Market woes hit December’s fund sales: IFIC

Fund sales finished 2007 on a cautious note, according to the latest statistics from the Investment Funds Institute of Canada. The best sales year in a decade finished with $2.9 billion in sales in December, $2.6 billion of which were in money market funds.

Pat Dunwoody, IFIC’s vice-president of member services & communications, described 2007 as “a healthy year for the mutual fund industry with total sales of $34.9 billion — the highest annual increase since 1997.

“With $23 billion in sales for 2007, Canadians overwhelmingly favoured balanced fund products, which include fund-of-funds and target-date portfolios,” Dunwoody said. “Money market funds, which had total sales in 2007 of $7 billion, also ended the year in positive sales territory.”

Taking a 12-month view, sales were great. The industry’s net sales in 2007 were $14.5 billion above the total for 2006. Both long-term and total fund sales for all of 2007 finished the year well above 2006. The $27.9 billion total for long-term fund sales in 2007 was $6.2 billion above the total for 2006.

IFIC notes long-term fund assets grew only 4.5%, or $27.9 billion, to $642.4 billion by year end. This is far below the growth rate seen over the past five years and is virtually identical to the net sales, so market growth of assets was essentially flat. In 2006 long-term fund assets grew 17.4% due to favourable market conditions.

Rudy Luukko, investment funds editor for Morningstar Canada, says the sales numbers mask a generally poor year, particularly when it came to the performance of equity-focused mutual funds.

“For the calendar year 2007, the median returns for Canadian Equity, Global Equity, International Equity and U.S. Equity mutual funds were the lowest they have been on a calendar year basis since 2002,” he says. “In several instances, the major core foreign equity categories actually had losses in 2007. The median Canadian equity, while still positive at 8%, was again the lowest it had been over the past five years.”

December 2007 was virtually the reverse of sales numbers from a year before when investors were riding a bull market and global credit problems had not come to the fore.

In December 2006, long-term fund sales were $2.5 billion while money market sales were $683 million. In 2007, long-term fund sales were a paltry $356 million, while money market sales came in at $2.6 billion. IFIC suggests that turbulence in equity markets and uncertainty in the future were likely the factors behind investors’ caution.

Luukko points out that as the market sagged, investors opted to play it safe and go with money market funds, which had their best sales year since 2001, which was at the height of a bear market. In fact, it was the first year since 2001 the category didn’t finish the year in redemptions.

“One of the noteworthy aspects of 2007 is the resurgence of money market fund sales, which certainly did not have to do with returns because money market fund returns continue to be very low after fees and expenses. This trend is more of flight to safety than anything else,” he says. “The median Canadian money market fund return was 3.6% last year — that was only up from 3.1% a year earlier, although it was the highest median return for that category since 2001.

Some sales trends defied market conditions, such as the sales of balanced funds, which continue to be strong.

“Especially as the year dragged on with the difficulties in the equity markets, there was continued strength in the balanced categories, which represented $23 billion in sales out of the total of $35 billion,” Luukko says.

IFIC says global balanced fund assets had the highest growth in 2007, increasing by almost $17 billion, or 21.6%, to end the year at $95.7 billion. Much of the growth in both the balanced asset classes was due to fund-of-fund sales.

Fund-of-fund sales remained strong in December, with $739 million in sales, roughly in line with November’s $788 million, but down from this time last year, when sales were $1.5 billion.

Luukko says investors also put more money into international equity categories in 2007.

“We still had some money flowing into international equity, which excludes U.S. holdings. Sales in this category were up $2.5 billion versus $2 billion in net new sales the year before,” he says. “This suggests individuals still want to have foreign diversification but are wary of the U.S. market. The U.S. represents a big chunk of the world’s market capitalization, but that was not reflected in the sales of funds with U.S. holdings this year.”

Sales from individual fund companies varied. As it did throughout 2007, RBC Asset Management smashed its competition. The bank-owned fund giant reported finishing the year with $8.9 billion in net fund sales, of which $5.7 billion was in long-term funds. In December, RBC had a staggering $1.4 billion in overall net sales, although only $113 million in long-term sales.

The long-term sales leader for December was another bank-owned firm, Scotia Securities, which had almost $295 million in net long-term fund sales. Once a minor player, Scotia aggressively built up its market share in fund sales this year by selling to its pre-existing banking customers.

On the losing side of things for the month, AIM Trimark sticks out. The company finished the month of December with $303 million in net long-term redemptions. Over the course of 2007, the firm’s assets under management declined by 8.4%, although this is not an accurate measure of redemptions.

The firm has been plagued recently by high-profile departures, which include those of the company’s chief investment officer and two of its most popular fund managers.

AIM Trimark’s woes in 2007 pale in comparison to those of AIC Limited, which saw its assets erode by almost 25%.

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

(01/15/08)