Fund outflows reach $1.1 billion in October, investors ignoring market rally

(November 15, 2002) For the second consecutive month, mutual fund redemptions topped the $1 billion mark as wary investors continued to shy away from the markets, despite signs of a rebound. Outflows totaled $1.1 billion in October, says the Investment Funds Institute of Canada, the same as September. It’s the seventh straight month of redemptions.

“Consistent with the previous month, net redemptions for October remain at $1.1 billion,” said IFIC president Tom Hockin. “Total net redemptions for the last seven months represent only 1.3% of the total assets in the industry.”

“The redemption split was about 40% in money market and 60% in long-term funds,” says Erwin Go, IFIC’s acting manager of statistics. Money market fund redemptions were $451 million while long-term fund outflows were $680 million.

The balanced, Canadian stock and foreign stock fund groups were hardest hit in October, while dividend/income, bond/income and real estate gained.

“Investors are still a bit wary of getting back into the markets, even though there are positive signs,” Go told Advisor.ca. “They want to see sustained performance growth.”

The big returns in stocks last month occurred mostly outside Canadian borders, notes Dan Hallett, senior investment analyst at Sterling Mutuals in Windsor, Ontario. The NASDAQ rose 17% in October while the S&P 500 was up 7%, but the S&P/TSX Composite Index managed only a 1% gain.

“Given the sustained weakness experienced by the major stock indices — in addition to the economic uncertainty we’re facing — it will take a while before fund investors will feel comfortable enough to commit sustained net investment into funds again,” Hallett told Advisor.ca.

“The silver lining here is that fund investors have tended to time their buy/sell trends quite poorly,” Hallett says. “This doesn’t bode well for the returns investors ultimately realize from their funds, but it is one [contrarian] indicator that may bode well for the markets going forward.”

Gross sales of all funds were $9.7 billion in October. Total assets under management climbed 1% compared to the previous month to $385 billion; however, assets are down 2.6% from last October. Unitholder accounts rose 1.8% from 2001 to $52.6 million.

Year-to-date, gross fund sales stand at $101 billion, while total redemptions are at $97 billion. Despite a record run of monthly outflows, net sales for the year are still positive, thanks to a strong RRSP season early in 2002.

Yesterday, Morningstar reported mostly positive mutual fund performance figures for October. Funds that focus on U.S. equities were the leaders, but overall, two-thirds of the 32 asset categories tracked by Morningstar rallied. (Click here to read Advisor.ca’s story for more information on Morningstar’s findings.)

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

(11/15/02)