Investors buy short-term: IFIC

Canadians are continuing to park their money instead of investing long term. The money market fund buying spree continued in March, according to the latest data from the Investment Funds Institute of Canada (IFIC).

In light of the current market volatility, IFIC views the sales results as positive.

“Total asset growth in March was $7.7 billion, an increase of 1.1% from February, with $2.8 billion coming from market effect,” says Pat Dunwoody, IFIC’s vice-president of member services and communications. “Sales were solid overall in March, with inflows to money market funds particularly strong.”

A deeper look at the data shows some troubling signs that have now persisted for more than a quarter, notably flat sales in long-term funds — the bread and butter of most fund companies and their networks of advisors.

Long-term fund sales finished the month with $65.9 million in redemptions, compared to $4.6 billion in sales for the same month in 2007. Even more troubling is the fact that long-term fund sales are in redemptions for the year to date, at -$1.5 billion in sales, compared to +$16.3 billion in 2007.

A large part of this flat sales trend is due to market conditions. According to IFIC, long-term fund assets fell by $22.6 billion for the 12 months ending March 2008. In the previous four 12-month periods, long-term asset growth averaged $83.6 billion.

The saving grace for the industry is new money is coming in, though it is being invested in short-term money market funds. Money market fund sales in March were $2.6 billion. Year-to-date short-term fund sales are $10.7 billion, compared with $744.7 million at this time in 2007.

Overall, the industry’s level of sales remains fairly similar to what it was at this time last year. IFIC notes that over the past 12 months, fund sales were $27 billion, just under the total for the previous 12 months of $27.8 billion.

“There is a bunker mentality that has emerged among Canadian fund investors. On the whole, the willingness to make a commitment to long-term funds had dried up,” says Rudy Luukko, investment funds editor at Morningstar Canada. “At the same time, investors appear to be hanging in with the long-term funds they had accumulated previously.”

Luukko says investors are thinking short term, which has manifested itself in money market fund sales. It seems investors want to ride out the volatility rather than show a preference for income or conservative investing, since long-term bond or fixed-income funds are largely being ignored.

“Both domestic and fixed income were in redemptions,” he says. “Investors have not had a lot of appetite for long-term bond funds. The strong preference was simply to go for the safest category, which is the Canadian money market category.”

Luukko says for the most part, sales in equity funds were also ignored through what he refers to as a “buyers’ strike.”

“It appears to cut across both domestic and foreign categories in equity funds. Although we have seen within the equity funds, it varies depending on the specific category. Global and international equity funds had modest positive sales, while U.S. equities were still negative,” he says. “Where there does appear to be a brighter spot for the industry is in the balanced area. Globally diversified balance funds were able to achieve net new sales of 446 million new dollars.”

On the individual company side, in a primary investment management role, RBC Asset Management had net sales of more than $1.2 billion, of which more than a billion was in money market sales.

Luukko suspects much of RBC’s sales were to institutional or high-net-worth investors as opposed to retail investors since the RBC premium money market fund, the top selling money market fund in Canada for the month, requires a minimum investment of $100,000.

On the opposite end of the spectrum, AIM Trimark had a disastrous month in sales, with redemptions of $688 million in long-term funds. Positive sales in money market funds slightly offset that total, so the firm finished the month with net redemptions of $652 million.

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com