The RBC Monthly Income Fund has been one of my favourite balanced funds for a long time. Take 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. And it just received the Fundata FundGrade® A+ Rating™ for 2012. The only real drawback to this fund is that it is not available for registered plans. Not to worry. There are some very good alternatives.
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 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, I 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.
Here’s what I found:
BMO Monthly Income Fund. This fund 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 I 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 big 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.
Fideilty Monthly Income Fund. This fund just scored the Fundata FundGrade A+ Rating for 2012. It aims 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 November 30, more than a third of the fund was in global securities. It has also been the most volatile and the most expensive, with an 2.29% MER. Despite the higher costs, returns have been strong, posting top-quartile performance for the past five years.
Mawer Balanced Fund. The target asset mix of this high-quality offering from Calgary-based Mawer Investment Management is the fairly typical 60% equity and 40% fixed income. Unlike the other funds, which invest in individual securities, this offering is a fund-of-funds that invests in a mix of other Mawer funds. It will invest globally, and as of December 31, held more than 35% outside Canada. Despite this, volatility has largely been kept in check. The MER is very low, coming in at 0.98%. The fund also landed the Fundata FundGrade A+ Rating for 2012. The biggest drawback to 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 or RRSP-eligible funds that will have a risk reward profile that is very similar to that of the RBC Monthly Income Fund. Considering my 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 RBC Monthly Income Fund.
Dave Paterson, CFA, is the Director of Research, Investment Funds for D.A. Paterson & Associates Inc., a consulting firm specializing in providing research and due diligence on a variety of investment products. He is also the publisher of Dave Paterson's Top Funds Report and Mutual Fund and ETF Update offering regular commentary and in-depth analysis of Canada’s top investment funds. He uses a unique analytical approach to identify funds with strong, risk-adjusted returns, and regularly publishes his insights and analyses in Fund Library.
Notes and Disclaimer
© 2013 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.
Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated.