December punctuates terrible 2008: IFIC

The Investment Funds Institute of Canada can be counted on to accentuate the positive in the fund industry — for instance, sales for funds overall were positive for 2008, by $100 million. It’s pretty evident, however, that it was the worst sales year in the industry’s history, and December didn’t do much to change that.

“We saw some positive signs in December,” says Pat Dunwoody, IFIC’s vice-president, member services and communications. “Industry assets under management grew by $1.7 billion, overall redemptions were down from November and we saw an increase in fund sales to several long-term fund categories such as Canadian Equity funds and Global Equity Balanced funds. Clearly, some investors are moving back into the market”.

It will take a significant resurgence to recoup the redemptions suffered in long-term fund categories — roughly $14.2 billion worth, notes Rudy Luukko, investment funds editor for Morningstar Canada.

“The significance of this is it’s by far the greatest outflow of long-term funds on a calendar basis the industry has ever had,” Luukko says. “It’s actually the first time on the calendar year basis we’ve had net redemptions of long-term funds.”

Luukko highlights that sales for much of the year, particularly since equity markets started to head south in the summertime, has been characterized by massive outflows from equity mandates to the tune of $12.2 billion. The one saving grace for the industry is that most of the money appears to have remained in the asset pool, as investors parked their redemptions in money market funds.

“Sales for all categories of funds were very narrowly positive on the calendar year. That was attributable to money market inflows being a little higher than the long-term fund outflows. The combination of falling markets and fund outflows taken together creates a very difficult challenge for the industry as we head along down the road in 2009,” he says. “What’s it going to take to turn things around? I can’t see any change in momentum until the markets turn around, and Morningstar has no forecast for when that will be.”

December figures do show a little bit of a resurgence in equity fund categories, like Canadian equity, but not enough to push long-term fund sales into positive territory. Even more troubling is that inflows from money market funds could not offset redemptions for the industry, which were $792 million in December.

“The inflows of money market funds were not sufficiently high to offset the outflows from the long-term fund categories,” Luukko says. “The month of December was the sixth consecutive month of redemptions for long-term mutual funds. We haven’t had a positive sales month for that category since June of 2008.”

The Canadian Money Market fund category had sales of $1.6 billion in December, up from $1.5 billion in November. It was the best-selling CIFSC category in nine of the last 12 months, including December. Canadian Equity funds had the second-highest net sales in December, at $335.8 million.

Luukko suspects the introduction of the tax-free savings account (TFSA) may give a shot in the arm to long-term fund sales over the next couple of months.

“One helpful development is the introduction of the TFSA. It has the type of asset level for which mutual funds can be a suitable investment. It will be interesting to see whether investors choose to invest in guaranteed deposits or if they’re willing to try a balanced fund or an equity fund in the TFSA,” Luukko says. “I keep seeing it referred to in marketing materials and websites from investment firms, in the absence of any degree of good tidings for the markets as a whole.”

Some firms have been able to perform reasonably well during the drought in long-term fund sales, through the sales of segregated funds. Seg funds are not specifically tracked by IFIC, although they often include mandates that are tracked by IFIC. For fund companies, it’s the long-term fund categories that create attractive fee income, and seg funds do the same.

Companies like CI Investments have weathered the downturn well, through strong seg fund sales.

“In the month of December, seg funds from CI outsold its mutual funds by significant margins. The company had $71 million in net sales for seg funds, excluding distributions, versus only $17 million in mutual fund sales.”

Coincidentally, CI, which is not an IFIC member, will no longer be reporting its sales to IFIC.

(01/15/09)