Balanced fund returns (an update).
Individual investors know that the Pension Investment Association of Canada (PIAC) is a good reference point for their investment portfolio construction. What does the average Pension Fund in Canada look like? What do average returns look like?
“PIAC represents over 130 pension funds that manage total assets in excess of $1 trillion on behalf of millions of Canadians.” PIAC’s average asset allocation is a composite of these 130 pension funds. The average looks like a big balanced fund. The bond allocation is 33%, stock is 43% and real estate is 9%. That’s 85% of the portfolio. For the individual investor who follows this blog and mimics the PIAC asset mix, the remaining 15% is their opportunity to put their stamp of individuality on this PIAC Core portfolio. That might mean adding a Beutel Goodman small cap fund, for example, or specialty mandate like Mawer, New Canada, say, or something completely different like BluMont Capital, market neutral. Most often it’s simply a favourite stock.
What are Balanced Fund returns?
Unfortunately, PIAC does not report average returns. Were they to do so, however, the returns would look, well, average. (Average asset allocation = average returns). Typical (average) balanced fund returns are shown in the following table.
|Returns to March 31||1 Year||2 Year||3 Year||4 Year||5 Year||10 Year|
|TSX Composite index||-9.8%||4.2%||15.6%||1.1%||1.6%||7.2%|
|DEX Universe bond index||9.7%||7.4%||6.6%||6.2%||6.1%||6.5%|
|Mercer median balanced fund*||1.3%||6.0%||11.3%||3.6%||2.6%||N/A|
|RBC Dexia balanced Pooled fund*||1.1%||5.8%||11.3%||3.6%||2.6%||5.8%|
Longer-term average returns look like the following graph.
What can individual investors learn from this?
- Returns don’t spend much time at the average. (See chart).
- There is never a time of certainty … even for a balanced portfolio.
- A balanced fund spends very little time in negative territory. And the less time spent in negative territory, the faster portfolio returns compound.
- An investor can get a lot of stuff wrong … as long as they get their asset allocation approximately right.
- A balanced portfolio wins across many different market environments.
*Mercer and RBC balanced fund asset mixes approximate the PIAC asset allocation. PIAC allocation is 33% bonds, 43% stock and 9% real estate. Mercer median is approximately 45% bonds, 55% stocks. RBC Dexia balanced allocation is approximately 40% bonds, 60% stocks.
** Dad’s portfolio of index funds has a strategic mix of 45% stock, 45% bond & 10%. Only the asset mix is active. Current mix is 52% bonds and 48% stocks. Since inception, there were two negative years (-11% 2008 and -6% 2002).
See also Inattentional blindness.
_____________________________________________________________________________________Next time? More Risk Management. Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan