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The Continued Interest in Balanced Funds Among Canadian Retail Investors
Retail assets in balanced funds totaled over CAD 735 billion by the end of 2023. This represents a growth of roughly CAD 135 billion over the last five years, nearly all attributable to capital appreciation.
Key Takeaways
Canadians continue to show preference for more globally oriented options. Global balanced funds (less than 70% in Canada-domiciled securities) grew while Canadian balanced funds (more than 70% in Canada-domiciled securities) shrank.
There are few sustainable balanced funds, but they still represent a big part—23%—of the sustainable funds market. There were 17 new sustainable balanced funds last year.
Average balanced fund fees have declined over the last 10 years, though the pace has slowed more recently. Mutual fund fees dropped 20 basis points to 1.31%. ETF fees plunged 47 basis points.
In 2023, the three global allocation indexes beat the three Canadian allocation benchmarks for the first time in three years.
Balanced funds are the second largest category in Canada in terms of total assets. There were more than 1,000 unique balanced funds in Canada with about CAD 735 billion in assets as of December 2023. They provide straightforward, diversified portfolios for many investors, and despite muted inflows, new funds and market appreciation have bolstered balanced fund assets over the last 10 years.
The Morningstar Annual Canadian Balanced Landscape Report provides robust commentary and analysis on the state of these funds. This article summarizes its findings. Download the full report here.
Canadian retail investors showed great interest in balanced funds during the pandemic but have shied away from them since March 2022. The size of balanced funds in Canada peaked at the end of December 2021 at CAD 839 billion, driven by CAD 60 billion in net inflows in two years. However, inflows peaked in March 2022 and have gone down ever since. Balanced funds experienced net outflows of CAD 75 billion from March 2022 to December 2023, more than all the net inflows from January 2019 through February 2022.
By multiple measures, Canadians continue to show preference for more globally oriented options. Global balanced funds (those holding less than 70% of assets in Canada-domiciled securities) grew, taking in more than CAD 44 billion in net inflows. Canadian balanced funds (those holding more than 70% of assets in Canada-domiciled securities) shrank, seeing more than CAD 45 billion in net outflows. This widened the market share gap between the two categories.
Sustainable Balanced Funds Continue to be a Priority
Sustainable fund assets hit all-time highs in 2023 with 78 new sustainable funds and CAD 45 billion in total assets under management. There were 17 new sustainable balanced funds, which now represent 23% of sustainable funds available to Canadians.
Part of the continued success of sustainable funds in Canada may be attributed to the February 2023 launch of the Canadian Investment Funds Standard Committee’s, or (CIFSC) inaugural Responsible Investment Identification Framework. This disclosure-based framework aims to increase transparency and provide clarity around six non-mutually exclusive responsible investment approaches. The approaches include:
- ESG Best in Class
- ESG Exclusions
- Impact Investing
- ESG Integration and Evaluation
- ESG Related Engagement and Stewardship Activities
- ESG Thematic Investing
The 76 balanced funds identified by this framework have earned a total of 198 responsible investment flags. Global balanced funds represent approximately 90% of sustainable balanced funds. ESG Integration and Evaluation, where funds consider environmental, social, and governance criteria as an essential component of their security selection evaluation methods, and ESG Exclusions, where specific sectors, industries, materials, or companies are excluded based on ESG criteria, are the most common approaches. Impact Investing, which requires funds to a have stated impact measurement and management policy, is the least common approach due to its more stringent requirements. These trends are consistent with broader sustainable fund trends.
Canadian Balanced Fund Fees Continue to Decline
Fees for balanced funds in Canada have been declining steadily over the last 10 years. In 2014, investors paid an average of 1.52% for mutual funds and 1.05% for ETFs. Today they pay 1.31% and 0.58%, respectively.
The most significant fee decrease for ETFs occurred between 2017 and 2018. This coincides with the entrance of Vanguard, the investment giant known for its low fee strategies. Its impact on competitor’s fees has been called the “Vanguard Effect.” Vanguard Growth ETF (VGRO), Vanguard Balanced ETF (VBAL), and Vanguard Conservative ETF (VCNS) offered one-stop portfolios of passive stock and bond ETFs at less than a fourth of the average fund's price at the time of their launch.
Morningstar Allocation Indexes Performance Since 2009
Allocation funds and indexes bounced back following a difficult year. The last time allocation portfolios faltered, which was in 2008, four of the six Morningstar Allocation indexes posted double-digit calendar-year returns led by strong stock performance. This happened again in 2023: four of the six indexes rose by double digits over the year due mostly to equity gains.
Final Thoughts on the Data
The data’s narrative hasn’t changed since last year’s report: Investors continue to prefer cheaper options and more global balanced strategies. Fee-based advice share classes took in the most flows while commission-based share classes saw more outflows. Firms are adjusting to this trend, launching more global balanced funds and fee-based advice share classes while closing Canadian balanced funds and commission-based share classes.
Last year, 2023, was the second year since the full implementation of the CFRs, which promote more transparency for investors on fees and options. We expect the true impact will be seen in flows and fees, which has been the case so far. Since the start of 2022, outflows at commission-based share classes accelerated. This narrowed their market leadership slightly.
Read the full report for more comprehensive analysis of the Canadian Balanced Fund Landscape.
Other notable sections of the report include:
- Largest Asset Managers by Balanced Retail Assets
- Bank-Owned Asset Managers Vs. Competitors
- Large Distribution-Channel Shift
The data in this report was compiled with Morningstar Direct, a comprehensive platform that helps asset and wealth managers build their assets and manage their portfolios by supporting market research, product creation, positioning, marketing, and distribution strategies. Start a free two-week trial of Direct today.