During the financial crisis, fearful investors parked huge amounts of money in short-term money market funds. For a little over a year, however, money has poured out of these funds in favour of long-term mutual funds and other investment options.The February 2010 analytical report by The Investment Funds Institute of Canada (IFIC) recalled that from March 2008 to February 2009, the mutual fund industry saw $12.9 billion leave long-term funds while $9 billion was shifted to money markets. That trend has completely turned around according to sales statistics for the 12-month period ending February 2010. "The reverse dynamic has taken hold with long-term funds moving back into positive net sales territory and money markets dropping into net redemption territory." IFIC's long-term category includes all funds except money market funds.
The report shows that total net sales for the 12-months ending February 2010 were $2.4 billion made up of $25.6 billion in long-term fund sales and $23.2 billion in money market net redemptions. (See inset graph).
More good news for the mutual fund industry is the dramatic recovery in assets as stock markets have regained strength. In the 12 months ending February 2010, IFIC's results show a 25% increase in total assets from $477 billion to $597 billion (see inset graph p.32).
Much of the shift of money market funds, to long-term funds represents investors moving back into the stock market says Dennis Yanchus, Manager, Statistics and Research at IFIC. "What we've seen is people essentially moving off the sidelines; moving back into the long-term fund category," he explains. The trend follows the improvement in equity markets last year, he added.
Mr. Yanchus underlines that money market net redemptions are not all from retail investors. This figure also includes money invested by institutional managers handling pension funds. Note: some mutual fund companies, such as CI Investments and Russell Investments, do not provide sales data to IFIC).
Baby boomers' concern about the low yield of money market funds explains a large part of the shift, says Fred Pinto, Managing Director, Distribution Services at Toronto-based Russell Investments Canada. These are investors who are "approaching retirement or that are in retirement where they've got an income need of four to five per cent, which is not going to be met with the cash instrument."
IFIC figures show that balanced and fixed income funds were the most popular choices. A total of $17.6 billion flowed into balanced funds in the 12 months ending February 2010, although precise data on the destination of individual money market redemption dollars is not available.
Shifting to balanced funds accommodates advisors and clients who believe that stock market volatility will continue in the near term, although the market outlook is generally positive for four years or more, according to Roy Vokes, a financial advisor at the Kleinburg Ontario branch of Worldsource Wealth Management. "I'm far more worried about any downside than trying to capture big upside," he says. "I don't believe there is big upside to be captured."
The market will continue being volatile for several years, Mr. Vokes believes, adding that volatility leads investors "to knee-jerk reactions," which can sometimes become costly. Investors who cashed out prematurely during the market downturn prove the problem, he says.
He hopes to prevent hasty reactions by using balanced funds and matching the proportion of equity in a fund to the individual clients' risk tolerance. "The volatility of a balanced fund is directly proportional to the equity weighting of the portfolio," he says. In the event of a dip in the market, a balanced fund will typically take a lesser hit than an equity fund. "In anticipation of volatility in the equity market I'm recommending balanced funds that have a lesser weighting of equities at the moment," he says.
This trend appears likely to continue, in Mr. Pinto's estimation. "I think you're going to see a secular trend of people moving into balanced and income-oriented products primarily because you've got this big bulk of baby boomers who are just about to hit retirement," he says, explaining that 'secular trend' refers to a trend likely to last between five to ten years.
Still on the sidelines
The shift has another dimension. Mr. Pinto, citing Russell research, estimates that the 50-plus age group has approximately $300 billion on the sidelines in high interest savings accounts and guaranteed investment certificates. "Despite that sort of transition (from money market funds) into conservative balanced and fixed income funds, there still exists an enormous amount of cash in near-cash vehicles like high interest savings and GICs."
Because of this, Mr. Pinto says that advisors still have an opportunity to encourage clients to move some of this cash back to the stock market. The $300 billion figure represents approximately 25% of the investible asset pool for investors in this age group, he says.
Doug Coulter, president of RBC Asset Management, sees long-term funds as one of three destinations for dollars redeemed from money market funds.
"The second tranche that you would see flows going into would just be back into stocks and bonds ... individually-owned stocks and bonds," he says.
The third destination is high interest savings accounts that appeal to those who want a higher yield than available in money market funds but also want guarantees on their capital.
He estimates that approximately half of RBC's money market redemptions have gone to these accounts, reflecting a common estimate for redemptions from bank-owned money market funds.
RBC, which says it has a 30% share of the money market fund business, has had approximately $11 billion in redemptions during the past year and approximately half of that went to high-interest accounts.
Many investors are deliberating two choices, Mr, Coulter says, paraphrasing what he considers a typical investor question. "I've got two options. I can go back into the market ...or I can continue to stay in cash. But are there other places that I can now get a little better yield than what I was getting in my money market fund?"
He estimates that in RBC's case, approximately 65% of net money market redemptions went into high-interest savings accounts and near-cash products such as guaranteed investment certificates, and that the remaining 35% went to long-term mutual funds and individually held stocks and bonds.