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Canadian balanced fund investors prefer cheap global funds, according to Morningstar’s latest Canadian Balanced Funds Landscape report. Such strategies captured most of the balanced fund inflows over the past five years.
Balanced funds are changing, though; alternative strategies appeared in nearly one out of every three at the end of 2024. Investors need to pay attention to what they own, and can no longer assume that an allocation strategy limits its diet to stocks and bonds.
The nearly C$800 billion balanced fund segment’s slow march toward more inexpensive options should continue, due to investor demand and how firms respond to it.
Investors Bought Cheap Funds and Sold Expensive Ones
Overall, the group suffered a third straight year of outflows. C$13 billion left, as market turbulence and rising interest rates since 2022 have led some to believe the traditional 60/40 portfolio’s time had passed, even though balanced funds rebounded in 2023 and 2024 on average.
Some of these funds continued to reap inflows. Those in the cheapest decile of their categories took in net new money for a fifth straight year—C$10 billion—while those in the most expensive decile had their fifth year of outflows—C$11 billion.
ETFs, whose low costs have attracted inflows globally, were not the only story here. Traditional mutual funds accounted for more than half the flows into the cheapest decile. Choosing low-fee funds is one of the best ways to improve long-term performance, so this is a positive trend.
Investors and Firms Went Global
Investors also preferred global balanced funds. The Global Equity Balanced, Global Neutral Balanced, and Global Fixed Income Balanced categories collectively took in more than C$25 billion in flows over the last five years. Canadian Equity Balanced, Canadian Neutral Balanced, and Canadian Fixed Income Balanced funds experienced outflows of C$44 billion in that same time.
Firms shifted their lineups along similar lines. The number of Canadian allocation strategies shrank from 261 in January 2020 to 190 in December 2024, mostly due to the closure and liquidation of existing funds. More than a dozen Canadian balanced funds moved into global balanced categories.
Investors have gone global as Canadian equities have lagged global stocks. The Morningstar Global Markets Index has beaten the Morningstar Canada Index over the last three- and five-year timeframes.
Use of Alternatives Increased
Balanced funds have included more alternative investments in their portfolios in the five years through December 2024. Nearly one in three have some alternative exposure. Private equity (whether through limited partnerships or direct investments) appeared in more than 100 of these funds as of December 2024, up from 54 in December 2020. Thirty firms offered at least one balanced strategy with alternatives as of December 2024, up from 23 in December 2020.
The use of alternatives varies. RBC Select (the largest allocation series in Canada in terms of assets) has had direct real estate exposure since 2019, and it added a direct infrastructure fund at the end of 2024. Fidelity’s All-in-One ETFs allocate 1%-3% to a bitcoin ETF, while the firm’s largest allocation series, the Managed Portfolios, opts for liquid alternative strategies that involve short selling.
Investors should determine whether such allocations fit their needs. Private asset alternatives like private equity can offer more diversification but can also lower portfolio liquidity. Additionally, balanced funds’ alternatives stakes have a ceiling. Federal regulation NI 81-102 caps exposure to illiquid securities and alternative or nonredeemable funds at 10% of assets.
What We’re Watching
Regulation should aid the turn toward global strategies. Total Cost Reporting, coming into effect at the end of 2025, will help investors understand what they’re paying in trading costs and where the fees they pay are going. More fee transparency could encourage investors to pay even closer attention to fund fees and pressure fund firms to cut costs. The shift to cheap balanced funds will continue for the foreseeable future.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
