Mutual funds lose more ground in January

(February 17, 2003) Contributions to mutual funds and total assets were both down in January, for the 10th straight month but the fund industry expects to see a turnaround in February, says the Investment Funds Institute of Canada. Mutual funds have been in net redemption since last April.

In January, Canadians pulled $469 million out of mutual funds, three-quarters of that from money market funds. Money-market funds have dragged down total sales for a couple of months now. Currently, Canadians have $59.9 billion parked in money market funds.

“Net redemptions for the month of January were $469 million, of which only $115 million were from long-term funds,” said IFIC president Tom Hockin in a statement. “February, being the height of RRSP season, should positive sales.”

Added Dan Hallett, senior investment analyst at Sterling Mutuals Inc. in Windsor, Ont., “I’m not surprised we had net redemptions in January. I will be surprised if a month from now you’re telling me a negative figure for February as well.”

Hallett attributed the negative sales to continuing declines in world stock markets. “This is clearly a reflection of the lack of investors’ confidence in the equity markets’ ability to recover anytime soon. Very simply, investors will need to see prettier returns before they’ll commit any serious money to stock funds again,” he said.

The biggest net losers were common shares, particularly foreign common shares, though Hallett pointed out that there is some relative strength in U.S. common shares. Equity funds have been in net redemption for eight months and posted an outflow of $3.6 billion over that time. Overall, mutual fund assets now stand at $381 billion, a fall of 10.6% from last January’s $427 billion.

Still, some categories of funds are doing reasonably — or relatively — well. “The bond and income and the dividend and income categories have remained fairly strong 151; splitting nearly $400 million in net sales in January,” Hallett noted. “However, even net sales from these categories are down 22% from January 2002 figures.”

All the major fund complexes were hit with redemptions, but some of the smaller players posted growth, including Manulife, Guardian, Mawer, Brandes, Northwest, Cartier and Saxon. Franklin Templeton, AGF and AIC saw the biggest redemptions.

Will February see a turnaround? “Particularly the last couple of years it seems that RRSP season really doesn’t get rolling till Feburary, particularly the last couple of weeks of February,” Hallett said.

Added Earl Bederman, president of Toronto consultancy Investor Economics, “Historically a lot of people wait till the last minute to make their contributions. Certainly this year, with the markets being nervous, I don’t think there’s any real incentive to get your money in right away.”

And they may be considering other investments. December and January both saw the introduction of new market-linked GICs and capital-guaranteed notes. It’s too early to tell how much they will draw away from traditional fund investments, but they may be the safe-haven option this RRSP season.

“I suspect that investors are looking at alternative uses for their money. Alternative options — i.e. GICs, linked notes, hedge funds, income trusts, individually managed accounts, etc. — are likely to be taking away some of the fund industry’s market share,” said Hallett.

“I think anecdotally we know that households are cautious and they may be building up money in liquid or downside protection vehicles, but there’s no firm data to validate that,” added Bederman. “We’ve been tracking market-linked GICs and noticed over the year that they have been going up. But a number of them are fund linked. So some of the assets could find their way into funds.”

Filed by Scot Blythe, Advisor.ca, sblythe@advisor.ca.

(02/17/03)