IFIC confirms strong fund sales in July

(August 18, 2003) It’s official — investors ploughed money back into mutual funds in July to the tune of $321 million, according to IFIC’s revised monthly report on the industry.

“Sales were fueled by positive flows of $463 million into long-term funds. Also, year-to-date redemptions have decreased by $4.6 billion from the same period in the previous year,” said Tom Hockin, president and CEO of IFIC. “This is the first month the industry has had a year-over-year increase in assets since June 2002.”

The final announcement of IFIC’s survey was delayed from Friday, August 15, due to the power outage that left Ontario and the U.S. northeast in the dark on Thursday afternoon.

But if investors are getting back into the markets, they’re starting at the safe end. The strongest new sales were in dividend and income funds, accounting for $398 million alone and with sales rising 2.7% month over month. The second strongest category was bond and income funds, but net sales of $329 million in these funds marked an 18% decrease in from June.

Canadian equity funds posted impressive sales gains of 18%, but still remained in the red as redemptions beat out new sales by $200 million.

July marks the fourth consecutive month of growth in net sales and IFIC estimates that net assets under fund management came in at $403.2 billion by the end of the month. That marks an increase of 3.2% over the June total of $390.8 billion.

Money market funds saw net redemptions of $141 million, as investors favoured equity funds. Assets under management in money markets totalled $56.9 billion.

“Most fixed income strategists are looking for a bear market in bonds going forward, so where can the investor go?” asks Peter Loach, vice-president and managing director of mutual fund research at BMO Nesbitt Burns. “You have to step away from yield. You can stay in income trusts, but you have to watch it. You definitely have to move into equities for longer term portfolios.”

He says that July was a “very strong” month, noting that it stops the negative trend seen in 14 of past 15 months. Most important, Loach says there is a return to core products such as equity and balanced funds.

“You’re seeing balanced funds turn the corner, they were negative for the prior three months and they’re higher $104 million [this month],” he says. “For long-term goals, you’re not going to get there with money market funds or with bonds. When people learn to swallow that pill, you’re going to see more and more flows into equity product.”

Loach points out mutual fund sales generally follow the markets higher, rather than fuelling rallies. But he has noticed investors are becoming increasingly anxious to jump back in, lest they miss the boat entirely.

“In the old days a lot of the flows would go to the funds that had a strong one- and two-year number, but I think people’s time horizons have decreased now,” he says. “I think there’s a lot of sellers’ regret now. I think it’s almost a stronger emotion sitting on the sidelines and seeing markets rally 15% than being invested and losing money.”

That emotional reaction to feeling “left behind” spurs investors into the market, buying funds after the market has already bounced off of its lows. When retail investors do return to equities, they traditionally start by wading into the cautious end of the markets.

“It looks like investors are just tiptoeing back, because they’re still sticking with pretty conservative stuff,” said Dan Hallett, president of Dan Hallett & Associates Inc. “Whether the sales numbers are going to make people feel better again, it might be a factor. But at the end of the day what I think they want to see is a more positive overall picture for the economy and the stock market.”

While some might think the improved sales are a reason to celebrate, Hallett says that it looks as though investors are repeating the same mistakes they always make: chasing returns.

“The extent to which people start buying funds again really depends on performance and that’s the sad reality, not so much for the industry, but for individual investors because historically, they sit and wait for performance to have already happened and then jump back in. You do that over and over and you’re not going to make much money.”

Hallett says that this is a good opportunity for an advisor to demonstrate to their client the impact this mistake can have on a portfolio.

“The way I would use it is to point out the mistakes that investors have made over and over again,” he says. “I would point out the mistakes that have been made in cycles over time and that that’s the reason a lot of people haven’t done well.”

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Have you noticed an upturn in fund sales in your practice? Are you having a hard time keeping clients invested? Are they prone to chasing returns, despite your advice? Share your thoughts in the Talvest Town Hall on Advisor.ca.

Filed by Steven Lamb, Advisor.ca, slamb@advisor.ca

(08/18/03)

Steven Lamb