Fund sales remain in a rut

(August 16, 2004) Canadian investors are not changing their tastes when it comes to mutual funds, as risk aversion appeared to remain high in July, according to the latest industry data from IFIC, which today reported net sales of $544 million.

“It’s just a continuation of the trend — people shunning equity funds and favouring the funds that are perceived to be more conservative,” says James Gauthier, a CFA and mutual fund analyst at Dundee Securities. “The perception is that there is still a lot of risk in equity funds and that bond funds and income trust funds don’t have a lot of risk in them.”

He says that over the past year or so, most fund groups have turned in positive performances, but the perception lingers that bond and income funds are the safe place for investors to park their money.

“Bond yields have been going up for the past four or five months,” says Gauthier. “I really don’t think the near term ups and downs in the bond market itself, or what the Fed is doing, have any implications as far as mutual fund flows are concerned.”

Total net mutual fund sales were $544 million, excluding $270 million in re-invested distributions. Excluding money market funds — which were hit by net redemptions of $249 million — net new sales totaled $792 million.

“This puts long-term fund sales for the first seven months of 2004 at $13.9 billion, the highest for sales in the same period since 2000,” said Tom Hockin, IFIC president and CEO. “Investors continue to focus on balanced, bond and dividend and income funds.”

But despite positive net inflows, total assets under management fell 1.3% from June, to $470 billion, due in large part to the underperformance of stock markets around the world

Gauthier points out that much of the redemptions have come from the massive global equity funds, which can see millions in assets withdrawn without seeing a very large percentage change.

“We’re going to have to see one of two things for the trend to reverse,” says Gauthier: “A dramatic change in interest rates on the 10-year bond — which I can’t see happening anytime soon — and a tremendous up or down move in the equity markets. It’s going to take something pretty dramatic to kick investors in the butt and make them change their ways.

“How investors would react to such shocks, I have no idea, because usually they react the wrong way.”

On Friday, Morningstar Canada confirmed its preliminary finding that only 10 of the 32 indices tracked by the research firm managed to turn in a positive performance in July. Natural resource funds were strongest, fueled by the ever-increasing price of crude oil. The price of crude also helped drive the Canadian Income Trust and Canadian Dividend indices higher.

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