Fund industry sees strongest January in years

Canada’s mutual fund industry enjoyed continued strength in January, with sales of long-term funds spiking to $4.1 billion, according to IFIC, up from an already healthy $2.4 billion in December.

Overall assets under management climbed 1.9% in January, topping $673.4 billion, with long-term funds holding $627 billion. That marks a year-over-year increase of 14.5% for total assets, and more than 15% for long-term funds. Cumulative net sales over the past 12-month period totalled $23.1 billion.

“The industry has seen this as very positive news. Generally, they paint a rosy picture, but in the case of this month, it’s supported by the numbers,” says Rudy Luukko, investment funds editor, Morningstar Canada. “It’s the best January since 1997.”

In terms of overall asset preference across the IFIC reporting universe, Canadians continued to heed the advice that they should diversify abroad. Global and international equity funds posted net new sales of $1.99 billion, while domestic equity funds saw net redemptions of $1.39 billion.

“What stands out is the strong shift toward global investing,” says Luukko. “Over the past year, global equity has gone from being a category that had very tepid buying interest to being the hottest category in the country.”

Luukko calls the global equity fund sales “very noteworthy,” as they represent a strong recovery from January 2006, when the category saw net redemptions of $167 million.

“When investors are looking to diversify globally, they do mean diversification,” he says. “They are expressing a strong preference for broadly diversified asset classes, more so than the regional plays.”

Within the broad Canadian equity heading, there were patches of relative strength. Broken down by CIFSC categories, Canadian Dividend and Equity Income funds saw positive sales of $131 million, compared to net redemptions of $744 million and $135 million in the Canadian Equity and Canadian Equity (Pure) categories.

Domestic balanced funds fared much better, with sales of $1.40 billion, while global balanced fund sales totalled $1.36 billion. U.S. equity and sector-specific funds saw relatively little interest, attracting net sales of just $135 million and $463 million, respectively.

“Despite the general aversion we saw to the domestic equity markets, the domestic balanced categories still put in a strong showing,” says Luukko. “At least, Canadian Balanced did — it was up $777 million over the past year.”

“Canadian Income Balanced funds attracted more than half a billion dollars in new money; however, sales are down sharply from a year earlier,” he says. “The explanation for this is that funds in this category tended to hold substantial portions of their assets in income trusts.”

The trust sector of the Canadian market has remained out of favour since the Halloween announcement that the federal government would impose a tax on distributed cash. The Canadian Income Trust category was hit with $396 million in redemptions in January.

January marks the first time that IFIC has compiled sales data for fund-of-fund and wrap products. In the past month, these products have been flying off the shelf, as investors poured $2.3 billion into them, accounting for 60% of net fund sales. In contrast, stand-alone fund sales totalled $1.6 billion.

“The mutual fund industry built on the sales momentum set in November and December, with an increasing number of investors purchasing fund-of-fund and fund wrap products,” said Joanne De Laurentiis, president and CEO of IFIC. “In total, about $93 billion of mutual funds are in these investment solutions, representing 14% of all industry assets.”

CIBC ranks as the largest manager of wrap and fund-of-fund products, with $20.4 billion in assets, followed by TD with $15.2 billion and IGM Financial with $14.8 billion. The top seller of portfolio products in January was RBC with sales of $585 million, followed by TD with $383 million.

The top-selling independent firm in the portfolio space was AGF, which added $188 million in net new sales. Franklin Templeton was not too far behind with sales of $164 million. Franklin Templeton also takes second spot in terms of AUM among the independent firms (behind IGM), with nearly $8 billion in assets.

Among fund complexes, RBC continued to dominate with net new sales of long-term funds totalling $820 million. Dynamic Mutual Funds ranked second with sales of nearly $558 million, followed by TD with $512 million in sales. Rounding out the top five were AGF, posting sales of $331 million, and BMO with about $311 million.

“Strong performance tends to attract strong sales. Dynamic has been benefiting from the predominantly strong performance of its money managers,” Luukko points out, but the firm also saw a substantial boost in a single fund — DMP Resource Class benefited from a limited partnership rollover, and was Dynamic’s top seller, with $321 million in new cash.

“Dynamic did benefit from that, but that didn’t explain all of its sales. For the fifth consecutive month, Dynamic is the company with the most distinct fund mandates earning a Morningstar five-star rating,” Luukko says. “Top-rated funds tend to attract money.”

Another factor that attracts money, it would appear, is a star manager. Despite the poor overall sales in the Canadian Equity category, Brandes Sionna’s Canadian Equity fund — run by Kim Shannon — reported net sales of $95 million for its first month.

“It led the category,” says Luukko. “Undoubtedly, a good portion of that $95 million was CI money. The inflows into Brandes were roughly comparable to the outflows of CI Canadian Investment, which had net redemptions of $108 million.

“In fairness to [new manager] Danny Bubis, for whom we have a high regard here, that $108 million is a very small portion of the $6.4 billion in assets of CI Canadian Investment. There’s been no stampede out.”

Another high-profile manager who appears to have influenced fund flows is Alan Radlo.

“Fidelity had $92 million in net redemptions during this booming month,” Luukko says. “It was largely attributable to the departure of Alan Radlo in December. That was strongly reflected in where the money was bleeding from.”

Fidelity saw redemptions of $76 million pulled from North Star, another $72 million from Canadian Growth Company and $62 million from its Canadian Asset Allocation fund — all funds that Radlo managed or co-managed.

“There’s a very clear connection between that highly regarded and now departed manager, and the lagging position in sales for Fidelity,” Luukko says.

AIC reported the highest net redemptions in long-term funds, at $74 million, followed by Fidelity with $61 million and GGOF with almost $29 million. Fidelity’s money market redemptions of $30 million, however, boost it to first place, with $91 million in overall redemptions.

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

(02/15/07)