The first RRSP season since the end of the bear market showed that Canada's small retail investors are back - but they're not back to normal.
The scars from the past two years of market turmoil are still evident as investors make their way back to Canadian mutual funds, and they speak volumes about how volatile markets have changed investors' thinking.
The Investment Fund Institute of Canada's sales numbers for the mutual fund industry for February - the final month for RRSP contributions to receive the tax benefit for the 2009 income tax year - showed a sharp net inflow of $3.1-billion of investor money in the month, almost double the inflows of a year earlier. New investment in long-term mutual funds - as opposed to money-market investments, which essentially amount to parking money in cash holdings, the fund-industry equivalent of putting it under a mattress - were $5.1-billion, the best February since 2007.
But while IFIC vice-president Pat Dunwoody said the industry group was "surprised by just how strong fund sales were this RRSP season," this February's total was still nearly 40 per cent below the average February total over the previous 15 years - a sign that investors are still holding back. Even more tellingly, the bulk of the money is finding its way into much more conservative investments such as balanced funds and bond funds - evidence that the volatility of the past two years has changed investors' appetite for risk.
"I think the recovery has been far quicker than what we saw in the last bear market," said Jonathan Hartman, vice-president of investment products at RBC Global Asset Management, referring to the more sluggish recovery in mutual-fund buying after the 2001-2002 bear market in stocks. "But we're seeing them coming back more cautiously."
Net purchases of balanced funds - which invest in a mixture of equity and fixed-income assets - totalled $3.7-billion in February, while bond fund net purchases were $1.3-billion. While equity fund sales were in positive territory for a second straight month (after nearly two years of steady net redemptions), they totalled a mere $104.5-million, as investors remain wary of stock-market volatility.
Thomas Dyck, president of TD Mutual Funds, said the deep stock market declines of late 2008 and early 2009, together with the whip-saw volatility that markets have demonstrated over the past couple of years, have caused a lot of investors to re-assess their appetite for more risky equity holdings.
"Those two things, combined, frightened a lot of people," he said. "Investors may have over-estimated their tolerance for risk."
"It does fundamentally change the nature of the conversations advisers have with their clients," he said.
"Actually experiencing a 50-per-cent drop in the market provides a lot of clarity bout how people really feel about that kind of loss, as opposed to just how they think they'll feel," Mr. Hartman said.
But mutual fund industry analyst Daniel Solomon at BMO Nesbitt Burns thinks the more conservative shift of investor appetite is a healthy sign for the fund industry.
"I think we will get into a more stable market from investors - something that more closely matches their risk appetite," he said.