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If you are just starting your investing career, you may not have enough money to buy a sufficient number of holdings directly and trading costs will be high. In such situations, an all-in-one fund may be the best solution, personal finance author Gail Bebee says. (Tory Zimmerman/The Globe and Mail)
If you are just starting your investing career, you may not have enough money to buy a sufficient number of holdings directly and trading costs will be high. In such situations, an all-in-one fund may be the best solution, personal finance author Gail Bebee says. (Tory Zimmerman/The Globe and Mail)

The Shrewd Investor

Easy ways to create a diversified portfolio in smaller accounts Add to ...

Diversification is one of the marks of a shrewd investor. By diversification, I mean owning a portfolio that includes at least all the main asset classes – cash, stocks, bonds – and a varied mix of individual holdings within each class. The particular target asset allocation will depend on your personal goals and risk tolerance.With a large portfolio, it is possible to get adequate diversification by buying individual holdings. If you have several investment accounts, you can concentrate assets in specific accounts (highly taxed bonds in an RRSP, for example) as long as your overall portfolio meets your target asset mix.

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If you are just starting your investing career or have an account such as a locked-in retirement account (LIRA) you want to invest on a stand-alone basis, achieving diversification can be problematic. You may not have enough money to buy a sufficient number of holdings directly and trading costs will be high. In such situations, an all-in-one fund may be the best solution.

When you buy units of an all-in-one mutual fund or shares of an exchange-traded fund, with one purchase you immediately own a diversified portfolio of equities and fixed income and, in some cases, even alternative assets. While these funds typically have conservative mandates, some have higher-risk higher-reward objectives.

My No. 1 choice for an all-in-one mutual fund is the Mawer Balanced Fund. The fund’s objective is to achieve attractive long-term risk-adjusted returns with a measure of stability for non-taxable investors. The fund is ideal for an RRSP. It is largely a fund of other Mawer funds and currently holds about 63 per cent stocks (domestic and foreign), 31 per cent fixed income and 6 per cent cash. This Globe 5-star fund has consistently outperformed its peers and its benchmark. The total net returns over one, five and 10 years are 12.0 per cent, 5.9 per cent and 8.1 per cent. With a management expense ratio of just 0.98 per cent, the Mawer Balanced Fund is a bargain.

A sister fund, the Mawer Tax Effective Balanced Fund, has a mandate that includes tax efficiency, so would be the better choice for taxable accounts. The one, five and 10 year returns are 11.9 per cent, 5.8 per cent and 7.9 per cent. Note that the minimum initial investment for either fund is $5,000.

Another Globe 5-star fund, the Steadyhand Income Fund may be a better fit for more conservative investors. Its mandate is stable income, modest capital growth and capital preservation. The long-term asset mix objective is 75 per cent bonds and 25 per cent dividend-paying stocks and REITS. The compound annualized returns over one and five years are 7.9 per cent and 8 per cent. The MER is 1.04 per cent and the minimum investment is $10,000.

The mandate of the CI Signature High Income Fund, another Globe 5-star fund, is a high level of income and long-term capital growth, which is higher risk than the above funds. It primarily invests in high-yielding equities and Canadian corporate bonds and currently holds an almost equal weighting of equities and bonds along with 10 per cent cash. The total net returns over one, five and 10 years are 11.3 per cent, 7.45 per cent and 9.88 per cent. With an MER of 1.60 per cent, this fund is more expensive than the previous funds, but the minimum investment is just $500.

Given the explosive growth of exchange-traded funds, it is surprising that not many Canadian ETF suppliers have embraced multi-asset ETFs. iShares offers a mish-mash of seven such funds and Horizons Canada has one actively managed multi-asset ETF. The best of the lot for all-in-one investing is iShares Diversified Monthly Income Fund (XTR). The fund’s objective is to provide a consistent monthly cash distribution and modest long-term capital growth. This is a fund-of-funds built from nine other iShares ETFs. Its current asset allocation is approximately 40 per cent stocks and 60 per cent bonds. The fund’s total return over one and five years is 7.46 per cent and 5.99 per cent. The MER is 0.57 per cent.

If you don’t mind a decidedly U.S. tilt to your investments, iShares series of target risk allocation ETFs which trade on the NYSE are worth a look. You can choose from four funds based on your risk tolerance: conservative, moderate, growth and aggressive. The iShares Moderate Allocation ETF (AOM-N) invests based on moderate risk tolerance and intermediate investment horizon and would work well as all-in-one fund. Like similar iShares Canadian offerings, this ETF is a fund-of-funds, in this case nine other U.S.-listed iShares ETFs. The asset allocation is currently about 43 per cent equities (United States and other countries) and 58 per cent U.S. fixed income. The fund has returned 7.14 per cent over one-year and 6.69 per cent over three years. Five-year returns will be available starting later this year. One of the advantages of U.S. ETFs is lower fees: in the case of AOM, the expense ratio is 0.31 per cent. Note that the returns for these funds are subject to Canada/U.S. currency exchange rate fluctuations.

The Mawer and CI funds pay monthly distributions while the Steadyhand fund and the U.S. ETFs issue quarterly distributions. Payouts tend to be higher if the fund name includes the word income.

The above all-in-one funds are quick and easy investment solutions that deliver decent returns and instant diversification at a relatively low cost. Any one would be a good candidate for smaller (or even larger) investment accounts.

Note: All return data as of March 31. Disclosure: I or my family own shares of XTR and CI Signature High Income Fund. The Mawer and Steadyhand funds would likely be holdings if our broker, RBC Direct Investing, would make them available to clients.

Gail Bebee is Canada’s independent voice on personal finance and author of No Hype –The Straight Goods on Investing Your Money, a popular book of investing basics for Canadians from a financial industry outsider viewpoint. Through her writing, speaking and teaching, Gail shows people how to take control of their money and achieve their financial goals. Her column will appear monthly on the Financial Road Map site. Her website is www.gailbebee.com

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