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A stock trader reacts to a declining Dax in Frankfurt on Aug. 5, 2011. (FRANK RUMPENHORST/AFP/Getty Images)
A stock trader reacts to a declining Dax in Frankfurt on Aug. 5, 2011. (FRANK RUMPENHORST/AFP/Getty Images)

Funds

Volatility takes its toll on mutual funds Add to ...

Investors are yanking their money out of long-term mutual funds for the first time since the 2008 financial crisis as they turn to alternatives such as gold and high-interest savings accounts for shelter from a tumbling stock market.

Mutual funds, excluding money market funds, suffered nearly $1.3-billion in net redemptions between the start of July and the end of September. It was the first quarter of net outflows since investors pulled $11-billion in the last three months of 2008, according to research firm Investor Economics.

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Most of the outflows came from equity and balanced funds. Gold, exchange-traded funds (ETFs) and high-interest savings accounts are siphoning away cash, industry observers say.

“Investors are nervous,” said CIBC World Markets analyst Paul Holden. “The equity markets jump around day to day, and retail investors are struggling to get comfortable in that kind of environment.”

Independent firms are having the toughest time, he said. Banks can rely on their branch networks to sell to investors, and insurers are also aggressively building up their wealth management arms, but most independent fund firms lack a dedicated sales force and must depend on financial advisers to pitch their products.

AGF Management Ltd. and IGM Financial Inc. , which owns Mackenzie Financial and Investors Group, face challenges because of their focus on global and international stock funds, Mr. Holden said. “At the industry level, [those have]been among the worst-selling categories.”

Canaccord Genuity analyst Scott Chan agreed the independents are facing harder times, but said the banks are also seeing sales slow. RBC Global Asset Management, a unit of Royal Bank of Canada and Canada’s largest fund company, had sales of only $737-million in long-term funds during the third quarter compared with over $1-billion a year ago, he said.

Many fund investors are turning to ETFs because of lower fees compared to actively managed mutual funds. “A lot of managers can’t beat a passive index,” he said.

ETF providers are luring customers with innovative products such as Bank of Montreal’s BMO Low Volatility Canadian Equity ETF , launched this month, which aims to smooth out some of the ups and downs of the stock market, Mr. Chan said.

Precious metals are also attracting money away from traditional mutual funds. For instance, Sprott Inc.’s closed-end funds focused on gold and silver bullion have attracted steady inflows, Mr. Chan said. In the third quarter, Sprott posted net sales of $655-million, which included $306-million from a follow-on offering on its Sprott Physical Gold Trust .

“Even my grandfather, who is in his eighties, is investing in gold bullion for the first time, but he buys the bars directly from the bank,” Mr. Chan said. “Normally, that is money that would go into mutual funds. My dad owns a gold ETF, too.”

Meanwhile, investor appetite is rising for new high-interest savings accounts set up by banks and insurers in recent years, which “have somewhat replaced money market funds,” said Carlos Cardone, a senior consultant with Investor Economics.

Savings accounts targeted at financial advisers and discount brokers have gained traction because they pay a higher yield than most money market funds, require low minimums of $1,000 or less, and pay a “trailer fee” commission to sellers, he added.

Assets in this breed of savings account hit a record high of $56-million at the end of June, while assets in all premium accounts, including those offered by online banks like ING Direct, rose to a peak of $215-million, said Mr. Cardone, whose firm tracks the numbers semi-annually.

Doug Coulter, president of RBC Global Asset Management, acknowledged that a lot of money has left his firm’s money market fund for higher-rate savings accounts, but he is not too concerned because “that is just going into another bucket at RBC.

“We have a money market business that has really moved to a high-interest savings account where we now have over $20-billion,” and the bank’s ETF business, which launched in mid-September, has brought in about $25-million in assets, he said. “RBC has always had a multi-distribution strategy.”

Net Quarterly Sales

A snapshot of publicly traded independent fund players:

IGM Financial Inc. ($1.4-billion)

AGF Management Ltd. ($585-million)*

CI Financial Corp. ($91-million)

Sprott Inc. $655-million

* Quarter ended Aug. 31 versus Sept. 30 for others.

**May also include institutional assets and closed-end funds.



Fund Facts

Here are quarterly net sales (redemption) numbers for long-term mutual funds (excludes money market funds) from Investor Economics.



Quarter

$ Millions

12/01/08

(11,068)

03/01/09

1,136

06/01/09

4,359

09/01/09

6,412

12/01/09

7,889

03/01/10

12,949

06/01/10

552

09/01/10

3,371

12/01/10

8,854

03/01/11

15,262

06/01/11

5,262

09/01/11

(1,279)

Source: Investor Economics

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