Performance only part of the fund sales story, report concludes

(March 11, 2003) Investment returns may help boost mutual fund sales, but there are other factors at play, according to a recent report from fund researcher Investor Economics. Industry players give investment performance too much credit for driving mutual fund sales and too much blame for sparking redemptions, says the report, called “Selling Steak or Sizzle?”

For example, Investor Economics found that four of the top five fund performers in 2001 had positive net flows in 2002, but only two registered decent numbers. “So the prior year’s performance can boost sales, but doesn’t necessarily propel them,” the report says.

Precious metals, the best performing asset class in 2000 and 2001, garnered positive but very small net flows in 2002. On the other side of the coin, one of last year’s worst performers — U.S. equity funds — led the pack in dollar terms, selling almost $2.50 for every dollar that went into the hot Canadian income trust fund sector.

So if performance isn’t driving sales, what is? Expectations, for one thing, Investor Economics says. “In some cases, it is the expectation that a hot fund or asset class will continue its winning streak. In others, it is the expectation that things have to get better.”

Advisors are also playing an important role, the report says. “Investors do not comb through thousands of funds to select the best performers. By and large, they rely on overloaded advisors who sell a limited range of funds from a limited number of manufacturers.”

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Branding is another factor. Asset classes and companies that are in fashion sell, Investor Economics says, no matter how they are currently performing. “Conversely, the most fabulous performance will not guarantee entry into the office of an overloaded advisor who does not know you.”

The Investor Economics report also looks at Morningstar’s popular five-star rating system for mutual funds, and gives it a positive review.

The report concludes that investors who used the star ratings to make purchase decisions at the start of 2002 were generally well served. “While red ink spread across the board, five-star investors lost less than four-star investors, who lost less than three-star investors, and so on.”

“We have concluded that a five-star rating is a very good predictor of positive net flows and a one-star rating is a very good predictor of poor net flows,” the report says, adding that ratings in between one and five don’t seem to mean much, at least in terms of sales and redemptions.

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What do you think drives fund sales? Do you agree with the Investor Economics report or is it missing any other factors you feel are equally as important? Share your opinions in the “Mutual Funds and Other Products” forum of the Talvest Town Hall on Advisor.ca.

Filed by Doug Watt, Advisor.ca, dwatt@advisor.ca

(03/11/03)

Doug Watt