Piggybank and calculatar with asset allocation pie chart

Though low-fee, index-based ETFs dominate the market in balanced categories, they’re not going unchallenged. Actively managed asset-allocation products also form part of the investing landscape. And while their assets under management are much lower, these active strategies are proving to be worthy competitors to the likes of billion-dollar-plus offerings from the Vanguard and iShares families.

Unlike in the mutual fund space, where multi-asset funds have the largest market share, the $12.6 billion held in these ETF categories represented only 3.7% of assets as of January, according to the Canadian ETF Association.

More than half that amount, $6.7 billion, was held by Vanguard Investments Canada Inc. Another $4 billion was held by iShares sponsor BlackRock Asset Management Canada Ltd. Most other ETF providers held less than $100 million in balanced mandates, or more commonly nothing at all.

This represents a business opportunity for firms that can leverage their expertise in active management. One prominent contender is Toronto-based CI Investments Inc., which operates as CI Global Asset Management.

Originally launched as a stand-alone ETF in August 2019, what is now the ETF series of CI Global Asset Allocation Private Pool was created in July 2020 via a fund merger. All aspects of the fund — the asset mix, the sub-portfolios delegated to sector equities and fixed-income specialists, and the currency exposure — are actively managed by CI personnel.

The ETF will make significant shifts from its neutral equity weighting of 60%, ranging up to about 10 percentage points higher or lower.

“We use the ranges to protect capital first, and deliver returns,” said lead manager Drummond Brodeur, senior vice-president, portfolio manager and global strategist with CI. If circumstances warrant, he’s open to holding up to 20% of the fund in cash.

The various series of the pooled fund have combined assets of about $700 million, of which only $16 million is held in the ETF series. This mandate is essentially a more concentrated version of the CI Global Income & Growth Fund, a mutual fund managed by the same CI team and with a similar strategy. “That’s pretty close to the same fund [as the ETF],” Brodeur said.

Launched in 2007, the CI mutual fund has the top five-star Morningstar rating for risk-adjusted returns in the Global Neutral Balanced category. Its assets of more than $9 billion exceed the combined totals of the five largest balanced ETFs. “We can make very significant shifts that these days can be moving over a billion dollars in a day,” said Brodeur.

Other examples from Toronto-based firms of actively managed multi-asset ETFs include the Exemplar Growth and Income ETF, sponsored by Arrow Capital Management Inc.; the IA Clarington Loomis Global Allocation Fund, from IA Clarington Investments Inc.; and the Purpose Tactical Asset Allocation Fund, from Purpose Investments Inc.

Some balanced ETFs take hybrid approaches that combine elements of both active and passive investing. Such is the case with TD Asset Management Inc.’s TD One-Click portfolios, which launched in August 2020.

Jonathan Needham, vice-president, ETF distribution, said the One-Click suite was designed to be low-cost but with “more tools in the toolbox” that TDAM believes can deliver better results than existing passive competitors.

The TD One-Click Moderate ETF Portfolio, for example, holds about 15 underlying TD ETFs, of which about 30% of the assets are actively managed. “With broad market exposure we don’t want to spend too much, so we use passive,” said Needham. “And where we think there’s specific factor risks, or an ability to reduce risk, or ability to add some alpha, that’s where we use some active strategies.”

The neutral asset mix of TD One-Click Moderate is 60% equities, 40% fixed income, but can vary by up to 10 percentage points. “We rebalance when we think the market presents the opportunity,” said Needham, adding that TDAM takes a “risk-optimized” approach to asset allocation.

Employing risk metrics and TDAM’s capital markets outlook, portfolio managers seek to maintain a similar risk profile to a 60-40 portfolio even when overweight in equities. Among the vehicles that enable them to do so are TD’s low-volatility factor-based ETFs.

Elsewhere, Toronto-based Mackenzie Investments, despite its extensive expertise in active management, opted for a strategic index-based approach to its suite of multi-asset ETFs. “We do not engage in tactical trading,” said Prerna Mathews, vice-president, ETF product and strategy.

Mackenzie’s balanced funds are designed to appeal to a wide audience, and all of the underlying ETFs in the funds are index-based. Also, with the exception of a small allocation to its emerging-market bond ETF, all holdings are in core asset classes.

“The goal is to keep these solutions simple,” said Mathews. “The moment we start to get into engineering lots of different building blocks, you’re making it a more complex solution in terms of underlying costs.”

Mathews said she advocates maintaining a low-cost core holding for clients, together with actively managed or non-core holdings that are customized for individual clients. “Keep your core low cost,” she said. “And use your tactical allocation, your satellite exposures to really dial up your view.”

Embracing indexing has enabled Mackenzie to charge management fees in line with the lowest-cost providers of balanced ETFs. The Mackenzie Balanced Allocation ETF, for example, has a management expense ratio of 0.19%. By comparison, the more actively managed TD One-Click Moderate charges a slightly higher 0.28% while the MER of CI’s fully active ETF weighs in at a loftier 0.90%.

In pitching its ETF to advisors, CI points to the past results of its close mutual fund counterpart. Overcoming the hurdle of higher fees, it has outperformed the $2.2-billion Vanguard Balanced ETF Portfolio and the market-leading $3.4-billion Vanguard Growth ETF Portfolio.

“The track record I think speaks for itself,” said CI’s Brodeur. That said, since CI’s ETF series has less than two years of history, it’s still early to be making meaningful ETF-to-ETF comparisons with Vanguard.