Funds reward risk, but sales remain slow

Investors were rewarded for taking on more risk in the third quarter as small-cap and sector-specific mutual funds led the pack, according to the latest analysis of returns from Morningstar Canada.

Of the 43 Morningstar Canada fund indices, 41 turned in a positive return, with 13 posting double-digit percentage gains.

The top performer was the Morningstar Canadian Small/Mid Cap Equity Fund Index with a stunning 17.1% return. It was followed closely by the Real Estate Equity Index with 16.5% and Canadian Focused Small/Mid Cap Equity Fund Index with 16%.

Rounding out the top five were the Global Small/Mid Cap Equity Fund Index (15.2%) and Financial Services Equity Index (15.6%).

The Natural Resources Equity Index gained 14.8%, while the Precious Metals Equity Index earned 14.2%.

“Risk taking was rewarded in the third quarter, particularly in September when economically-sensitive sectors like precious metals and natural resources—as well as small-caps and emerging markets—posted the strongest gains,” says Esko Mickels, a fund analyst with Morningstar Canada. “Investors flocked to lower-quality companies that had been among the hardest hit by the financial collapse.”

Foreign equity funds also turned in strong gains. The Emerging Markets Equity Index gained 12.3% for the quarter, while European Equity and International Equity were up 12% and 10.5%, respectively.

As good as those returns may sound, they could have been far better, were it not for the dampening effect of the rising Canadian dollar.

Several major foreign stock indices posted gains in the neighbourhood of 20%. But the dollar gained 11.4% against the U.K. pound, 3.9% against the euro, and 11% against the Mexican peso.

The U.S. Equity Fund Index turned in a 7% return for the quarter, less than half of the 15.6% gain posted by the S&P 500 Index.

“The general increase in risk taking boosted the Canadian dollar because it trades as a risk currency, as opposed to the U.S. dollar, which is traditionally seen as a safe haven,” Mickels explains. “The loonie is also tied to commodity prices, which have increased as the markets advanced.”

The only fund indices that failed to gain ground in the third quarter were Greater China Equity, down 0.5%, and Japanese Equity, down 3.1%.

Sales whacked by redemptions Sales of funds were relatively healthy on a gross basis, but redemptions carved away much of the gains at several management firms.

CI Financial reported net sales of $35 million from its two subsidiaries — CI Investments Inc. and United Financial Corporation — on gross sales of $654 million. Money market funds were hit with net redemptions of $29 million with a single institutional investor accounting for $27 million of that total. Assets under management at the end of September totaled $64.8 billion.

“The recovery has been quite remarkable with our assets under management now exceeding their level of Sept. 30, 2008,” says Stephen A. MacPhail,the president of CI. “The rally of the last seven months has been very positive for our fund investors who stayed invested and benefited from the turnaround.”

Investors Group reported $10.6 million in net new money, with $25.4 million in net sales in long-term funds, and $14.7 in net money market redemptions. Total mutual fund assets under management were $56.6 billion at month end.

Mackenzie Financial announced net redemptions totalling $170.2 million, including $160.2 million in net redemptions from long-term funds. Total assets under management at the end of September were $62.0 billion.

Counsel Group of Funds announced $13.8 million in net new money, with $6.2 million flowing into long-term funds, and $7.6 million more heading into money market funds. Total assets under management were $2.03 billion.

(10/02/09)