Fund sales rebound
Equity funds neglected

The Investment Funds Institute of Canada recently reported that sales of mutual funds topped $1 billion for the month of December. The industry is looking forward to building upon this momentum, but there are signs that investors are still skittish and have not yet regained their appetite for stock funds - the industry's bread and butter. This has implications for both investors and advisors.

The numbers

On the year, 2003 was the first calendar year - since 1988 - that money was pulled out of funds on a net basis. Last year, the fund industry reported nearly $607 million in net redemptions. Proportionately, 1988 and 2003 redemption figures were almost identical and both years followed what proved to be bear market bottoms.

+ Non-money-market funds reported their strongest net sales (as a percentage of assets) since Mar 2002 (a month which usually includes some RSP contributions).

+ Balanced fund net sales have rebounded to spring 2002 levels (which preceded the long redemption streak in stock funds).

+ Dividend funds posted their best absolute net sales since 1998 and its highest relative sales (net sales as percentage of prior net assets) since spring 2002.

+ Stock funds remain in net redemptions (though U.S. stock funds brought in new money). Also, gross purchases of stock funds are on the rise - a trend I expect will continue through the RRSP season. Actually, I think we'll see net sales for stock funds sometime during RRSP season.

The major themes that took hold early this year continue to roll along. Bond and dividend funds accounted for 113 percent of total net sales and 111 percent of non-money-market net sales. However, in my opinion this has simply been an example of an old theme - chasing returns. So, what does the future hold for the industry?

Looking ahead

We may well see stock funds bringing in net new money - probably next month. But, if it happens at all, will that be the start of a trend? I think trends in the types of funds people buy simply follow performance. But there are a couple of factors that argue against a return to years of $10 billion or more in stock fund sales.

The "all stocks all the time" mantra that permeated much of the industry was obviously inappropriate for many people. If it wasn't clear before, it should be like crystal today that investors underestimate how much risk they can truly assume, no matter how many profile questionnaires they're asked to complete. A bear market has an amazing ability to test one's risk tolerance - even pushing a few too far the other way. However, the point is that with many investors probably overweight equities in the first place, perhaps the last few years has been more of a return to a more normal asset mix.

Also, what many academics and other researchers see in terms of demographic trends paints a bleak picture for the demand for equities - as our population ages and starves for more cash generating securities.

Avoiding past mistakes

Demand for stock funds will surely return but it will be more cyclical than it has in the past. The past, however, provides a frightening picture of what the future may hold. The performance chasing of past - or what I call the vicious cycle of investor behaviour - has resulted in performance of just about 4.5 percent per year. That figure is estimated for all stock funds - diversified, small cap, sector, resources, venture capital, etc.

The median stock fund has a ten year annualized return of a little over 6 percent - which amounts to a shortfall (due to timing of cash flows) of more than 150 basis points per year. While we all must ensure that our asset mixes reflect factors specific to each of us, going hog wild on stock funds today may simply toss us back into the vicious cycle of the past.

Investors and advisors should be urged to structure portfolios on a forward-looking basis and resist the urge to make the easy (but often dangerous) choice - last year's winners.

RRSP deadline reminder

March 1, 2004 is this year's deadline to make RRSP contributions and have it applied to 2003. While this is a leap year, February 29 falls on a Sunday this year - which is why the deadline is extended by a day.