Skip to main content
Canada’s most-awarded newsroom for a reason
Enjoy unlimited digital access
per week
for 24 weeks
Canada’s most-awarded newsroom for a reason
per week
for 24 weeks
// //

The independent fund analysts at Morningstar Canada stopped covering wrap products four years ago, which is odd because these all-in-one mutual fund portfolios are stellar sellers.

"We just weren't getting a lot of eyes on these reports," said Philip Lee, senior fund analyst at Morningstar. Seriously? People have invested upward of $146-billion in mutual fund wraps and no one wants to know more about what they're buying?

That's the wrap world for you: Investing neophytes buying prefab mutual fund portfolios mainly through bank branches. "I don't know how many of these people go out and do their own independent research," Mr. Lee said.

Story continues below advertisement

This Portfolio Strategy column is for people who buy wraps. If you're not one yourself, pass it along because lots of people are buying these things. Over the five years to Feb. 28, sales of wraps offered by members of the Investment Funds Institute of Canada grew 132.8 per cent in total while standalone funds gained 19.1 per cent.

Wraps are not known by that term once you step into a bank branch. Instead, they're referred to by names such as "portfolio solutions" or "managed portfolio services." That's marketing talk, not investing talk. But let's not be too cynical because wraps, despite some serious faults we'll look at shortly, can serve a useful purpose. "By and large, they can provide a good way of building a diversified portfolio," Mr. Lee said.

When you buy individual mutual funds, it's up to you or your investment adviser to combine them into a properly diversified portfolio. Wraps do that work for you. They hold anywhere from six to a dozen or more funds in a blend that instantly gives you a diversified portfolio tailored to various investing goals and risk levels.

Take the $1.3-billion BMO SelectClass Security Portfolio, for example. Its weighting to bonds includes Bank of Montreal mutual funds focusing on Canadian and global government and high-grade corporate bonds, plus a bit in a BMO high-yield bond fund (high-yield bonds are issued by companies with mediocre to weak financial stability). The exposure to stocks includes the BMO funds covering Canada, the United States, Europe and Asia.

Would an experienced investor or adviser be able to create something better? Absolutely. Would the kind of neophyte investor who buys funds in a bank branch? The Morningstar anecdote about investors not researching wraps suggests not.

Wraps also offer automatic rebalancing, which means they adjust your holdings periodically to make sure you don't stray from your target mix of assets. If stocks are soaring, your wrap will pare your holdings. If stocks are sinking, your wrap will buy you enough to get back to that target mix.

Rebalancing is one of the greatest benefits of wraps in the eyes of Tom Dyck, president of TD Mutual Funds, which has sold more than $20-billion in wraps that go by the names Comfort Portfolios and TD Managed Assets Program, or MAP.

Story continues below advertisement

"Left on their own, people get emotional about their investing decisions and quite often will do the wrong thing at the wrong time," Mr. Dyck said. "I think that one of the greatest advantages of [wrap]programs is that the management of your money is left to professionals."

The drawbacks with wraps start with the fees. As is so often the case, convenience can be costly. Not always, mind you. Mr. Dyck said some of TD's Comfort Portfolios have fees that are a little bit less than the weighted average of the funds included in the product. In essence, investors have been getting a small discount.

More commonly, wraps charge fees to clients that are greater than they might pay if they used standalone mutual funds. One way they do this is to add an extra fee on top of the weighted-average management expense ratios of the funds on which the wrap is built.

Mr. Dyck said TD does this in some cases with its MAP products, where the fees may be 0.25 to 0.5 of a percentage point higher than the weighted average of the underlying funds. His explanation is that MAP fees reflect two levels of service - one from the TD adviser who sells the product and another from the money managers who oversee the MAP product itself.

"What you're getting is a more complex solution - more oversight, more due diligence from our professional money managers," he said.

Another way that wraps juice fees is by presenting the investor with a more expensive mix of funds than he or she might build on their own. Let's go back to the BMO SelectClass Security Portfolio for an example.

Story continues below advertisement

This wrap includes a 5-per-cent weighting in BMO Guardian Canadian Large-Cap Equity Mutual, with an MER of 2.44 per cent. This fund has decent long-term performance numbers, but the cost is high for something that holds big Canadian blue-chip stocks. And then there's a 2.5-per-cent weighting in BMO Guardian Asian Growth & Income-Class M, which has a too-rich MER of 2.84 per cent.

Both of these choices are defensible from the point of view of building balanced portfolios, but they make the SelectClass Security Portfolio more expensive than it could be. That's a common theme with wraps - extreme diversification that has the effect of boosting costs and, in turn, revenues for the banks issuing them. Is there value here, at least? Not if a wrap is overdiversified to the point where the benefits of having professional money management get watered down to nothing.

Of course, it's the packaging of wraps that matters to the people who buy them, not what's inside. As Morningstar's Mr. Lee puts it, "Any time something is sold as a one-stop solution or a portfolio solution, it tends to sell well."

A better approach than wraps is to put together half a dozen or so low-cost mutual funds or exchange-traded funds and do your own rebalancing once a year. As for your mix of stocks and bonds, an old rule of thumb was to determine your weighting in stocks by subtracting your age from 100. With people living longer and needing more investment growth, the latest thinking is to subtract your age from 110 or even 120.

Wraps do win on simplicity and convenience, though. But don't park your brain at the door of your bank branch before buying.

Four questions to ask about wraps

Story continues below advertisement

Wrap products are mutual fund bundles commonly sold by banks to neophyte investors looking for a simple way to build a portfolio. Here are four things to ask someone selling a wrap:

1. What are the fees?

Ideal answer: The fees are the same or less than what you'd pay if you bought the funds in the wrap individually.

Watch out for: Wraps that charge a premium.

2. What are the returns?

Ideal answer: Better than average when compared against the appropriate mutual fund benchmarks.

Story continues below advertisement

Watch out for: Wraps that are fee traps - big costs, substandard returns.

3. What is the investment


Ideal answer: Effective diversification for your investing needs, not overdiversification.

Watch out for: Wraps with more than 12 to 15 underlying funds - that's overkill.

4. What mutual funds

Story continues below advertisement

are included in the wrap?

Ideal answer: Good quality low-cost funds in core categories.

Watch out for: Expensive funds in fringe categories, poor performers that you'd avoid if buying funds individually.

Follow me on Facebook. I'm at Rob Carrick - Personal Finance.

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow the author of this article:

View more suggestions in Following Read more about following topics and authors
Report an error Editorial code of conduct
Tickers mentioned in this story
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to If you want to write a letter to the editor, please forward to

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

UPDATED: Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies