RRSP season 2008 was marked by an unusual level of contributions into short-term money market funds. Long-term funds, meanwhile, were in net redemption territory as nervous investors deferred decision-making due to market volatility.
But, when volatility subsides and investors are ready to make a long-term fund commitment, where are they likely to transfer this parked money? Experts interviewed by The Insurance Journal said that balanced funds should collect the lion’s share.
Iassen Tonkovski, senior analyst at Investor Economics says "during the first quarter of 2008, short-term mutual funds reeled in $11 billion in net flows, while long-term mutual funds were $2.2 billion in the red. During the first quarter of 2007 the two categories saw net flows of $992 million and $16.4 billion, respectively."
In its March report, The Investment Funds Institute of Canada (IFIC) said that "Canadian Money Market funds have led the way in sales since October 2007." IFIC says "the tightening of credit markets and the drop in consumer confidence, particularly south of the border, has flowed through to increased uncertainty and volatility in stock markets around the world over the past nine months."
As of March, long-term fund sales were $9.9 billion over the past 12 months, down from $25.7 billion for the 12 months ending March 2007. Most of the flows to long-term funds have shifted to money market funds, IFIC notes in its report. Money market funds accounted for $17 billion of the $27 billion in total industry sales over the last 12 months.
At some point, the money market fund investors will feel comfortable going back into long-term funds and balanced funds are likely to be one of their first choices, says Dennis Yanchus, manager, statistics and research with IFIC. The reason is two-fold, he explains. First, with many investors nearing retirement, the balanced asset allocation is more and more important. The other significant factor is that "after any shock people move to balanced funds." Market downturns, he explains, remind people that diversification is important.
Overall, balanced funds account for 36% of total mutual fund industry assets. This figure includes 22% of assets that fall under the domestic balanced category and 14% in the global balanced category.
IFIC’s March report also showed that after money market funds, the second largest "contributor to industry sales over the last 12 months were global balanced funds which brought in $11.6 billion and domestic balanced funds which attracted $2.3 billion."
Why was so much money parked this RRSP season? Mr. Yanchus says it could be due to a number of reasons. Many investors might be overweight in domestic equity due to the long running bull market that preceded the current volatility. They may be looking at strategies now to diversify and rebalance their portfolios.
"An advisor might meet with a client and say, ‘You can’t sleep at night?’ Well, let’s park the contribution and move it back into the market over time when you feel more comfortable." This money might be moved back into long-term funds all at once or through dollar cost averaging. Once again, we’re likely to see the recipient of these money market funds be balanced funds or balanced fund of fund products, he adds.
Dan Hallett, president of Dan Hallett and Associates Inc., a Windsor-based research company that helps advisors keep on top of the industry and build portfolios for their clients, says money market funds are generally the RRSP season choice of the last minute contributor. They don’t want to be pressured to choose. "Typically, these short-term funds are held for a year before being transferred into longer term funds."
The good news for the fund industry is that investments into money market funds indicates that the investor is deferring, but still planning to make, a long-term fund decision. "If they only wanted a safe haven, they would be better to be in a GIC or high interest savings account," he adds.
And when they do decide to transfer this parked money into a long-term fund, he agrees with Mr. Yanchus that balanced funds will be a popular choice. "Balanced funds have long been really a core holding for funds investors…They have that middle ground. The equity risk is dampened by the amount of cash and bonds they hold."
Banks promoting money markets?
Doug Conick, vice-president, investment funds, at Manulife Financial thinks that the "amazing" flows into money market funds has a lot to do with the banks. "The banks are really promoting money markets."
Why? "It’s the path of least resistance." Money market funds are parking lots, he says, but once they are in there, the investor might transfer to other funds.
The problem with parking money is that by time they decide to get back into the market, the investor might have missed out on significant growth. When the markets come back, they could quickly rise 20% or more and the parked money won’t benefit, he says.
That’s the great thing about advisors and the advice channel, says Mr. Conick. He thinks advisors’ "big value proposition is their ability to manage client behaviour…to get them to focus on the long-term and not the short-term."
This is not an easy job in rollercoaster market conditions, he acknowledges. "It’s an uphill slog if clients are really nervous." He says Manulife has seen lower sales across the board for its mutual funds due to the market conditions, but "We are still selling long-term funds," he says adding, "Our inflows over the last few months haven’t been as skewed toward money market funds as the (rest of) the industry." He says advisors who are convincing their clients to keep investing are the key to these long-term fund sales.
Dave Richardson, vice-president, RBC Asset Management chafes at the view that banks are promoting money market funds. "We don’t encourage money markets funds. That’s just not right…We’ll say, when there is a deadline, that they should make the contribution. Sometimes the best thing is to make the contribution into money market funds and come back later, hopefully soon."
He adds that RBC has a specific program to follow up with investors who invested in money market funds, particularly for those in registered plans. This program started as of March 1. At the point of contribution, the advisor will often set up a time to meet with the client to choose a long-term fund, he adds.
Mr. Richardson says there are always last minute contributors who choose money market funds for the short-term, but this year was exceptional: RBC had three times more money market fund sales than last year during the RRSP season. Why? "Volatility. People are reluctant to make a decision."
Mr. Richardson believes that the amount of parked money this season was due to the fact that the TSX dropped in January. "If you have RRSP season during unusual volatility, people tend to delay their decisions and push into February, giving less time for decisions. It’s a combination of volatility with being up against the deadline."
He adds that the idea that banks are promoting money market funds particularly irks him because his role is to explain to advisors why it’s important to encourage investors to choose long-term funds.
Investors who sat on the sidelines in the money market funds in January, missed out on the robust recovery that took place by April, he adds. This is why balanced funds and packaged portfolio solutions are ideal for many investors – they tend to stay invested throughout the market ups and downs, he added.
Mr. Richardson also shares the view that much of the parked money will be shifted to balanced funds. This would be very much in line with the strong trend toward balanced funds and packaged solutions, which are "by far our best sellers…and represent almost 100% of net sales." In terms of gross sales, this figure would be 50%, he adds. Net sales do not include redemption numbers, whereas gross sales figures include all inflows.
The reason behind the popularity of these funds is simplicity and the fact that they want a professional to manage their money for them. "Investors are looking for straightforward solutions." A standalone balanced fund, such as RBC’s Balanced Growth is often the choice of someone just starting out investing, particularly during RRSP seasons since it is accessible for as little as $25 per month, whereas the portfolios require a minimum investment of $5,000, he adds.
The types of investor who choose balanced funds "runs the gamut. Some investors are there because they don’t think they have the knowledge…others are sophisticated investors who don’t have the time to manage their investments."
Mr. Yanchus of IFIC says that although, overall, most investors in the first quarter of 2008 were "reactive" to the market by investing in money market funds, there is a growing core group of investors who, every month, are putting their money in balanced funds, or fund of funds products despite market conditions. Fund of fund products, which offer a portfolio solution for investors, are often classed by IFIC within the balanced category due to their diversification and balanced asset allocation strategies.
The fact that there is this core group of investors investing steadily in these balanced products is a sign of a maturing market, adds Mr. Yanchus.
It is only fairly recent that Canadians have had a significant portion of their personal wealth invested in the stock market, he observes. Before 1990 most Canadians were primarily investing in non-securities related investments such as high-interest earning GICs.