More than half of that, $6.7 billion, was held by Vanguard Investments Canada Inc. Another $4 billion was held by iShares sponsor BlackRock Asset Management Canada Ltd. Most other ETF providers held less than $100 million in balanced mandates, or more commonly none at all. .
This is a business opportunity for companies that can leverage their expertise in active management. One of the main competitors is CI Investments Inc., of Toronto, which operates as CI Global Asset Management.
Originally launched as a standalone ETF in August 2019, what is now the CI Global Asset Allocation Private Pool series of ETFs was created in July 2020 through a fund merger. All aspects of the fund—asset mix, sub-portfolios delegated to equity and fixed income specialists, and currency exposure—are actively managed by CI staff.
The ETF will make significant changes from its neutral equity weighting of 60%, up to around 10 percentage points up or down.
“We use ranges to protect capital first and deliver returns,” said lead manager Drummond Brodeur, senior vice president, portfolio manager and global strategist at CI. If circumstances warrant, he is prepared to hold up to 20% of the fund in cash.
The different series of the mutual fund have combined assets of approximately $700 million, of which only $16 million are held in the ETF series. This mandate is essentially a more focused version of the CI Global Income & Growth Fund, a mutual fund managed by the same CI team and with a similar strategy. “It’s pretty close to the same fund [as the ETF]Brodeur said.
Launched in 2007, the CI mutual fund earned the highest five-star Morningstar rating for risk-adjusted returns in the Global Neutral Balanced category. Its assets of more than $9 billion exceed the combined totals of the five largest balanced ETFs. “We can make very significant changes that these days can move over a billion dollars in a day,” Brodeur said.
Other examples of actively managed multi-asset ETFs by Toronto-based companies include the Exemplar Growth and Income ETF, sponsored by Arrow Capital Management Inc.; IA Clarington Loomis Global Allocation Fund, from IA Clarington Investments Inc.; and the Purpose Tactical Asset Allocation Fund, from Purpose Investments Inc.
Some balanced ETFs take hybrid approaches that combine elements of active and passive investing. Such is the case with TD One-Click Wallets from TD Asset Management Inc., which launched in August 2020.
Jonathan Needham, VP, ETF Distribution, said the One-Click suite was designed to be low-cost, but with “more tools in the toolbox” that TDAM says can deliver better results. than existing passive competitors.
The TD Moderate ETF Click Portfolio, for example, holds approximately 15 underlying TD ETFs, with approximately 30% of the assets actively managed. “With broad market exposure, we don’t want to overspend, so we use passives,” Needham said. “And where we believe there are specific risk factors, or an ability to reduce risk, or an ability to add alpha, that’s where we use active strategies.”
The neutral asset mix of TD One-Click Moderate is 60% equities and 40% fixed income, but can vary by up to 10 percentage points. “We rebalance when we think the market presents the opportunity,” Needham said, adding that TDAM takes a “risk-optimized” approach to asset allocation.
Using TDAM’s risk parameters and financial markets outlook, the portfolio managers seek to maintain a risk profile similar to a 60-40 portfolio, even when overweight equities. Among the vehicles that allow them to do so are TD’s low volatility factor ETFs.
Elsewhere, Toronto-based Mackenzie Investments, despite its extensive expertise in active management, has opted for a strategic index approach for its line of multi-asset ETFs. “We don’t engage in tactical trading,” said Prerna Mathews, vice president, ETF product and strategy.
Mackenzie’s balanced funds are designed to appeal to a broad audience, and all of the funds’ underlying ETFs are index-based. Additionally, with the exception of a small allocation to its Emerging Markets Bond ETF, all holdings are in core asset classes.
“The goal is to keep these solutions simple,” Mathews said. “As soon as we start designing a lot of different building blocks, you make it a more complex solution in terms of the underlying costs.”
Mathews said she advocates maintaining low-cost core holdings for clients, as well as actively managed or non-core holdings that are personalized for individual clients. “Keep your heart low,” she said. “And use your tactical allocation, your satellite exposures to really increase your view.”
Adopting indexing has allowed Mackenzie to charge management fees in line with the cheapest balanced ETF providers. The Mackenzie Balanced Allocation ETF, for example, has a management expense ratio of 0.19%. By comparison, the more actively managed TD One-Click Moderate ETF charges a slightly higher rate of 0.28%, while CI’s Fully Active ETF MER weighs 0.90%, higher.
In introducing its ETF to advisors, CI highlights the past performance of its close mutual fund peer. Overcoming the hurdle of rising fees, it outperformed the Vanguard Balanced ETF portfolio by $2.2 billion and the market-leading Vanguard Growth ETF portfolio by $3.4 billion.
“I think the track record speaks for itself,” CI’s Brodeur said. That said, given that CI’s ETF series is less than two years old, it’s still early to make meaningful comparisons between ETFs and Vanguard.