Despite advisors’ best efforts, extreme nervousness has kept many clients huddling in the safety of cash and low-risk money market funds this RRSP season.

Shocked and scared by the extreme volatility of financial markets during the past few months and concerned that more troubles lurk in the shadows, many clients have been reluctant to commit any money to their RRSPs. Coaxing them into equities has been an even tougher challenge, even though prices are a bargain compared with prices at the height of the market this past summer.

“This has been the most time-consuming RRSP season I’ve ever had,” says Bill Bell, president of Bell Financial Inc. in Aurora, Ont. A couple of clients converted their entire portfolios to cash, he says, despite his advice to stay the course with a balanced approach.

“I’ve had to spend much more time than usual with clients,” he adds, “helping them feel comfortable with strategies we’ve been using for the past 10 years. I’ve spent more hours with each client and have seen fewer people, as some have been running and hiding.”

In January, the S&P/TSX composite index dropped by 6.1%, its worst monthly showing in 18 years. Investor fears were apparent in January mutual fund sales; figures released by the Investment Funds Institute of Canada, show several major fund companies, including AIM Funds Management Inc., AGF Funds Inc., Franklin Templeton Investments Corp. and Mackenzie Financial Corp. (all of Toronto) suffered net redemptions. The redemption numbers would have been even worse were it not for the industry’s net inflow of $4.8 billion into the safe haven of money market funds. Redemptions and skimpy sales in domestic and foreign equity funds took the industry’s overall net fund sales for January to $461 million — a mere fraction of the $3.9 billion reaped in January 2007, when favourable market sentiment was running high.

“Clearly, money market funds are the product of the season,” says Randy Ambrosie, president of AGF. “Advisors are seeing a lot of nervousness on the part of their clients, and that has translated into caution.”

Assets under management in money market funds grew by 30% in the past year and stand at their highest level in five years, according to IFIC. Aside from this “safe haven” investment, the other bright spot in an otherwise dismal season was fund-of-funds or portfolio products. After accounting for a number of fund mergers that influenced the figures, IFIC reports that fund-of-funds net sales were $341 million in January, vs $2.3 billion in January 2007.

“When clients are investing in a wrap or a portfolio of funds, they’re much less likely to time the market,” says Dennis Yanchus, statistics analyst with IFIC in Toronto. “With fund portfolios, there’s no bad time to buy. They are sold on the basis of convenience, with the fund manager taking responsibility for asset allocation and rebalancing. Typically, the managers will take profits in areas that have done well and reallocate to areas that have lagged, which is the opposite of what individual investors tend to do.”

Advisors also report growing client interest in products that guarantee the principal and lock in returns along the way, such as segregated funds and Toronto-based IA Clarington Investment Inc. ’s “target click” funds. Manulife Financial Corp. ’s IncomePlus product, which guarantees an annual income no matter what happens to the investment, is also garnering interest.

Tony Di Thomasis, president of De Thomas Financial Corp. in Thornhill, Ont., has found clients responsive to funds run by “deep value” managers such as Peter Cundill and Francis Chou. Their funds have lagged during the past few years of hot markets because of high cash positions, but they have a reputation for limited downside and solid long-term performance. Dividend and income funds and balanced products also have gotten a somewhat more positive reception than garden-variety equity funds, say advisors.

Investors are being bombarded with a variety of negative events, including a looming U.S. recession, a falling U.S. dollar, the subprime mortgage mess, the credit crunch and the potential domino effects on global financial institutions. Clients are afraid that markets haven’t yet hit bottom, and some advisors are reluctant to insist clients commit to equities now, only to see prices fall further in the coming months. With so much uncertainty, many advisors have suggested their clients put RRSP contributions in money market funds so they can at least take advantage of the tax refund. The strategy is to average into long-term investments during the coming months or to revisit the situation when the dust has settled.

@page_break@“People are sitting on their hands and their wallets, and this is not a sensible attitude,” says Gavin Graham, chief investment officer with Guardian Group of Funds Ltd. in Toronto. “There’s a rethinking of tolerance to volatility, which always happens when volatility is on the downside. When volatility is on the upside, they have less trouble committing to equity investments at inflated prices.”

Hartford Investments Canada Corp. has pioneered an innovative product this season that addresses client reluctance to plunge in, yet helps them get into the water gradually and earn a healthy rate of return while they wait. Called DCA Advantage, the program simplifies dollar-cost averaging by automatically investing client funds over a period of either six or 12 months in Hartford mutual funds selected by the client. The six-month plan pays a 7% rate of interest on an annualized basis on any cash that’s waiting to be invested, while the 12-month plan pays 4% annualized. Largely as a result of the positive response to this product, Hartford was one of the few fund companies, aside from the major bank-owned firms, to finish January with positive sales.

“We’ve developed a ‘one ticket’ solution that removes the emotion from the investment decision,” says Mary Taylor, senior vice president of product marketing at Hartford. “The ups and downs in the markets are balanced as dollars flow into the chosen funds on a monthly basis. The advisor doesn’t need to make another sale, which is often difficult to do when the client is emotional.”

Also doing well this RRSP season was the family of exchange-traded funds launched by BetaPro Management Inc. of Toronto about a year ago. It has seen AUM grow to $800 million. The ETFs provide leveraged exposure to various financial markets by linking returns to market indices and commodities, but the BetaPro ETFs are unusual in that they provide the opportunity to profit from both upward and downward trends. Investors may choose between “bull plus” versions, which offer double the daily performance of the underlying benchmark, and “bear plus” versions that offer twice the inverse performance of their underlying benchmark and, therefore, go up by double the rate of any decline. The funds cover niches such as financials, energy and gold, as well as the broader indices.

“Currently, we have more assets on the bear side,” says Howard Atkinson, president of BetaPro. “Interest has picked up since the market volatility increased. When all the screens are turning red, there’s some green with our “bear” units.”

The IFIC figures show that some investors took advantage of mutual funds that benefit from rising commodity prices this RRSP season. Natural resources and precious metals equity funds showed positive net sales in January. Emerging market equity funds also enjoyed positive inflows for the month. IE