February fund sales positive, but analysts urge caution

(March 17, 2003) For the first time in nearly a year, Canada’s mutual fund industry enjoyed a positive month in February, with net sales reaching $485 million, the Investment Funds Institute of Canada reported today. But analysts say the respite from weak sales could be short-lived.

For January and February, the traditional peak RRSP months, net sales were flat at $16 million, compared to $6.7 billion in 2002, a staggering 99.8% decline.

The bond/income and dividend/income categories attracted the most new sales in February, dragged down by losses in the foreign and Canadian equity categories.

“While the redemption streak was broken, stock funds continued their uninterrupted bleeding,” says Dan Hallett, senior investment analyst at Sterling Mutuals, noting that year-to-date redemptions in the equity categories total more than $800 million, compared to nearly $3 billion in net sales last year.

IFIC president Tom Hockin says that long-term funds posted net sales of $633 million in February, a nine-month high. Investors pulled nearly $150 million from money market funds last month. “Despite highly volatile markets, it is pleasing to see that investors have put money into long-term mutual funds,” Hockin added in a statement.

But Hallett says it’s premature for the fund industry to be optimistic about the latest figures. “I would expect further weakness in subsequent months,” Hallett told Advisor.ca.

Other analysts believe fund sales won’t bounce back substantially until well after a sustained stock market rally. “It will take many months before investors feel confident to return en masse as buyers of funds,” Investor Economics president Earl Bederman said at a conference earlier this month.

Gross sales of all funds were $9.4 billion in February, including $4.1 billion in money market funds. Industry assets came in at $375 billion, down 1.7% from January and off 13% compared to last February, reflecting a decline in market valuations, IFIC said.

Mutual fund performance was generally weaker in February, with three-quarters of funds reporting negative returns, according to a report released today by Morningstar Canada. (Use Advisor.ca’s selection of Morningstar tools for your research by clicking here.)

Twenty-two of the 32 fund indexes monitored by Morningstar finished the month in the red. The precious metals category was February’s worst performer, declining 7%. The international and European categories each lost 6.2%. U.S. equities shed 4% while Canadian equities were off 1%.

“Uncertainty about war kept stock market returns depressed in February, and the majority of mutual fund categories continued to suffer,” says Morningstar analyst Raju Khatra.

For the second straight month, income trusts finished on top of the heap, gaining 1.6% in February.

Related News Stories

RRSP season brings lower contributions, advisors report Fund industry mired in recession, researcher says Mutual funds lose more ground in January

Khatra notes that although dozens of income trusts have been introduced in the last year, those with longer track records continue to dominate the fund holdings in the trust category. “Of the 10 income trusts most widely held by these funds, all had been around for at least five years,” he says.

The ability of newer trusts to generate a steady stream of income has yet to be tested, Khatra says, and institutional investors remain reluctant to get into the sector because of the shareholder liability issue. “Legal vagaries that could expose an investor in a trust to unlimited liability in the case of a lawsuit have led many pension funds to avoid income trusts,” he says.

Bond funds also performed positively last month, gaining 0.6%. “Risk-averse investors helped keep demand for longer term Canadian government bonds healthy in February,” says Khatra.

---

Are these stats similar to what you found in your business in February? Any predictions for March? Share your thoughts in the “Free for All” forum of the Talvest Town Hall on Advisor.ca.

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

(03/17/03)

Doug Watt