Growing interest in balanced funds calls for improved information and more focus on pricing

An analysis of Norwegian balanced funds conducted by Finanstilsynet has identified some aspects for improvement. The analysis shows that in many cases the fees charged for managing balanced funds' equity investments significantly exceed the fees charged for managing pure equity funds.

"For mutual fund investors to be charged higher management fees by balanced funds than if they invest directly in a combination of fixed income and equity funds is unfortunate. Specifying a fund's returns broken down on equity investments and fixed income investments, and not just stating overall returns, will put customers in a better position to assess the merits of balanced funds relative to pure fixed income and equity funds", says Anne Merethe Bellamy, Deputy Director General, Capital Markets Supervision, Finanstilsynet.

A growing share of mutual fund investors have opted for balanced funds. Assets managed by balanced funds have risen by more than 170 per cent since the start of 2013 and now stand at NOK 57 billion.

The balance between equities and fixed income securities in balanced funds is normally allowed to vary within a set range. This enables the manager to enhance a fund's return by increasing the allocation to the asset class which in the manager's market view offers the best return prospects. Finanstilsynet's analysis shows that many balanced funds make little use of the scope available for reallocation.

"Little rebalancing over time combined with considerably higher management fees may suggest that customers would be better served by investing directly in both equity and fixed income funds", says Ms Bellamy.