Fund industry mired in recession, researcher says

(March 4, 2003) Canada’s investment fund industry is in a recession, characterized by weak sales amid under-performing markets, says Investor Economics president Earl Bederman. But despite the gloomy scenario painted by the mainstream media, the fund industry researcher says there are some positive trends, particularly for advisors.

Total mutual and segregated fund industry assets stood at $433 billion at the end of 2002, down 9% from the previous year, Bederman noted this morning at the Strategy Institute’s annual investment fund summit in Toronto. Mutual funds have been in net redemption since April 2002.

“We are in a recession,” he said. “Probably the first, and certainly the deepest we have witnessed in the investment fund business.”

During a recession, excesses that build up during the expansion phase of the cycle tend to be cleaned up, Bederman added, pointing to industry consolidation and the departure of various firms from the industry. “Those are natural characteristics and not necessarily a bad thing.”

The problem has been exacerbated, he says, by unrealistic expectations created in the boom years of the mid to late 1990s, when “people believed the fund industry would grow to the sky.”

“A lot of the disappointment we feel today about the industry is not just because it’s not doing well, but because it’s weak in relation to the inflated expectations that were created.”

On the positive side, although redemption rates of long-term funds were up slightly in 2002 compared to the previous year, those rates are “remarkably low and well contained,” Bederman says.

That suggests advisors have done a good job convincing investors of the importance of long-term planning and staying the course.

In addition, the market share of intermediated advice has been on the rise during this downturn. “The fund industry is about advice and advice is gaining in the overall marketplace,” Bederman says. “In this period of weakness, the fund industry has become more dependent on independent advisors.”

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However, that increased focus on advice is creating new challenges for the independent advisor. Bederman’s research also reveals that the market share of branch-based advice has nearly doubled in a very short period of time. “The financial institutions have begun to figure out the reality of how to succeed in the fund industry.”

Looking ahead, Bederman believes the worst may not be over for the fund industry. Considering the current stock environment, it’s no surprise sales are down, he says, suggesting that trend won’t reverse until well after a sustained market buildup.

“It will take many months before investors feel confident to return en masse as buyers of funds.”

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Is the worst yet to come for the mutual fund industry? Have we seen the last month of redemptions, or will the downward spiral continue? Share your thoughts in the “Mutual Funds and Other Products” forum of the Talvest Town Hall on Advisor.ca.

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

(03/04/03)

Doug Watt