Portfolio renovation: An easy way to boost your returns
Cleaning out your portfolio doesn't have to be difficult. Follow these simple steps to lower fees.
Disappointing returns plagued many portfolios in 2012, especially those concentrated in the Canadian market. The broad S&P/TSX Composite Index grew by less than four per cent for the year but many sectors such as energy and small companies were deeply in the negative.
As 2013 dawns, the question of where to invest will become prominent as RRSP season heats up. Stock picking is a difficult task. It is equally challenging to select a winning mutual fund portfolio. However, there are things you can do to renovate your portfolio without rebuilding from scratch. Over the next weeks I’ll provide tips to help you improve returns and reduce your exposure to risk.
First off, dig out your investment statements; this will be therapeutic especially if they’re sitting unopened. Don’t be dismayed if they seem designed by a cryptographer. Investment statements, particularly Canadian mutual fund statements, are often lacking in basic information such as returns, fees and types of funds. Don’t be discouraged. If you work through the following steps you will improve your investment knowledge and the performance of your portfolio.
Even investors who utilize the services of an advisor should go through this process. In our current system, advisors are usually compensated by the fund companies. As a result, ensuring clients have the best funds at the lowest prices is not always a priority.
1. What have you got? Most people hold mutual funds in their various investment accounts including RRSPs, RESPs (Registered Education Savings Plans), RRIFs (Registered Retirement Income Funds) and non-registered accounts. You may have a mix of investments with some stocks, mutual funds, bonds and even exchange-traded funds (ETFs). Such a mishmash isn’t recommended but I’m going to focus on mutual funds.
Highlight the equity funds (those investing in stocks rather than bonds) in one colour and the fixed income or bond funds in another. I’ll deal with the equity group for now.
It can be difficult to determine the various types of funds. If the name includes something like stock, equity, bonds or fixed income, it makes it easier, but many fund monikers don’t give you much information. Some funds will be a blend of bonds and equities -- called balanced funds. I’ll write about them next week.
You can look up your funds up on a site such as Morningstar Canada. You will need the full name of the fund and sometimes they are abbreviated on statements. If you have an advisor, ask to be provided with this information.
2. What are the fees? Note the annual fees beside each fund. In all likelihood the equity funds will have an MER (management expense ratio) over two per cent and many may be much higher. The average for Canadian mutual funds is in the 2.25 to 2.5 per cent range. International funds and those focusing on specific sectors such as technology or energy could be as high as three per cent.
Again, an advisor can help you with this or you can look for the information on Morningstar, the investment site of your bank, advisory firm or the mutual fund company itself.
3. Lower the fees. Reducing fees will boost returns even if you do nothing else to renovate your portfolio. Fees are a hurdle. The higher they are, the longer it will take you to reach your goal. Only after fees are paid do you start making any money.
Not only that, but fees magnify losses. Say the stock market is down five per cent and your management fees are three per cent, then your fund will sag by eight per cent.
For many years investors were told that you get what you pay for. Higher fees meant higher returns. We now know that is not the case. In fact, there is an inverse relationship between fees and mutual fund performance. The higher the fees, the more likely the fund is to underperform its peer group and its benchmark index.
Those working with an advisor can request a list of alternative mutual funds with lower fees and comparable or better returns. Bear in mind that most advisors are paid through trailer fees imbedded in the MER. Lower fee funds may offer lower compensation to advisors.
On Morningstar.ca you can quite easily come up with your own alternative list through the Fund Selector tool. Pick your fund category, select fees lower than Category Average and choose only four- or five-star funds.
Some that pop up will only be available to certain investors, teachers for example, but this exercise will help you replace higher fee funds with cheaper and better performing alternatives.
If you have an advisor, talk to him or her about your reduced fee fund list and which ones might be appropriate for your portfolio.
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