Roller-coaster stock markets can be nerve-racking, but that's the price we pay for potentially higher returns.
For middle-aged folks building a nest egg, however, or more risk-averse investors, conservative mutual funds can help dampen volatility in a registered retirement savings plan. Balanced funds can mitigate the impact of a market downturn because they include bonds in the mix. Some funds are known to hold higher-than-normal levels of cash, which can help cushion the blows from free-falling stocks.
Global equity funds can also reduce risk by diversifying away from one stock market. Just be mindful of fees: They can eat away at returns over time.
We asked analysts to suggest two conservative fund picks for an RRSP.
Dan Hallett, director of asset management at HighView Financial Group
- Steadyhand Founders Fund
- Fund category: Tactical balanced
- MER (management expense ratio): 1.34 per cent for a $10,000-minimum investment, or even less with higher minimums
This fund is invested in other Steadyhand equity and income funds managed by firms with good track records.
It also offers investors unique fee breaks, Mr. Hallett says. Fee discounts for larger investments, along with rebates for owning the fund for more than five years, could quickly take the cost below 1 per cent annually, he noted.
"This [approach] encourages longer holding periods, which my research and others have linked to higher investor returns," he says.
Balanced funds are ideally suited to conservative investors, he said. This fund, whose asset mix is determined by Steadyhand Investment Funds founder Tom Bradley, held 17 per cent in cash at the end of 2014. The cash will be "useful when we get a more serious market decline," Mr. Hallett said. Launched in early 2012, the fund has gained an annualized 11.06 per cent for the two years ending Dec. 31.
- CI Signature High Income
- Fund category: Global neutral balanced
- MER: 1.6 per cent
This $10-billion global stock-and-bond fund has maintained "strong performance despite attracting a boatload of new money from investors," Mr. Hallett says.
The fund, which has returned an annualized 10.32 per cent over the 15 years ending Dec. 31, is run by a team overseen by Eric Bushell, chief investment officer of CI Investment's Signature unit. Launched as a Canadian-focused offering emphasizing income trusts, real estate investments trusts and high-yield bonds, the fund later took on a more global approach.
"It is no stodgy balanced fund," Mr. Hallett says. With its fixed-income portion in corporate and high yield bonds, "it takes on more credit risk … but investors have been nicely rewarded," he notes. The fund's lower fee makes it a bargain compared with many similar funds, and that certainly has been a "material factor" in its long-term returns, he said.
James Gauthier, head of investment fund research at HollisWealth Inc.
- EdgePoint Global Growth & Income Portfolio
- Fund category: Global equity balanced
- MER: 2.12 per cent with a minimum investment of $15,000
This global stock-and-bond fund is ideal for an RRSP because it is managed by "excellent stock pickers," while the fixed-income exposure provides a bit of buffer in falling markets, Mr. Gauthier says. "It also charges a very attractive fee."
The fund is run by a team led by Tye Bousada and Geoff MacDonald, who helped co-found EdgePoint Wealth Management Inc. in 2008 after leaving Invesco Canada Ltd. The team looks for stocks from companies with margins of safety, strong barriers to entry and strong management teams that can build their businesses regardless of the economic environment, Mr. Gauther said.
Top holdings include Microsoft, Wells Fargo, Alere and WABCO Holdings. The fund, which recently held nearly 30 per cent in corporate bonds and 10 per cent in cash, has posted an annualized 12.28-per-cent return for the five years ending Dec. 31.
- Cambridge Canadian Asset Allocation
- Fund category: Tactical balanced
- MER: 2.45 per cent
The managers of this Canadian stock-and-bond fund will change the portfolio's asset mix depending on economic conditions, Mr. Gauthier says.
"The fund's equity exposure has been as low as about 50 per cent to as high as 93 per cent," he says. More recently, it held 65 per cent in stocks and 26 per cent in cash.
The fund is overseen by Alan Radlo and Brandon Snow, who are co-chief investment officers of CI Investment's Cambridge unit, while Robert Swanson determines the asset mix. The team has done a good job of adding value, but big shocks to the stock market can "rock this fund a bit more than the typical balanced fund," Mr. Gauthier said. "The fee is not the lowest in the category, but reasonable," he adds.
The fund has returned an annualized 8.73 per cent for the five years ending Dec. 31.
Christopher Davis, director of manager research at Morningstar Canada
- Mawer Global Equity
- Fund category: Global equity
- MER: 1.45 per cent with minimum investment of $5,000
Canadian investors are generally heavily into domestic stocks, so a global stock fund may be a good addition to an RRSP, Mr. Davis says. "I don't think investors should put all their chips on a country that represents less than five per cent of the global stock market."
Slumping resource stocks represent a big chunk of Canada's market, including energy names battered recently by plunging oil prices, he said. "It highlights the risk of betting too much on Canada."
Mawer Global Equity, which is overseen by Paul Moroz of Mawer Investment Management Ltd., takes a "relatively conservative approach" and focuses on quality companies, Mr. Davis said. "It has been less volatile in down markets, while doing relatively well in up markets."
For the five years ending 2014, the fund has posted an average annual return of 14.53 per cent.
- PH&N Bond Fund
- Fund category: Canadian fixed income
- MER: 1.16 per cent for C series; 0.60 per cent for D series with a minimum of $25,000
Investors should have some bond exposure despite concerns over rising interest rates, Mr. Davis says. The PH&N Bond Fund, which is overseen by the PH&N fixed-income unit at RBC Global Asset Management, gained more than 8 per cent last year.
"Any bond fund doing well last year was pretty surprising," he said. "Nobody expected bond yields to go down because they were so low already. … It's just an example of the potential peril of trying to time the market."
The fund, which invests in Canadian government and corporate bonds, also benefits from reasonable fees, he noted. The younger C series posted an annualized gain of 4.56 per cent over the five years ending Dec. 31. The D series returned an annualized 6.91 per cent over 20 years.
"Bonds are also a good fit for an RRSP since income is taxed more heavily than capital gains [outside a retirement plan]," he said.