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I recently received an e-mail from a reader who is trying to evaluate the RBC Managed Payout Solution mutual funds for an elderly relative.
He wrote: "My relative needs safety of her capital and a reasonable return of plus/minus 3.5 per cent. She needs to draw about 5 per cent per year to meet her living expenses, which this fund indicates can be done. Do you recommend it?"
Well, for starters, there is not one fund but three, all of which RBC says are designed to offer tax-efficient cash flow while minimizing risk. The funds are RBC Managed Payout Solution (MPS), RBC Managed Payout Solution – Enhanced and RBC Managed Payout Solution – Enhanced Plus.
All are funds of funds; that is, they invest exclusively in other RBC funds. The difference is in the amount of money they pay out and in the asset mix, which affects the risk level.
RBC Managed Payout Solution
This fund invests in nine RBC funds, with a heavy emphasis on bonds and short-term income. It is the least risky of the three, with almost two-thirds of the assets in fixed-income funds, 5.1 per cent in cash and the rest in equities. The current monthly payout is 3.8 cents (45.6 cents a year). That works out to a yield of 5.1 per cent based on a price of $9.02 (A units), which is slightly higher than the target-income goal set by our reader.
This fund can trace its history back to August, 2004, so we have a solid track record to work with. The 10-year average annual compound rate of return to June 30 was 4.1 per cent, above average for its peer group. The one-year gain was 4.7 per cent.
Although this fund is conservatively invested, it won't be immune when the market goes south. Its worst one-year return was a loss of 10.4 per cent in the 12 months to February, 2009. Since then, the fund has only lost money in a single calendar year, dropping 0.6 per cent in 2015.
The management-expense ratio is 1.63 per cent.
RBC MPS – Enhanced
This fund is somewhat more aggressive, although it still favours fixed-income securities. About 60 per cent of the portfolio is invested in bond funds and cash, with about 40 per cent in stocks.
This asset mix suggests a somewhat higher risk level than the basic MPS fund, and the numbers confirm this is the case.
The worst 12-month period (also to February, 2009) shows a loss of 15.7 per cent. The 2015 loss was 0.8 per cent.
However, you get a somewhat better return for taking on more risk. The 10-year average annual compound rate of return is a little higher, at 4.3 per cent, with a one-year gain of 6.7 per cent. The current monthly payout is 4.35 cents (52.2 cents annually) for a yield of 6.1 per cent based on a recent price of $8.53.
The management-expense ratio here is 1.83 per cent.
RBC MPS – Enhanced Plus
This is the most aggressive – and therefore the most risky – of the three funds. About 40 per cent of the portfolio is invested in bond funds and cash with the rest in equity funds.
As you might expect, given the strong bull market we have experienced in recent years, this fund's tilt to the equity side has resulted in the best returns, with a five-year average annual gain of 6.9 per cent and a one-year advance of 8.7 per cent. But the 10-year average annual compound rate of return is below that of the other two at 3.8 per cent. That reflects a loss of 23.1 per cent during the 2008-09 crash.
The current payout rate is 3.9 cents a month (46.8 cents a year) for a yield of 7.2 per cent based on a recent price of $6.49.
The MER is 1.95 per cent.
Based on the parameters outlined by our reader, the basic RBC Managed Payout Solution Fund offers the best combination of cash flow and safety. The other two are well worth considering by those who are willing to accept a little more risk for a better return.