Canadians opt for balance, Americans time market

(August 24, 2005) The stereotype of Canadians being more conservative investors than their American cousins appears to be true, at least in their tastes for mutual funds, according to an IFIC study.

After studying sales data over the past 10 years, IFIC found that Canadians show a stronger affinity for balanced funds, while U.S. investors are more likely to drop the fixed income component and invest in straight equity funds. On both sides of the border, the largest allocation is to equity funds, although current sales trends in Canada favour balanced.

Based on the latest data, tracking sales up to July 2005, Canadian balanced funds have year-to-date new assets of $113.7 billion, up from $81.8 billion the same time last year.

“Balanced funds represented almost half of all sales of mutual funds in Canada in 2003 and 2004,” says Erwin Go, IFIC’s manager of statistics. “At the same time, U.S. investors were heading back into equity funds. The difference between investors in the two countries is probably indicative of the more conservative nature of Canadians.”

The survey of data indicated that both sides of the border were susceptible to the lure of equities at the height of the tech rally in 2000, with Canadians allocating the vast majority of resources to straight stock funds, while U.S. investors still held a large portion of money market funds in that year.

Following the tech meltdown however, Canadians have remained wary of pure equity funds, preferring balanced, bond and dividend and income funds. After a brief but massive overweighting in bonds in 2002, American investors have returned to equities, only dabbling in balanced funds.

In Canada, balanced funds tend to account for between 15% and 18% of fund holdings over the past six years, with the proportion increasing over that period. Equity funds still make up the lion’s share of holdings, at 48%. In the U.S., equity funds accounted for 54% of assets in 2004, while balanced funds made up just 6.4%.

Along with the American preference for equity funds, U.S. investors also hold a much larger proportion of their assets in short-term money market funds, which would allow them to more freely time the equity markets. American investors held 23.6% of assets in money market accounts, while Canadians held just 10.2%.

As a result of Canadian investors’ apparent preference for longer term investing, the industry has much lower redemption rates than in the U.S. The long-term view seems to be paying off for Canadians too, as compound annual growth rates in fund assets have been superior to those of the U.S. over one-, three-, five- and 10-year horizons.

The IFIC report also points out that the Canadian industry offers a disproportionately large number of funds. While the U.S. capital market is about 20 times larger than Canada, the number of funds available is only four times greater. There are 1,915 mutual funds available here, 65% of which are equity funds, with 14% being classed as balanced.

In the U.S., there are 8,044 funds, with 57% being equity funds and just 6% balanced. Bond funds make up the second largest grouping, at 25% of the total.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com