2002 in review: Mutual fund sales down, but not out

(December 27, 2002) If you believe the newspaper headlines, Canadian investors spent most of 2002 “fleeing” or “abandoning” mutual funds. There’s no question the bear market put a severe dent in fund sales this year, but industry experts say advisors need to keep the losses in perspective, and encourage clients to do the same.

Mutual fund net redemptions averaged more than $650 million a month from April to November, following a typically strong RRSP season. “But we’re talking about a $400 billion industry,” says Rob Bell, senior vice president at Morningstar Canada. “So we’re looking at redemptions of only about 1% of assets.”

“While the headlines suggest that investors can’t get their money out fast enough, the reality is the most common investor behaviour is wait and see,” says Tom Hockin, president of the Investment Funds Institute of Canada.

Hockin says that despite the dramatic volatility, Canadians are still expressing confidence in mutual funds. “In fact, 90% of all redemptions have been in money market funds, which aren’t really much of a commitment to mutual funds in the first place,” he says.

But there are worries some fed-up investors, particularly those burned by the tech bubble, may have lost hope that the markets will ever bounce back.

“What we as an industry have to communicate is this: the mistake wasn’t investing in tech stocks,” says Dan Hallett, senior analyst at Sterling Mutuals. “The mistake was investing in stocks with little or no supporting fundamentals; investing disproportionately in stocks and much too heavy in a particular sector.”

However, Bell says that message of diversification may be lost on clients, who often invest emotionally. A dose of common sense from advisors might do the trick, he says.

“Most people are going to need more than bond returns can provide in their retirement, they’re going to need some exposure to equities,” Bell says. “What this bear market has shown everybody is that you really have to be diversified, you can’t count on one asset class to carry you through.”

Bell admits it’s not an easy sell. “For many people, this is the first bear market that’s lasted more than several months.”

Investors need to be reassured that markets won’t always be this volatile and that swearing off stock investments is a bad move, says Hallett.

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“It’s as big a mistake going into 100% bonds today as it was going into 100% equities three years ago,” adds Bell.

Mutual fund companies are also feeling the bear market pinch, Bell says. Although most have managed to maintain assets, there’s been little growth in revenue, forcing firms to tighten their belts, particularly in marketing. “They’ve slowed down in launching new funds and there has been some industry consolidation,” Bell says. “But it hasn’t been devastating.”

There are hopeful indicators for the fund industry heading into 2003. The markets perked up a bit in the fourth quarter of 2002 and, historically, fund sales rebound in January as RRSP season kicks into high gear.

“We’ve had relatively good news over the past three months, so advisors have a good reason to visit their clients during RRSP season,” Hockin says. “I think we’ll see some net sales.”

But don’t expect fund sales to reach gangbuster levels overnight, Hockin cautions, noting that investors are notoriously slow to catch up with the markets. “Research clearly shows that it takes a full year of recovery before mutual fund investors take a real interest,” he says. “I think it will be a mildly good first six months [in 2003], and maybe stronger in the last six months.”

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Filed by Doug Watt, Advisor.ca, dwatt@advisor.ca

(12/27/02)

Doug Watt