For more than 80 years, mutual funds have been an integral component of Canadian portfolios and savings plans, enabling investors to conveniently tailor their investment strategies to their unique risk styles.
Over that time, Canada's mutual funds industry has evolved to provide everything from strategic tax-saving opportunities to "bundled" solutions that provide a one-stop balanced portfolio. And as interest rates savings instruments have fallen in value since the early 1990s, Canadian investors have increasingly relied on mutual funds to meet their financial goals.
But the fallout from the financial crisis heralded by the bankruptcy of Lehman Brothers five years ago created a significant shift in those trends.
"It really shook investors' faith in not only the market, but in the meaning of risk," says industry veteran Blake Goldring, chair and CEO of AGF Management. "It forced investors to rethink their risk tolerance."
"Since the 2008-2009 market downturn, we've observed a general level of anxiety among Canadian investors," says Goshka Folda, senior managing director of Investor Economics. The most visible evidence of that anxiety was the enormous cash cushion investors had amassed: at the end of 2012, of the $3.1-trillion Canadians hold in investable assets, more than $1-trillion was sitting in instruments with a maturity of under one year – on the sidelines, she says.
Starting in January 2013, says Ms. Folda, "We saw a very important shift, with sales accelerating in equity investment."
That bodes well, she notes, especially for the many baby boomers now within 10 years of retirement age. "There is a growing realization that, in order to accumulate more and grow their financial retirement nest egg, they still need exposure to equities."
With interest rates that have nowhere to go but up, she explains, there is risk associated with holding bond and fixed income investments, and a very solid rationale for equities.
In addition, investors reviewing their portfolios with their advisers are finding that the case for foreign diversification is mounting, reports Ms. Folda. "Throughout 2013, we've seen a number of breaches of the historical highs for the U.S. stock indices. The Canadian economy is probably not keeping pace with the U.S. economy, and the international situation is providing greater opportunities in many cases."
In general, she says, investors are making a gentle but definitive return to equity investing, "with a foreign flavour. When you look at the composition of the asset mix of the industry, it is a more balanced portfolio than it has ever been before."
Canadians are very aware of the demographic trends challenging public pension plans such as the Old Age Security benefit, and longer lifespans that extend retirements to 20 or more years, says Mr. Goldring. "We've heard the adage that there's no return without risk, and that's certainly true. Exposure to asset classes that are subject to a little bit more volatility, but in a risk-controlled manner, can lead to excellent investment outcomes."
Fixed income investments simply won't generate the returns people need to provide a sufficient retirement income stream, he stresses. "Investors need to take on some equity risk if they want their investments to grow at a rate higher than inflation."
While the financial crisis has had many regrettable outcomes, it has also had one positive effect, he says. "Investors are much more aware of the danger of silver-bullet-type solutions – it really reinforced the need to be diversified."
That understanding has contributed to even greater demand for "fund-of-fund" products. "One of the major trends we continue to observe is that the mutual funds industry is helping investors take the emotion out of investing, to stay true to a properly diversified portfolio, with these fund solutions," says Ms. Folda. "We continue to see strong sales of these diversified solutions."
"Not many people have the time or expertise to choose among a multitude of investment options to create a portfolio that balances risk and return," says Joanne De Laurentiis, president and CEO of The Investment Funds Institute of Canada. "Fund-of-fund products simplify this process."
There are fund-of-fund options for every type of investment personality, from aggressive to conservative, she stresses. "For example, as people approach retirement, they can choose one that is less volatile."
Financial advisers can recommend the products that they think are best suited to each client, she adds.
Source: The Investment Funds Institute of Canada