Pre-Built Portfolio Funds

Within the ProsperiGuide website, the term "pre-built portfolio fund" is given to any fund in which a group of investments are combined together to create a portfolio.  A minimum of two asset classes must be present for the term to apply. This is a diverse group of funds, ranging from those utilizing a small number of individual stocks and bonds to complex “funds of funds” comprising a diverse holding of securities numbering in the thousands.

If you agree that investment funds are an undemanding and straightforward way for the average person to invest, then owning a pre-built (or hybrid) portfolio fund should be the easiest and simplest way to invest.

All pre-built portfolio funds share these basic features:

  • A combination of money market assets (cash equivalents) and fixed income assets (bonds)
  • Equity assets (Canadian, U.S. and international), which may include:
    • The option to add subtypes of the core asset classes plus other asset classes
    • Exposure to commodities, real estate and infrastructure
  • Types and percentages held in each asset category are based on the fund’s objectives
  • Multiple types of investment income (such as interest, dividends and capital gains)
  • Their objective is to provide a measure of safety, income and capital gains, over time and in one fund

Due to their relative simplicity, pre-built portfolio funds are designed for investors who:

  • Are new to investing
  • Have only a small amount to invest
  • Want to simplify their holdings
  • Have little time or inclination to manage multiple funds personally

Assembling Assets: From Simple to Complex

Investment funds companies have created three ways to invest in pre-built portfolio funds, based on the number of funds in the fund and whether or not the asset mix allocations will change over time. Funds may be sorted into:

  • Individual funds
  • Funds of funds
  • Target (retirement) date funds

These will be discussed in the table that follows.

Individual Funds

Funds of Funds

Target (Retirement) Date Funds

  • Fund names vary, for example:
    • Balanced
    • Income and growth
    • Diversified
    • Asset allocation
    • Individual stocks, bonds and cash instruments are assembled by the fund manager to create a portfolio
  • The target asset mix is determined by the fund’s policy (fixed percentages or asset allocation)
  • The equity component and the level of risk vary between funds (linked to the volatility of the underlying components)
  • Balanced funds are periodically rebalanced to their target mixes
  • Referred to as a portfolio fund or fund of funds
  • A balanced fund, which uses multiple funds to create a portfolio instead of using individual stocks, bonds, or cash instruments
  • Has a predetermined asset mix, ranging from conservative to aggressive, based on the fund’s objective
  • The equity component and the level of risk vary between funds (linked to the volatility of the underlying components)
  • Each fund is periodically rebalanced to its target mix
  • Also referred to as life cycle funds
  • Funds are generally constructed using multiple funds (a fund of funds approach but with an added feature). The overall asset allocation automatically adjusts to reduce the equity exposure as your expected target (retirement) date approaches.
  • At inception, it has an aggressive growth objective (high equity component) and then becomes more conservative (equity reduces) as it approaches its maturity date. The maturity date is usually selected to match the investor’s retirement date.
  • Each fund is periodically rebalanced to its short-term target mix
  • A low-maintenance, investment portfolio for investors looking for a one-stop investment shop

 

There are more balanced funds in Canada than any other type of fund.

Look Inside a Fund: Spot the Similarities and Differences

Pre-built portfolio funds have so many variations that you won’t really know what you are buying unless you read the investment fund report. It makes no sense to compare fund performance and fees until you’ve identified the similarities and differences between funds.

Develop a personal motto to “know before you buy”. Discriminate between funds by identifying similarities and differences using the following four characteristics. Do they give you any hints regarding the type of fund it is? Use the following five characteristics to compare the similarities and differences between funds. The table below will outline what you should be looking for as you compare different funds.

Characteristic

What to Look for

Why It’s Important 

Investment objective/strategy

  • The target asset allocations to cash, fixed income and equity
  • The fund’s objectives, investing style and approach taken

 

  • The stated target asset allocation percentages and acceptable ranges (e.g., 60-70% in equities)
  • The expected variation of the target asset mix: fixed, active asset allocation (up to 100% equities) or adjusted over time (target date)

  • The investment objectives and approach used (e.g., growth versus value, active versus passive)

  • To assess the potential level of risk (risk increases as % equities held)

  • To establish the target allocation and acceptable limits of equities held; risk increases with active asset allocation (more than 70% held in equities)

  • To evaluate funds; to judge which funds are suitable

Type of fund

  • Individual fund of funds or target date

 

  • The number of individual stocks and bonds held

  • The inclusion of investment funds versus individual securities. Specific asset class funds may hold fewer individual stocks and bonds compared to portfolio and target date funds.

  • Fewer individual holdings; more reliance on the skills of the fund manager to match or outperform a benchmark portfolio

  • More individual holdings or the addition of investment funds increases diversification and reduces risk that performance will significantly vary from a benchmark portfolio

Asset allocation and asset classes held

  • Asset allocations
  • Categories and sub-categories included

 

  • Resemblance to, or deviation from a balanced asset mix (60% equities/40% fixed income)

  • Asset classes other than cash, fixed income and equity (e.g., real estate, alternatives, small companies)

  • To align the target asset mixes of your fund and investor profile

  • More asset classes increase diversification, potentially reducing risk and enhancing returns

Geographic locations of assets, particularly equities

  • Canada, U.S. and International
  • The % allocation between Canadian, U.S. and international equities

  • A small or non-existent allocation to one or more of these three geographic regions

  • Inclusion of asset sub-categories, such as emerging markets

  • Optimizing diversification by holding a one-third allocation to each core region. Allocations limited to only one or two regions increases the level of risk.

  • Including an allocation to emerging markets increases the potential risk and return

    • To manage the risk of sector or country concentration, especially for those investors who participate in employer share purchase plans and also own investment funds heavily weighted to Canadian equities (e.g., employees of energy and mining industries are particularly vulnerable because the factors impacting the performance of our Canadian equity market and their company shares are often the same)

Pre-Built Portfolio Funds Comparison

The following two Morningstar investment reports will give you some tips on how to compare different pre-built portfolio funds. Click the button below to start.

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Compare Active vs. Passive Styles

The following two Morningstar investment reports will help you understand the difference between active and passive investment styles. Click the button below to start.

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