Big Bank Monthly Income Fund Comparison

A reader emailed me asking about the differences between the big bank monthly income funds as they all seem to have one.  At first glance, they are all fairly similar with mostly Canadian exposure invested in a combination of dividend paying equities and bonds.  However, digging a bit deeper, there are noticeable differences in terms of cost, distributions and performance.

To get an accurate picture, I surfed over to the morning star website to do some research on the various monthly income funds.  Here is a summary of what I found (as of June 30, 2009):

CIBC RBC BNS TD BMO
MER 1.41% 1.14% 1.39% 1.40% 1.49%
Morning Star Rating 4 5 3 4 4
Div / Share $0.88 $0.57 $0.50 $0.42 $0.72
Current Yield 7.10% 4.77% 5.56% 2.95% 9.08%
Equity/Bonds/Cash 60/26/12 42/50/5 45/38/13 60/31/9 42/54/3
Load none none none none none
Min Investment $500/$25 $500/$25 $500/$50 $100/$100 $500/$50
10 Year Return 7.50% 7.50% not avail. 7.50% 4.80%
Net Assets (millions) $5604 $6,235 $646 $3,614 $4,463
NAVPS $12.40 $11.95 $8.99 $14.25 $7.93
Foreign Exposure none none 6% US none none

Looking at the table, it seems that each fund has their pros/cons.  RBC seems to be the lowest cost with the highest morning star rating, but with a lower distribution relative to the rest.  I personally own CIBC Monthly Income which seems to be in the middle of the pack with an above average distribution.  If I were to pick an income fund today, it would probably be the BMO Monthly Income Fund.  They have been paying $0.72 dividend /share for years now which works out to be a fairly high yield at today’s price (NAVPS).

It’s worthy to note though that each of these funds have a significant bond allocation which should be accounted for in your total portfolio asset allocation.  As well, since bond distributions are considered interest income, it may be the most tax efficient route to hold these funds within an RRSP or TFSA.

Do you own any of the big bank income funds?

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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Ken
8 years ago

I have the BMO Monthly Income Fund in my TFSA and RSP. I have just been informed that they are reducing the income from 0.06 per unit to 0.024 per unit. Are the other big banks going the same way, or should I be looking elsewhere for my monthly income?

Steven
9 years ago

Hi Paul,

TD is a good simple stand-alone investment solution, but:
1. It is at least a medium risk investment itself due to its equity/fixed income ratio. I guess this is debateable depending on your definition of “risk”. Again, because it is 60 equities – 40 fixed income/cash, I feel that it is medium risk.

2. Its main purpose to provide consistent monthly income is defeated when held in an RSP. TD MI is what is considered to be a stand-alone solution. A stand-alone solution that does NOT provide monthly income is much more suitable for an RSP.

Yes, the example with Front Street Special Opps was an extremely extreme one. I merely used it to illustrate that funds should not be avoided merely because of high MERs. It is the net return after MERs that matters, not MERs themselves. Everything in life has a cost. We must evaluate things based on their value as well, not only their cost.

I am an investment advisor myself. I do not call clients who hold mutual fund portfolios 3-4 times a year, not because I don’t want to, but because it’s not necessary. Rebalancing once or twice a year is more than sufficient except in extreme circumstances. Portfolios with individual stocks and bonds is a different story that requires more diligence in on-going monitoring.

As an advisor I take timeframe and risk tolerance very seriously. This is not due to regulatory requirements but because I want my clients to do well. When clients do well, they refer – that is what my business is built on – referrals. Imagine a client who claims to be able to only tolerate low risk (10% loss during a down market), and I got them into a fund that tanks 25% in the next financial crisis. If the client has the intestinal fortitude to wait, they would probably make their money back in the year or two after that. But because I inaccurate gauged his/her risk tolerance, they have now realized a loss that will be much more difficult to recoup. Helping clients get investments with risks they can tolerate will ensure that they stay invested even during market downturns, and we know that markets always trend upwards.

Paul N
9 years ago

Hi Stephen,

I appreciate you taking the time to fully explain your thoughts on this. I also saw the other post you had even though it seems to have not posted here as well yet.
I think we are looking at this from two completely different perspectives. Myself from the smaller investor group just looking to create a fairly simple not too risky retirement plan. I think that can be done with a monthly income fund. I personally also have a company DC plan with the choice of about 30 MF’s which has not done as well as my MI fund. The MER’s are certainly higher as well.

In your last post you use a really sector specific (resources) specialty fund as your example with a 10 % MER. I can’t see a small investor investing more then a minor percentage of their money in that regardles of the return. I could see that type of fund turning around and shedding all that gain just as easily. Also if it turns around and has 2-3 negative years that huge MER will eat away your gains very quickly. You would have to time a fund like that and get out.

You kind lost me with your “invest within your risk tolerance and timeframe” comment as well. I think in most cases that’s not a genuine thought from an advisor / “fund salesperson”, or when you fill out the ridiculous 10 question form at a bank. That line seems to serve many purposes. Especially if its from one of those advisors that never attempts to contact their clients. There should be meetings 3-4 times a year and discussions about whats in the clients best interests first. (which lets face it is making as much money for their retirement as possible while keeping risk in check)

Steven
9 years ago

Hi Paul,

If an investor is looking to make small or periodic investments…I definitely agree an MF is the most cost efficient way to go.

Traditionally in the investment industry…a medium risk (balanced) portfolio usually consists of 50% fixed income/cash and 50% equities.

A higher equity portion than that is usually considered to be riskier than a medium risk portfolio. TSX declined 33% in 2008. Anyone losing more than that was probably in a full equity and therefore high risk portfolio.

Most big banks nowadays also offer most mutual funds in the industry at front end 0%. I know that for sure this is the case at RBC branch networks via their Investment & Retirement Planners. The industry is phasing out of DSCs as investors become more educated. FE 0% is a fair option in my opinion for investors who are simply too busy with their lives to educate themselves.

Paul N
9 years ago

Hi Steven,

Good comments, I have read before that the TD MI fund is considered a “closet” index fund. An ETF is a lower cost way to invest, I would imagine ishares XIU would be the fund that would be comparable, or your own mix of XIU and XSB for the bond component would be similar. But how does a smaller investor purchase $100.00 worth of ETF units economicaly every paycheck? A bit difficult with an ETF. Especialy if you have to buy two? Your trading fees would really be a killer.

I can’t really agree that that fund is a Medium/high risk fund. At the peak of the financial crisis some funds lost 50-60% of their unit value. The TD fund somewhere around the 30% range, It’s back to the 2008 level now. Plus the dividend kept buying you new units all through it. It’s maybe not THE best investment but for a combination of simple reasons

I still feel it’s a pretty simple choice especially for the lazy, or type of investor who could get roped into a Front load, or DSC fund, or some ridiculous predatory fund like for example prime america’s model. I just hate seeing people get “fee’d” to death and not make a decent return, simply just because they don’t have the time in a busy world to learn the difference between a good and bad investment.

Steven
9 years ago

Hi Paul,

I apologize for not seeing your request for recommendations. Let’s use a more extreme example to illustrate:

Pull up a fund called Front Street Special Opportunities Cdn Ser A on Morningstar: http://quote.morningstar.ca/quicktakes/Fund/f_ca.aspx?t=F000005I7J&region=CAN&culture=en-CA

A whopping 10% MER. However, over the past 5 years it has outperformed its underlying index by 6.74% and outperformed the average competing fund by 5.55%. Note that this is NET of the 10% MER charged by the fund.

So if you were to invest in an ETF that tracked the TSX resources sector for the past 5 years, you would’ve made at least 6.74% less (not including trading fees and MER on the ETF). You would’ve made at least 5.55 less if you went and looked for a low MER mutual fund in the same category.

So are MERs the most important factor to consider? Are ETFs the absolute best solution?

Once again, monthly income funds, whatever firm they are from, are structured to do just that, provide monthly income. Think about what is sacrificed in the process of generating this monthly income and what purpose this monthly income could possibly serve if it were inside an RRSP.

Every product exists and continues to exist for a reason. ETFs, mutual funds, stocks, bonds, hedge funds are neither intrinsically good or bad. It’s about picking the quality products that do suit you risk tolerance and timeframe.

Steven
9 years ago

Hi Paul,

8 to 9% could be bad or good, depending on the risk you’re taking??? The TSX has an annualized return of over 10% per year for the past 51 years according to Andex Charts. In that case, if your actively managed fund Canadian equity returns 9% annually, is it a good investment? Absolutely not. You would be better off with an ETF that tracks the TSX!

Conversely, if you are in a money market fund that returns 8 to 9%, then it would be a spectacular investment wouldn’t it?

Never look purely at returns, but at RELATIVE returns.

TD MI is a great fund, and yes it has done well. But no it is NOT a low risk fund. Read the prospectus regarding this. It is 60% equities and 40% fixed income that lost more than 20% in the worst of times. That is a bigger lost than most investors can stomach. It is what is considered a MEDIUM-HIGH risk fund.

Paul N
9 years ago

Hi Steven

I can’t really see a problem with any fund that returns an average of about 8 or 9% over 10 years regardless of its internal structure. The TD MI fund has done that. It’s a fairly low risk fund that seems to give the hoped for returns of riskier higher fee funds. I can’t see it being inappropriate for an rrsp or tfsa. There are so many highly touted, high fee dog funds out there that have had far less growth for the same time period. Of course im sure some “advisors” or investment companies continued to make profits while the individual investor may not have.. (they get their continuous commissions from the mer’s of course even when the fund falls flat or loses money).

I would love to see your recommendations of better funds ?

Steven
9 years ago

As a matter of fact, NONE of these funds are meant to be held in an RRSP. There are opportunity costs associated to a fund which structures itself to pay an income flow monthly. Holding these funds in plans where the income stream is not able to be withdrawn (RRSP) defeats the purpose of having monthly income.

Also note that TD Monthly Income is NOT in the same category as the other 4 MI funds. It is a Canadian Equity Balanced fund whereas the others are Canadian NEUTRAL Balanced and as such is more aggressive (note the -23.4% return in 2008).

One common misconception investors have is that high yield is always a good thing? Not necessarily. It is your NET return that matters where distributions are considered to be reinvested. It doesn’t matter if a fund yields 20% annually if its price declines by 30% over the same period. BMO Monthly Income is a poor choice out of the 5.

Geoff I
10 years ago

The BMO monthly income fund is a perfect fund for a TFSA. I personally have it as the bulk of my TFSA with dividends automatically reinvested and the return of capital will not create a cost base problem in the future because it is in a TFSA.