Fund industry shifts to more rational asset mix

(September 30, 2003) After three years of wobbly markets, the asset mix of Canada’s mutual fund industry is settling down to more balanced levels, according to Investor Economics’ monthly report, with equities falling and fixed income advancing.

At the end of August, equity funds accounted for 50% of total mutual fund industry assets, down from 60% in 2000. Fixed income funds rose to 20% of assets in 2003, from 13% three years ago. Balanced funds held steady at 16% while money market funds rose to 13% from 10%.

“We believe Canadian households are entering a period in which the emphasis will be on managing risk, not embracing it as investors did in the 1990s or shunning it as the did in they last three years,” the Insight report says.

Looking back, Investor Economics points out that in 1990, 53% of fund assets were in bond, money market and balanced funds. “It may be hard to believe, but the fund business was not always about equities, though that was certainly the case during the booming 1990s.”

Today’s hot fund classes are dividend and income trust funds, Investor Economics says, in line with the “risk-aversion mantra” of the last few years.

That could provide a challenge for the fund industry, the report argues, considering that many firms have “mortgaged much of their futures to the cult of equities. This will pose problems for their revenue streams if stock market volatility continues at high levels.”

“Fund companies will have to apply to their business strategies that same balanced asset allocation approach that they have long preached to the general public,” the report adds.

Still, Investor Economics expects sales of equity funds to rise as stock markets recover, although not to the extent that they did in the 1990s. “Our data suggests that equity funds are on the mend and positioned for a turnaround.”

The report sounds a final cautionary note on income trusts, the current flavour of the month in the investment world. “Over-dependence on one specialty category can be hazardous to one’s health,” Investor Economics says. “For proof, we need to look no further than the tech bust and the dozens of specialty funds that fell victim to it.”

Are you surprised at Investor Economics’ findings? Have you got any words of wisdom for other advisors about the use of income trusts in a portfolio? Share your thoughts and opinions on this topic in the Talvest Town Hall on Advisor.ca.

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