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This is a great time of year. Summer’s finally here and we start to think about vacations. However, before we take it easy, we should take a moment to tidy up our portfolios.
For mutual fund investors, there are some key elements to examine carefully.
The first area of concern is the issue of deferred sales change (DSC) or back-end load funds where up-front commissions are waived if the funds are held for a set period of time, usually six to seven years.
Unfortunately, if you need to sell prior to the maturity date, you could be charged anywhere from three to six per cent in redemption fees. When the markets turn sour, as they did in 2008, it is especially important to be nimble but DSC redemption schedules and fees can limit your agility.
If you own underperforming DSC funds, you have some options. You can take advantage of the yearly 10 per cent redemption allowance or you can switch within the fund family to a better performing product.
Read the fine print carefully, as fund companies differ in the technicalities. Neither option is perfect but at least they can help minimize DSC exposure and return some of your flexibility.
Your depth of diversification is an important aspect to examine. The average mutual fund investor only needs four or five solid funds to achieve adequate diversification.
Any more and you start to see the holdings overlap because many funds have the same companies in their top holdings. If you have several types of Canadian-focused funds, chances are very good that you have duplicated holdings.
If you suspect you’re over-diversified, ask your advisor for a correlation report, which should show exactly how much overlap you are experiencing. If things have strayed from your original mandate, you should consider rebalancing your portfolio and consolidating funds.
A red flag should go up if your funds are primarily in-house products. If you are at XYZ firm and invested only in XYZ’s proprietary products, you want to know the reason for the bias.
Are the investments in your best interests or in the best interests of XYZ? Your advisor should not be under pressure or obligation to recommend specific products but should be free to match your financial goals with the best funds in the marketplace.
And finally, management expense ratios (MER) merit very careful examination. In addition to whatever initial setup fees you are charged, you are subject to ongoing MERs. If they are unjustly high, MERs can severely reduce your nest egg.
MERs are a fact of life in the mutual fund world, but there are ways to reduce them.
If your funds have been underperforming too long and are subject to high MERs, think about switching. Search for funds with solid track records with MERs that are more in line with the fund’s performance.
You can also reduce the amount of money you are paying in MERs by getting rid of unnecessary funds. For example, if you hold a money market mutual fund, you are likely better served by a no-fee high-interest savings account.
Chances are that you’ll make similar returns but without paying fees.
The goal of any well-managed portfolio is to achieve better returns with less risk. If yours hasn’t been performing to expectations, it may be time to ensure your current allocation is still in sync with your original goals.
The time invested in a close examination might be the best investment you can make.
Kim Inglis is an investment advisor with Canaccord Capital. More information is available at www.kiminglis.ca. Member CIPF. The views in this column are solely those of the author.
