August 8th, 2017

Managed solutions 101

Managed solutions can be a great investment option for investors looking to streamline the investment process. With managed solutions, the portfolio manager carefully selects a broad range of investments and combines them into one product to provide a good level of diversification in a convenient, one-step investment product.

There are many types of managed solutions. Here’s how some of them work.

Fund of funds

When you think of managed solutions, you likely think of a fund of funds (FoF). FoFs aim to simplify diversification and asset allocation by investing in a variety of other mutual funds, instead of investing directly in stocks, bonds or other securities. Depending on the strategy of the FoF, diversification may be based on asset class, geography or sector. There’s a strategy for almost every type of investor, which makes these products popular with investors.

According to The Investment Funds Institute of Canada, sales of FoF products for the 12 months ending April 2017 were just over $31 billion. On the other hand, sales of standalone mutual fund products were just under $8 billion.

Target-risk versus target-date funds

Target-risk and target-date funds are specific types of FoF products.

Target-risk funds are structured based on the amount of risk an investor is willing to accept in a fund. Common categories are conservative (relatively low risk), moderate and aggressive (relatively higher risk). The fund manager chooses a mix of investment solutions that meets the fund’s target risk level and regularly adjusts the portfolio to stay on target. This is a simple way for investors to make sure their portfolio matches their risk tolerance, and will continue to do so over time.

Target-date funds are structured based on an investor’s expected retirement date. They’re based on the theory that the closer an investor is to retirement, the less risk they want in their portfolio. For example, an investor seeking to retire in 2045 would select a fund with a target date of 2045, and the investments held in that fund would carry a risk level appropriate with that time frame.

Because it’s a fairly long-term investment, a target-date 2045 fund would likely invest in more stocks than bonds and fixed-income products. However, the fund’s asset mix would change as time goes on, so that 20 years from now, that same fund would be investing more conservatively.

ETFs within a mutual fund

Some mutual funds and FoFs invest in exchange-traded funds (ETFs). The main advantage of this approach is being able to move in and out of markets quickly, because ETFs are very liquid. For example, a global fund may want to quickly lower its exposure to Europe and increase its exposure to the U.S. if a specific event drastically changes the market conditions in one of those areas. Or, an asset allocation fund may want to quickly increase its exposure to fixed income if equity markets tumble. Some ETFs also open the doors to niche markets or specialized asset classes that would otherwise be difficult to access.

To learn more about ETFs, read ETFs – Why are they popular? We also offer a course dedicated to ETFs.

Ready to take an IFSE course related to all types of investment funds? Start here:

Canadian Investment Funds Course (CIFC)