Editor's note: Today on Morningstar.ca we continue our look at Your retirement to-do list. Each day this week we look at a critical task that investors must accomplish before making the transition to retirement. These five tasks are: setting an appropriate asset allocation, selecting investments for your retirement account, setting a plan for retirement withdrawals, incorporating government benefits, and creating an estate plan. Check back all week for more insights from Morningstar's experts.
The reason we invest today is to meet our financial obligations tomorrow. This is as true for those starting their careers as it is for those who've ended them. Of course, different life stages call for different portfolios. Investors in retirement prioritize safety and income generation -- needs that call for cautiousness. Yet retirees still need to stay head of inflation and may yet have decades ahead or wish to leave a nest egg for their heirs -- goals that require taking prudent risk.
Investing in retirement requires a portfolio that provides a mix of capital preservation, income, and steady growth. These Morningstar medalists are designed to do just that.
Investing for capital preservation
Vanguard Canadian Short-Term Bond ETF (VSB) (Gold)
This offering is designed to keep capital safe over short time periods. The short-term bond index it tracks is dominated by government bonds -- typically a safe-haven asset -- and its modest corporate bond stake is focused on high-quality issuers. The fund's government-bond heavy portfolio makes it a bit more sensitive to changes in interest rates than its Canadian short-term fixed income rivals, but its high-quality holdings should help protect investors in market downturns. Its rock-bottom 0.11% management-expense ratio (MER) virtually assures it will capture a larger piece of short-term bond market returns than its more-expensive competitors.
Investing for income
PH&N Bond (Gold)
PH&N Total Return Bond (Gold)
For core Canadian bond exposure, you certainly could do far worse than these funds, which are among the rare few in their Canadian Fixed Income category to have been competitive with broad market index ETFs like Gold-rated Vanguard Canadian Aggregate Bond (VAB) and Silver-rated iShares Canadian Bond (XBB). These funds' ability to harness management's experience, skill and sophisticated risk-management tools -- not to mention moderate costs -- give them an edge over the passive competition. With a small portion of its portfolio devoted to high-yield bonds, Total Return is better suited for more risk-tolerant investors. Its sibling focuses on investment-grade bonds alone.
PH&N Inflation-Linked Bond (Gold)
The tiny Canadian inflation-protected bond market isn't exactly opportunity rich, but this fund has wrung impressive amounts of value from it. It's done so partly by getting the better end of the bargain trading with less-price-sensitive institutional buyers. Management enjoys this advantage because it enjoys flexibility to invest in nominal bonds when their valuations are more attractive. Its long-duration government bond portfolio makes this portfolio vulnerable to higher interest rates, but that doesn't necessarily doom it to poor returns. As the 2016 U.S. election outcome ratcheted up inflation expectations, the fund slipped 3.4% from Nov. 9 through year end. But it still eked out a 3.1% gain in 2016, outpacing the category average by an impressive 1.3 percentage points.
Manulife Strategic Income (Silver)
This offering takes more credit risk than the other bond funds on our list, but it isn't as racy as its High Yield Fixed Income category assignment suggests. More than half of its portfolio must be invested in investment-grade fare, diversified across investment-grade corporate issuers, securitized debt, as well as developed and emerging market debt. Its veteran managers, Daniel Janis and Thomas Goggins, have adeptly shifted between these asset classes based on their macroeconomic view and assessment of relative valuation, resulting in strong long-term returns earned with moderate volatility. They've also delivered a consistent stream of income out of the fund's yield, rather than out of its capital -- a common practice that erodes funds' long-term return potential.
Investing for Growth
Beutel Goodman Canadian Dividend (Gold)
This offering employs Beutel Goodman's disciplined, value-oriented approach with a dividend focus. The veteran management team requires a minimum 1.5% dividend yield at the time of purchase, and it is quick to sell stocks that cut their dividends. Overall, the portfolio yields 3.5%, a bit above the S&P/TSX Composite Index's dividend yield and in line with the Canadian Dividend & Income Equity category average. It's not so much the income that is the attraction here but its beneficial effect on volatility. Since its 2003 inception, the fund has suffered about half the Composite's losses in downturns. That's partly thanks to the extra cushion dividend payers provide, in addition to the sector diversification and holding up to 30% of the portfolio in U.S. and international names.
iShares EDGE Canada Minimum Volatility ETF (XMV) (Bronze)
Low-volatility strategies tend to be highly concentrated in relatively stable sectors like consumer staples, telecom and utilities. This ETF exhibits such a tilt as well, but its index prevents its portfolio from deviating dramatically from the S&P/TSX Composite Index's sector weightings. Such diversification is possible because the benchmark is engineered to deliver the least-volatile Canadian market portfolio; energy and basic materials stocks are volatile on their own but the overall portfolio won't be if they are paired with holdings that aren't highly correlated with the sectors. Volatility-minimization strategies have outperformed broad market indexes in recent years. Investors shouldn't expect a repeat performance, but they can anticipate this offering to deliver broad Canadian market exposure with below-market volatility.
Mackenzie Ivy Canadian (Bronze)
This offering provides mild-mannered equity exposure to investors willing to take some currency risk. (As a Canadian Focused Equity fund, it can hold up to 50% of assets outside of Canada.) Manager Paul Musson and his team look for stocks with sustainable competitive advantages, strong management teams and conservative accounting practices. This line of attack isn't a rarity, but management has distinguished itself with its long time horizon -- it develops a 10-year view for each holding -- and valuation sensitivity. These practices have helped shield investors from severe losses; in 2008, for example, it dropped 15% -- less than half the losses suffered by the Composite and the S&P 500 Index. The fly in the ointment here is a relatively high MER of 2.46% for the commission-based series, and 1.32% for the fee-based series, eroding this fund's competitive advantage.
