August fund sales typically slow: IFIC

As currently volatile markets continue to take down financial giants, cautious Canadians have responded by continuing to favour money market funds, according to preliminary numbers from the Investment Funds Institute of Canada.

This “response to heightened volatility in capital markets” resulted in $72.9 billion in money market fund assets at the end of August, up $24.5 billion from last year. While asset growth was strongest in money market funds, mutual fund industry assets were up $10.2 billion in August, a 1.5% increase over the previous month, to rest at $695.6 billion. However, noting the volatility in the market, IFIC reported that assets were not changed from last year at this time.

While the highest month-over-month growth was in money market and balanced fund assets — each of which grew by 1.8% — the growth in these areas was offset by a decline in equity fund assets. Equity fund assets fell $34.3 billion over the past 12 months (despite a rise of $4 billion in assets since July).

“August was a month where long-term funds continued to be in net redemptions, a trend that was led by equity funds,” said Rudy Luukko, investment funds editor at Morningstar Canada.

Long-term funds saw net redemptions of $144.5 million, compared to redemptions of $715.8 million in July and $558.8 million in August 2007.

“To put this in perspective, August is normally one of the slowest months of the year,” Luukko says. “Now, if you look at long-term funds, as a whole, last year we were also in net redemptions — for all types of funds — and this year’s numbers are actually an improvement from last year. Of course, last year was not an especially big hurdle for the numbers to clear.”

According to Luukko, it was the third worst August since 1999 for fund sales — the worst two being August of last year and August 2002.

Despite the decline in equity fund assets, balanced fund, bond fund and specialty fund assets were up $5.1 billion, $2.9 billion and $1.3 billion respectively from last year.

Total industry net sales (including money market funds) were $799.6 million in August, up from $646 million in July and a vast improvement over the $1.55 billion in redemptions posted last year. Money market fund sales were the largest contributor to August sales with $944.1 million. Money market fund sales were down from July, at $1.36 billion, but were up over last year.

“The sales of money market funds — short-term funds — at roughly $944 million, was the second highest month of sales in the last 10 years, exceeded only by $1.2 billion in sales in 2001,” explained Luukko. “Investors are responding to negative market conditions by generally avoiding new commitments in long-term funds. If new purchases are made, they are choosing balanced funds that have built-in diversification and are less risky than straight equity products.”

IFIC’s numbers corroborated Luukko’s observations, with persistent balanced fund sales of $504.9 million, keeping overall long-term fund redemptions low. In fact, balanced fund sales were up, slightly, from $528.9 million in July 2008 and $401.5 million in August 2007.

The top selling category, according to the IFIC numbers, was Canadian Focused Equity, with net new sales of about $71 million in August. “Given that this is a $63 billion category, [these new sales] are a very small amount in comparison,” explained Luukko. He also pointed out that the top selling long-term fund, Canadian Neutral Balanced, fared well last month: “Very much a reflection of the prevailing investor mood,” said Luukko. “Investors are choosing more conservatively managed funds.”

Luukko believes that the events of this week will do little to restore the buying interest in long-term commitments.

“These numbers are, overall, bleak tidings for the industry, and they arrived on a day when the financial services industry is generally having a bad day worldwide.”

Originally published on Advisor.ca on September 15, 2008