Fund industry ravaged by

October was the worst month on record for mutual fund redemptions in Canada, according to the latest statistical data from the Investment Funds Institute of Canada.

Industry assets under management fell nearly 10% from September to end October at $571.3 billion as equity markets went into near free-fall. Total industry assets were down 18.1% from the beginning of the year, and investors have reacted in droves by pulling their money out.

Industry net redemptions totalled $8.4 billion, up from net redemptions of $4.5 billion in September. It was the worst month on record for long-term fund sales, the most important asset class for the industry, with $6.5 billion in redemptions.

“October presented some substantial challenges for our industry and the investors we represent; however, there were a number of other factors that contributed to the net redemptions we saw this past month in addition to equity market declines and their effect on retail fund investment,” says Pat Dunwoody, IFIC’s vice-president of member services and communications.

There were some extenuating circumstances beyond poor market performance, namely an unprecedented number of so-called protection events on principal-protected notes (PPNs). In such a situation, the underlying asset, in many cases a mutual fund, is sold and the proceeds are moved to a fixed income product such as a zero coupon bond. IFIC argues this contractual institutional selling was a significant contributor to the total level of net redemptions in October.

Based on a sample of members representing close to 60% of industry assets, IFIC estimates that just over $1.4 billion or 17% of total net redemptions in October were due to institutional redemptions.

Rudy Luukko, investment funds editor for Morningstar Canada, points out that retail redemptions were still far-reaching and drastic. For example, sales in both balanced and equity funds suffered redemptions.

“The bulk of redemptions were driven by individual investors as opposed to institutions,” he says. “These are very big redemption numbers by historical standards. It’s not the first time there have been significant redemptions in any given month. On a percentage basis for long-term funds, this is about as bad a month as [they’ve] ever had. The dollar value of redemptions last month exceeded 1% of assets held in the beginning of that month. That’s only happened once before in the past for long-term funds, which was in January of 1995.”

Luukko points out that almost no asset classes were spared, except for the relatively small but growing categories of target date portfolios, which saw moderate net sales.

Going back to previous months when there have been significant redemptions in long-term mutual fund assets, these are usually offset by money going into money market funds. Last month, it appears that money was leaving the industry altogether. Money market funds had redemptions of close to $1.9 billion.

“Money market asset classes also had one of [their] worst months on record, although it was not a record. That record was set in September,” Luukko says. “Significant amounts of dollars are being shifted into GICs or high-interest savings accounts. Even within the money market category, there is something of a flight to safety.

“If there is no yield advantage to holding a money market fund, investors figure why not switch to another type of exposure — to cash that is guaranteed by federal deposit insurance.”

As mentioned earlier, the one bright spot for long-term fund sales was in the target date portfolio categories.

Three target date portfolio categories were among the five best-selling CIFSC categories last month. The 2020 Target Date Portfolio category led the way in sales with $46.9 million, followed by 2020+ Target Date Portfolio funds, which had net sales of $26.9 million. This is the first time either category has been in the top five.

A standout in this category was the BMO Lifestage Plus portfolios, which includes the guaranteed BMO Lifestage Plus funds, which are sold only through BMO advisors. They pulled in $19 million last month amid an aggressive national marketing campaign by BMO.

The best-selling long-term fund in Canada was Harbour Growth and Income fund, managed by Gerry Coleman.

“It was the only non-money-market fund in the top 10,” Luukko says. “It’s a very well-managed fund. Coleman is known as somebody who tends to do well in a down market. He’s a conservative manager, with a strong cash component to his funds.”

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(11/17/08)