Canadian Mutual Fund Analyst

 

Preliminary View of September 2003 Data – October 15, 2003

 

 

Looks can be deceiving!

 

Data reported today by the Investment Funds Institute of Canada indicate a relapse in net sales of Canadian mutual funds amounting to -$380 mn in September versus positive net sales of $304 mn in August and $321 mn in July respectively. However, as IFIC indicated in their early-month estimate, September is seasonally weak and upon seasonal adjustment a completely different image of mutual fund demand emerges. Specifically, CMFA estimates a seasonally adjusted net sales level of about $936 mn versus $752 mn in August and $519 mn in July.

 

On a seasonally adjusted basis, short-term funds posted net redemptions/negative net sales of -$959 mn versus -$337 mn in August. The string of net redemptions for short-term/money market funds now stands at twenty months. Long-term funds, however, posted a dramatic surge in net sales during September to a level of about $1.9 bn versus $1.1 bn in July. The recovery pattern for long-term funds is now very much in line with and is actually exceeding the cyclical recovery pattern of the mid-1990s.

 

The best way to compare the relative strength of individual categories is by the ratio of monthly sales to redemptions (R/S ratio). On this basis, Canadian Dividend and Income funds were the strongest category in September with an R/S ratio of 2.5 (as in 2.5 to 1) versus 2.2 for Canadian Bond and Income funds, the second strongest category.  Balanced funds posted a September R/S ratio of about 1.5 to take third place.

 

In terms of dollar net sales, Canadian Equity funds posted their first positive net sales level in 15-months with a $180 mn reading. US Equity funds recorded their fifth consecutive month of positive net sales at $115 mn while the non-US Foreign Equity fund category was just marginally negative and has seen 15-months of consecutive net redemptions.

 

In absolute terms, Canadian Bond funds recorded the highest level of net sales at $642 mn, which is their highest monthly level since the latter 1990s. Dividend and Income funds reported net sales of $547 mn, also their strongest showing since the late-1990s.

 

At face value, the September report may very well be taken as a sign that individual investors remain reluctant to participate in the mutual funds arena but the seasonally adjusted patterns say otherwise. The underlying recovery in equity fund demand is a trend that can only develop momentum as the economic recovery intensifies. Oddly, bond funds are hitting maximum stride in terms of demand as the worst of the economic downturn is well past. The ongoing leakage from money market funds may be explained by the lack of any returns after fees and inflation and have no cache as a safe haven investment. Consequently, we remain skeptical that money market funds will provide much future lift to equity funds, as there has been no meaningful cash build-up.

 

(Our detailed analysis of the September data for subscribers will be published shortly.)

 

 

 

 

For information contact Frank Hracs: 905 780 9309:  or frank.hracs@sympatico.ca

Biography and Notes

 

Notes on the author: In addition to launching the Canadian Mutual Fund Analyst Frank Hracs has most recently been Director of Currency and Credit Markets Research and Strategy for TD Securities 1998-2001; He was Chief Economist for RBC Dominion Securities from 1988 through 1996 and a member of the investment strategy committee; Manager of economic forecasting with Coopers and Lybrand Consulting Group from 1984 through 1986; Senior economist with McLeod Young Weir (now Scotia Capital Markets) from 1980 through 1984 where he was extensively involved with the development and maintenance of their bond indices; Senior Economist with Scotia Bank 1978-1980.

 

In addition to past consulting, in 1998 Frank was a contributing author to a new investment course sponsored by the Investment Funds Institute of Canada

 

Frank Hracs has traveled to every important world financial center to update clients on Canadian economic and financial market developments and over the years has appeared and been quoted on numerous occasions in the Canadian and international media.