Some good alternatives for registered accounts
Anybody who has followed this newsletter for a while knows that the RBC Monthly Income Fund has been one of our favourites. A quick look at the fund and it is not hard to see why. This low cost, conservatively managed balanced fund has rewarded investors with steady, stable performance that has consistently outpaced its benchmark and peer group. The only real drawback to this fund is that it is not available in registered plans.
RBC made the decision to close the fund to new contributions in registered plans back in December 2005. This was no doubt a difficult decision for the company as it had been the top selling fund in the country for the previous two years, and had just crossed the $7 billion mark. While the decision may have been difficult and potentially unfavourable with investors in registered plans, it was the right decision to make. At a certain level of assets, it becomes very difficult for the managers to implement their investment style and process, which often times can lead to a lack of flexibility that typically results in subpar performance. In looking at the top quartile performance it the fund has posted in every year except for 2009 and 2006 that is clearly not the case here.
While this has been great for existing investors in registered plans, it leaves any potential new investors out in the cold. With that in mind, we scoured the fund universe in search of a few options that may be a good alternative for the RBC Monthly Income Fund in Registered Plans.
BMO Monthly Income Fund (GGF 70148) – The BMO Monthly Income Fund is probably the most similar of all the funds we looked at. It has the objective of providing investors with a consistent level of monthly income and capital preservation. It invests in a mix of fixed income and high yielding equities such as dividend paying common shares and REITs. It pays investors a monthly distribution of $0.06 per unit, which works out to an annualized yield of nearly 10%. While we largely like the fund, there are a couple of concerns. First, the distribution is unsustainable at the current level without significantly eroding capital. However, for those reinvesting distributions in a nonregistered account, this isn’t as large a concern. The other issue is that long time manager Michael Stanley retired in March and the equity portion is now managed by Phil Harrington and Luis Zeitler.
Fidelity Monthly Income Fund (FID 269) – The fund looks to provide investors with a mix of income and capital gains. To do this, the fund invests in a mix of fixed income and high yielding equity investments. Unlike the BMO or RBC offerings, this fund will invest outside of Canada. As of July 31, more than 32% of the fund was in global securities. It has also been the most volatile and the most expensive, with an MER that is well above the RBC fund. Despite the higher costs, returns have been strong, posting top quartile performance for the past five years.
Mawer Balanced Fund (MAW 104) – The target asset mix of this high quality Mawer offering is the fairly typical 60% equity and 40% fixed income, which is a bit more aggressive than RBC. Unlike the other funds which invest in individual securities, this offering is a fund of fund solution that invests in a mix of other Mawer funds. It will invest globally, and as of July 31, held nearly 35% outside Canada. Despite this, volatility has largely been kept in check. The MER is very low, coming in at 0.98%. The biggest drawback of this fund is that the minimum investment is $5,000 which puts it out of reach for the smallest of investors.
Build your own – Using a couple of RBC funds, you can build your own portfolio that will have a risk reward profile that is very similar to that of the RBC Monthly Income Fund. Considering our analysis, a mix of 55% RBC Bond Fund and 45% RBC Canadian Dividend Fund should provide you a return that is comparable to the RBC Monthly Income Fund with similar volatility. The weighted average MER of the mix is 1.44%, which is slightly higher than the MER of the fund.