Pay Yourself with Ivy Global Balanced
Daniel Arsenault, CFA, FRM, MBA
Investment Director, Equities
- When drawing income from investments, using higher risk funds in a portfolio can lead to lower levels of capital over time compared with lower risk funds, even if the returns are slightly better for the high risk fund.
- Downside protection is critical to improving investment outcomes for clients who need to draw down income from their investments.
- The Mackenzie Ivy Global Balanced Fund has experienced better-than-market returns and downside protection over the long term.
For investors who draw regular income from their investments, capital preservation is equally important as growth, if not more so. The Mackenzie Ivy Global Balanced Fund combines the best global equity ideas of the Mackenzie Ivy Team and the best global fixed income ideas from the Mackenzie Fixed Income Team, according to the views of the Multi-Asset Strategies Team with the goal of providing consistent return on capital, diversification and some income. Due to the focus in the equities on protecting capital, the fund has experienced better-than-market downside protection over the long term. Since the addition of put options strategy overlaid on the bonds to protect against rising interest rates, the Mackenzie Ivy Global Balanced Fund/Class are uniquely positioned to protect on the downside.
Why does downside protection matter?
If a fund always goes up in value, income distributions to investors would partially come out of gains, and the rest can be a return of the investor's own capital. However, we know that all markets move up and down, and that income needs do not usually go down with markets. So, investors can end up taking money out when their investments are down, which leads to lower levels of compounding over time.
Take the example of two funds below. Funds A and B have roughly the same amount of return over the past 10 years. Fund A is a little higher but has slightly higher risk than Fund B. These funds belong to the same balanced peer group and are considered outperformers.
To illustrate the effects of taking income from an investment with more risk and lower downside protection, we set up automatic monthly withdrawals of $4,000 from an initial portfolio value of $1,000,000 for each fund. Fund A had a slightly higher rate of return when the portfolio was untouched, but the lower risk of Fund B means that the withdrawals have a less negative impact on its future value. At the end of 10 years, Fund B has about $57,000 more due to its more modest risk profile (see chart below).
The Mackenzie Ivy Global Balanced Fund/Class aims for through-the-cycle growth with an emphasis on specifically managing downside risk. This focus amplifies the benefits of balanced funds for clients who are seeking to draw income, and allows the funds to last longer.
Downside capture ratio is the percentage of market returns that a fund achieves when the market benchmark declines. If the benchmark declines 10% and the fund declines 9%, then the downside capture ratio is 90%. Pictured to the left, the Mackenzie Ivy Global Balanced Fund's Downside Capture Ratio is shown against the two example funds and the peer group average. Mackenzie Ivy Global Balanced Fund has a much lower Downside Capture Ratio.
To illustrate further, we present the same $1,000,000 portfolio with $4,000 taken out monthly over 10 years while being invested in Mackenzie Ivy Global Balanced Fund and compared to the Morningstar Peer Group. The lower overall risk, lower downside risk, and better through-the-cycle performance of the Fund produced a better overall experience for investors who would take an income out of their investments.
At the end of the 10-year period and after $4,000 gross monthly income, the $1,000,000 portfolio has grown to $1,429,947, or about $430,000 more than the average competitor balanced fund.
The Mackenzie Ivy Global Balanced Fund/Class has outperformed peers over long time horizons and with lower downside risk than the overall market and competitor funds average. We believe that this combination of characteristics makes the strategy ideally positioned as a long run core position in which investors can keep their money invested and use it to draw income. Because of these, over the past 10 years a $1 million portfolio invested in this strategy could have generated $48,000 in gross annual income and an additional $429,947 of growth net of income, potentially increasing the longevity of investors' capital.
For more information about Mackenzie Ivy Global Balanced Fund/Class, please contact your financial advisor.