Conventionally Managed Products

12.1 Conventionally Managed Products

Picture this: you’re sitting with your friend who says, “I want to invest in something straightforward—just stocks and bonds, nothing too fancy.” You reply, “Sure, there’s a type of product called a conventionally managed fund. It’s basically a basket of investments, run by a professional manager, that follows pretty established rules.” Then your friend goes, “That’s cool, but what exactly does that mean?” Good question. Let’s explore.

Conventionally managed products—often called traditional or “plain vanilla” investment funds—refer to pooled investments that focus mostly on well-known asset classes such as stocks (equities), bonds (fixed-income securities), or balanced mixes of the two. Beyond just the assets they hold, these funds follow regulatory guidelines that aim for transparency, diversification, and consistent disclosure to investors. In Canada, these guidelines include rules from the Canadian Securities Administrators (CSA) and oversight by the Canadian Investment Regulatory Organization (CIRO). Let’s break down what makes these products “conventional,” and why they’re often the go-to investment for so many folks.

What Does “Conventionally Managed” Actually Mean?

When we say these products are conventionally managed, we’re talking about investment vehicles, like mutual funds and closed-end funds, that use established strategies and reputable portfolio managers. Often, they must meet criteria set in regulatory documents such as National Instrument (NI) 81-102, which covers core rules for mutual funds in Canada. NI 81-102 is like the rulebook that says, “Here’s how to manage diversification, liquidity, and daily pricing.” As a result, many of these funds have daily valuations, standardized disclosure requirements, and a range of investor protections.

The managers in charge of these products are typically professionals registered with CIRO—think of them as the new single self-regulatory organization in Canada that took over from the Mutual Fund Dealers Association of Canada (MFDA) and the Investment Industry Regulatory Organization of Canada (IIROC) on January 1, 2023. CIRO ensures these portfolio managers are abiding by best practices, which helps you sleep a bit more soundly at night knowing someone’s watching out for your interests.

Anyway, the key point is that these “conventional” products are designed for everyday investors who want clarity, disclosure, and easy access to their money. They are not far-out alternative offerings, like a privately run hedge fund or direct real estate partnership.

How Are They Different From Non-Conventional Products?

Non-conventional—or alternative—products may have more flexibility in what they invest in, whether that’s real estate, commodities, private equity, digital assets, or less traditional strategies like short-selling or leveraging. They might also not follow the same diversification guidelines or daily pricing. Hence, these alternatives can offer unique returns (and sometimes bigger risks), but often at the cost of reduced liquidity, more complexity, or higher fees.

By contrast, conventionally managed products live in a more tightly regulated neighborhood. They usually keep portfolios well-diversified, use standard investing approaches, and accept that a large portion of their holdings will be easily convertible to cash. For instance, a broad-based equity mutual fund invests in many different stocks across sectors, which helps reduce the risk that one failing company can torpedo the entire fund.

Common Structures of Conventionally Managed Products

A handful of different structures or formats fall under the “conventional” banner. They might look or feel different, but they’re all following the same big set of rules about transparency, diversification, and disclosures. Let’s look at the most common:

• Open-end funds (e.g., most mutual funds):

• These funds continuously issue and redeem shares at their net asset value (NAV).
• NAV is typically calculated daily, so you can buy or sell at the price posted at close of business.
• Strongly regulated by NI 81-102 in Canada, ensuring standardized disclosure, daily liquidity, and restricted use of leverage or borrowed money.

• Closed-end funds:

• They raise a fixed amount of capital once (usually at inception), and the shares then trade on an exchange.
• Their market price can differ from the NAV, sometimes trading at a discount (or premium) based on supply and demand.
• They often can hold less liquid assets or employ more flexible strategies, although many still remain “conventional” enough for everyday investors.

• Wrap Products:

• If you’ve ever heard: “The entire portfolio is wrapped under one fee,” that’s essentially a wrap product.
• Instead of paying separate transaction commissions, you pay a single fee that covers all trades and management.
• Typically includes curated model portfolios, designed either by a team of in-house portfolio managers or by external managers.

• Balanced Funds or Model Portfolios with Overlay Management:

• Balanced funds invest in both equities (stocks) and fixed income (bonds) to hit a middle ground of growth potential and reduced risk.
• Overlay management coordinates trades across multiple sub-portfolios to maintain targeted asset weightings and overall risk management.
• Both balanced funds and overlay strategies tend to be well-suited for investors looking for simpler, “all-in-one” solutions.

The Importance of Transparency and Disclosure

Let me add a quick personal note: early in my investing journey, I jumped into a fund without reading any of the materials. You know that big stack of documents—prospectus, fund fact sheet, annual report—that show up in your mailbox (or inbox) when you invest in a mutual fund? I used to ignore them. Then one day, I realized I had no clue about the fees I was paying or the strategy the manager was following. Don’t do that!

The reality is, conventional products make it super convenient to see exactly how your money is managed. Regular disclosure documents provide:
• Fund Facts: Plain-language, brief summary of the fund’s strategy, risks, and costs.
• Prospectuses: More detailed legal and financial overview, including potential conflicts of interest.
• Annual and Semi-Annual Reports: In-depth updates on fund performance, manager commentary, and financial statements.

These transparency requirements exist precisely so that people can do their own due diligence or, better yet, have an informed conversation with their advisor. The entire arrangement operates under the watchful eye of the CSA and is enforced by CIRO guidelines. You can check out https://www.ciro.ca for details on how the organization oversees and regulates these offerings.

Regulations and Concentration Limits

If you’re reading up on mutual funds, you’ll notice they often mention rules about the percentage a fund can hold in any single security. For example, NI 81-102 typically enforces that a single issuer cannot represent more than 10% of the fund’s net asset value (subject to exceptions). This is done to protect investors from over-concentration or “all eggs in one basket” risk. Because these rules are spelled out in black and white, you generally know you’re getting a product that’s aiming for diversification.

In practice, this means you usually won’t see a conventional mutual fund loading up half the portfolio on a single hot tech stock. It’s there to ensure stability and predictability in the performance results (or at least reduce the risk of a meltdown).

Suitability Considerations for Investors

Whether you’re brand-new to investing or a seasoned portfolio manager, it’s always about “Does this particular product fit my risk tolerance, goals, and time horizon?” That’s the concept behind KYC (Know Your Client), KYP (Know Your Product), and suitability obligations that advisors must follow. CIRO has current rules stating that advisors must:

• Know the financial circumstances, investment objectives, risk tolerance, and time horizon of each client.
• Know the products they recommend, including fees, liquidity, and historical performance.
• Align the product with the client’s personal situation and objectives to ensure it is suitable.

This is extra critical when dealing with older clients who plan to retire soon or younger folks with a decades-long horizon. Advisors can help match that risk profile to the suitable conventional product. For example, a short-term investor might benefit from more conservative bond funds, whereas a young professional saving for retirement might choose a balanced growth fund with a heavier equity weighting.

Core vs. Satellite Allocation Strategy

Ever heard of the “core and satellite” approach to building a portfolio? That’s where you have a big chunk of your money in broad, diversified, “core” investments (like a low-cost equity index fund or a balanced fund) and then smaller “satellite” allocations to specialized or more tactical plays (maybe a bit in emerging markets, or an alternative asset class). Conventional funds often star in that “core” role because they’re:

• Diversified: They hold a broad mix of securities.
• Professionally Managed: Experts do the research, trading, and rebalancing for you.
• Transparent: You can quickly evaluate performance and costs.
• Highly Liquid: Shares can be redeemed at or near NAV on a frequent basis.

This arrangement helps keep your overall portfolio stable, while still allowing a touch of experimentation in the satellite portion—especially if you want to chase thematic or alternative strategies on the side.

Sample Pooled Investment Diagram

Let’s show a high-level overview of how conventional funds work in a simple flowchart:

    graph LR
	    A["Investor <br/> (You)"] --> B["Pooled Investment Vehicle <br/> (Mutual Fund)"]
	    B["Pooled Investment Vehicle <br/> (Mutual Fund)"] --> C["Professional Manager <br/> Oversees Portfolio"]
	    C["Professional Manager <br/> Oversees Portfolio"] --> D["Core Investments: Stocks, Bonds, or Both"]
	    D["Core Investments: Stocks, Bonds, or Both"] --> E["Returns, Capital Gains, Interest, Dividends"]
	    E["Returns, Capital Gains, Interest, Dividends"] --> A["Investor <br/> (You)"]

• Investor invests money in the mutual fund.
• The mutual fund pools that money alongside other investors’ contributions.
• A professional manager decides which stocks or bonds to buy or sell, within regulatory limits.
• Profits, losses, and dividends flow back to the investor in the form of increased share value or cash distributions.

Practical Examples and Case Studies

Case Study #1: A Conservative Mutual Fund Scenario
• Anne is 65, planning to retire in five years. She’s anxious about market downturns. She invests in a Canadian balanced fund—60% in high-quality bonds, 40% in dividend-paying stocks. Thanks to NI 81-102 rules, there’s a maximum of 10% in any single issuer, ensuring broad diversification. The balanced fund also provides annual and semi-annual reports, telling Anne how the fund is positioned and performing. She sleeps better at night knowing she’s not overexposed to any single name.

Case Study #2: A Growth-Oriented Closed-End Fund
• Mark is 35 and comfortable with volatility. He invests in a closed-end growth-focused fund trading on the TSX. Because it doesn’t have to redeem shares daily, this fund can hold smaller companies or less liquid positions. Mark notices the fund’s share price trades occasionally under its NAV, sometimes offering a bit of a discount. He follows monthly updates and checks the fund’s prospectus to track the manager’s fees and strategy. He’s aware that while he might snag shares at a discount, liquidity can be a bit trickier compared to a typical open-end mutual fund.

Case Study #3: A Wrap Product for Busy Professionals
• Sophia is a busy medical professional with no time to track her investments daily. She opens a wrap account through her advisor, paying a single annual fee for all transaction costs, management, and advice. The wrap program invests in several model portfolios aligned with her moderate risk tolerance. She gets an easy-to-read statement every quarter, clarifying performance and fees.

Potential Pitfalls and Best Practices

Pitfalls:
• Fee Overload: Some conventional products carry front-end loads, back-end loads, or large management expense ratios (MERs). Always compare fees.
• Liquidity Assumptions: Mutual funds are generally liquid, but closed-end funds can be less so.
• Performance Chasing: Past performance is not always indicative of future results. A top-performing fund last year might lag going forward.
• Overlooking Mandate Changes: Occasionally, a fund may alter its manager or shift its mandate. Keep an eye out for updated disclosures.

Best Practices:
• Read the Fund Facts: Way shorter than a prospectus, but still jam-packed with relevant info—risk rating, fees, and so forth.
• Leverage Professional Advice: Advisors are there to help reconcile the product’s features with your personal circumstances.
• Keep It Core: Many conventional funds serve well as part of your “core” allocation, thanks to broad diversification and professional oversight.
• Monitor Regularly: Check performance, changes in your personal needs, and shifts in manager strategy or fees.

Regulatory References and Additional Resources

• For official guidance, you can check the Canadian Investment Regulatory Organization (CIRO) website:
https://www.ciro.ca
CIRO enforces the rules that financial institutions and advisors must follow.
• The Canadian Securities Administrators (CSA) also provides details on NI 81-102 and other relevant regulations:
https://www.securities-administrators.ca
• For an in-depth look at regulatory filings and fund documents, visit SEDAR+:
https://www.sedarplus.ca

Reading material that’s super helpful:
• “Mutual Funds in Canada” by Alvin Hall – A straightforward guide to the Canadian mutual fund industry.
• “Investment Analysis and Portfolio Management” by Frank K. Reilly and Keith C. Brown – A heavier academic text for a deeper dive into portfolio strategies.

Online courses:
• CSI’s “Investment Funds in Canada” – A go-to if you want a recognized credential and deeper knowledge about fund products.
• Coursera’s “Global Financial Markets and Instruments” – Helps broaden your horizon if you want to see how conventional products fit into the bigger global puzzle.

Wrapping It Up

Conventionally managed products are a staple in most investors’ toolkits. They offer transparency, meet robust regulatory requirements, and typically deliver a diversified approach to investing in stocks or bonds. Sure, they’re not the only game in town—alternative products can also be interesting—but for stable, well-regulated, run-of-the-mill (in a good way!) solutions, conventional funds are often a smart choice.

Personal takeaway: The reason many folks stick to conventional funds is the simplicity and peace of mind they offer. There’s something reassuring about knowing your investments are handled by dedicated managers who must stick to guidelines on diversification and disclosure. Whether using them as your “core” or your entire portfolio solution, you’ll likely find them suitable in many circumstances—provided you’ve done the right homework (and your advisor has done the right KYC and KYP processes).

So, if you’re new to the market or simply looking for a steadier, well-tread path, consider placing conventionally managed products into your portfolio lineup. After all, there’s already enough complexity in the world, right?

Test Your Knowledge: Conventionally Managed Products Essentials