Long-term mutual fund assets drop: Investor Economics Insight

There have been a lot of losers during the past year’s market turmoil, and long-term mutual fund assets have been no exception.

A new Investor Economics Insight report reveals that, in May 2007, long-term funds brought in just over $3 billion in net flows, but in the same month this year only $537 million came from that investment option.

As well, during the 12-month period ending in March, long-term mutual fund assets dropped by 3.5% for the year prior.

“Because of the increase in volatility, investors and their advisors are waiting and seeing,” says Carlos Cardone, a senior consultant with IEI. “The good news was that money kept coming into mutual funds, but in this case it was short-term funds over long-term offerings.”

In fact, net flows for short-term funds nearly doubled this May over last, jumping from $625 million to $1.5 billion. Money market funds were the best-selling asset class, with $1.2 billion in sales.

Overall, mutual fund net flows fell from about $3.7 billion in May 2007 to nearly $2.1 billion this year.

Cardone explains that the movement into short-term funds proves people are being more cautious with their money. They’re not sure where the market will go, so they’re investing in 90-day instruments. When the market does bounce back, though, it doesn’t necessarily mean long-term mutual funds will return to their glory days.

“The asset base will be impacted by rising markets, so the numbers should improve, but all this money as we have seen going into money market mutual funds might not move to long-term mutual funds,” he says. “Part of it will move to other long-term investment products or stocks.”

While the share of long-term mutual fund assets for the country declined between 2004 and 2007, Ontario actually saw its share increase slightly from 30.2% 2005 to 32.5% during that time. British Columbia saw its short-term mutual fund assets skyrocket to $12.7 million in March of last year — a one-year growth total of 42.9%.

Cardone says Alberta and Quebec were underweight in long-term assets compared to the rest of the country, with Alberta’s three-year compound annual growth rate (CAGR) at 11.4% and Quebec’s at 12.8%. He explains that, because Alberta has the highest weighting in equity holdings — since many of the province’s residents hold stock in the oil companies they work for — there is “less room” to hold mutual funds.

Despite the fact more people are turning toward short-term funds, long-term options continue to account for a higher share of household financial wealth, hitting 30% this year, compared with 27.5% three years ago.

In every province the average long-term mutual fund holdings per household increased over the last three years. Households in Ontario have the most assets in long-term holdings, with an average of $66,000 — up from $50,000 in December 2004 — while Atlantic Canada has the least, with $28,000, an increase of $6,000 from between 2004 and 2007.

“This is something that clearly points to the fact that mutual funds are the cornerstone to household exposure to markets and investments,” says Cardone. “It’s an important piece of the nest egg.”

While the total market has declined, that doesn’t mean mutual fund sponsors aren’t still raking in big bucks. And the one doing the best is RBC Asset Management, which was ranked number one by IEI for total mutual fund net new money for the 12 months ending in March.

The bank brought in the most total assets under administration in every province except Ontario, Manitoba/Saskatchewan. (The two Prairie provinces are listed together in the report.) TD Asset Management and Investors Group held the top spot in those provinces, respectively.

Although it didn’t rank first in any province, CI Investments took the second spot in the mutual fund assets category for the country. GGOF and Brandes performed the worst out of the top 20 largest mutual fund sponsors, landing in the 19th and 20th spots.

RBC’s continued dominance isn’t a sure thing, however, as other market players have gained ground over the last few years. Toronto-based Sceptre Mutual Funds is the fastest-growing mutual fund sponsor over the last three years, while Standard Life is trailing close by in the second spot.

For one-year growth, Desjardins was the fastest growing mutual fund sponsor, with RBC at number two.

Cardone says that good growth rates can’t be chalked up to a company releasing a hot product. He says Desjardins has been trying to make inroads in Ontario for years and that’s now paying off. “There’s no luck in the mutual fund industry,” he says. “All this happens because these companies are successful in the long-term strategies that have been put in place.”

He explains that banks have done well over the years because they’ve successfully built in-house asset management capabilities, and large sales forces. “They can compete with the independent companies now,” he says.

While nobody’s handicapping futures sales, it’s fairly safe to assume the long-term fund space appears poised for improvement. “It’s interesting to look at the different provinces and how underweight some of them are,” says Cardone. “That says that mutual fund sponsors have opportunities to grow.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(07/04/08)

Bryan Borzykowski