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Mutual funds take a slide while equities rise

Mutual fund statement

Investors kept bailing out of their mutual funds last year, according to industry statistics. One kind of beneficiary? ETFs.

It’s happened before and it happened again last year. Equity markets and sales of equity mutual funds moved in opposite directions.

The multi-year sales drought dates back to 2008-2009. Back then, markets crashed and burned, leaving shocked investors with massive losses.

Yet even as the markets continued their ascent from the depths of March 2009, prospective new investors remained turned off and tuned out.

In 2012, according to the Investment Funds Institute of Canada, equity funds had net redemptions of $ 14.1 billion. That’s up from $ 10.8 billion redeemed a year earlier. There appears to be no immediate sales turnaround, even during the traditional peak investing season that we’re now in.

Exchange-traded funds are an exception to the redemptions trend. At $ 56.4 billion in assets in all categories, ETFs are a much smaller industry than mutual funds, but the gap is narrowing.

ETF assets grew by 30 per cent in 2012, triple the rate of mutual funds. Most of this money went to fixed income funds, but sales of equity ETFs were also positive.

Institutional buying contributes to ETF asset growth. Roughly a third of ETF assets are held by institutional investors who like the fact that management fees of ETFs are low and you can buy them without any embedded compensation payable to commissioned retail brokers.

One attraction for retail investors is that, once they acquire an ETF, they pay the same per-unit management fees for small holdings as institutional investors pay for their multi-million-dollar holdings.

Whether through mutual funds or ETFs, fund investors who bought equity funds near the market bottom or who stayed invested after taking a bear-market mauling have been rewarded. Last year was a turnaround year for domestic equity funds and an even better one for funds investing outside Canada.

Median one-year returns in major foreign categories like global equity, U.S. equity, international equity and emerging markets were all in the double-digits. Though domestic equity funds didn’t do so well because of our slumping resources sectors, returns last year were typically around seven per cent.

Not bad at all, when GICs are paying so little that your after-inflation return is next to nothing. And that’s before taxes.

Canadians who invest in funds are still mostly in traditional mutual funds, so reports of the demise of these funds are greatly exaggerated. A total of $ 820 billion was held in long-term mutual funds at year-end, 11 per cent more than a year earlier.

While shunning new commitments to equity funds, mutual fund investors have embraced balanced funds. These funds had $ 27.4 billion in net sales last year and are firmly established as the most popular and widely held type of fund. ETFs remain very minor players in balanced funds, though ETFs are increasingly showing up as holdings of mutual funds of funds.

Balanced funds are the industry’s one-stop shopping solutions. These funds appeal to investors willing to delegate key decisions to the pros and who are tolerant of the frequently pricy management fees and expenses.

Investors who chose balanced funds as a conservative alternative to safe but poorly yielding GICs can feel good about their decision right about now. Returns for balanced funds were mostly six to eight per cent last year, with equity-heavy global balanced funds at the higher end of this range.

Bond mutual funds also remained popular, despite low yields, attracting net new sales of $ 19 billion, more than double last year’s total.

The largest category, Canadian fixed income, returned just 3.4 per cent. Even that seems a tough to attain this year, given the low-yield environment and the risk that rising interest rates may erode bond prices.

For higher fixed-income yields this year, investors will again need to accept more risk, looking at investment-grade corporate bonds and even more adventurous assets like high-yield bonds and emerging markets bonds.


thestar.com – Business