without a long term track record. The funds are restricted from buying the bigger companies, and have a few hundred holdings. As such, it is almost impossible for them to provide returns equal to the market benchmarks. If a fund happens to perform well, then investors will start buying it directly. Once that happens, the fund is gradually removed from the portfolios. None of the mutual funds that I wanted from my branch were available through the Portfolios.
The Compliance department at our company won’t allow selling most of these funds directly. They do not have the long term record that would provide confidence in them as a suitable investment.
Finally, if you read the article Are the Banks Hiding Mutual Fund Charges you will see that you are overpaying for having your money invested into these poor investments. The example discussed there – RBC Global Asset Management – brings in more than $2.5B in Management Fees for these funds. The funds are managed on computer by a small team. The fee is an average of 1.6% on your investments! The charge to you is massively out of line with the cost of managing the portfolios!
Summary
If your bank offers you portfolio funds, my suggestion is that you find an independent professional who will offer you much better performing investments at lower lifetime cost to you. While they are certainly not a scam, portfolio funds are marketed very deceptively by the financial institutions offering them. Avoid them at all costs!