RRSP fund sales: Confidence is building

“There’s a rotation out of Canada,” says Craig Strachan, vice president and head of product with Toronto-based Fidelity Investments Canada ULC. “For clients buying equity products, the U.S. is in favour, as well as developed overseas markets such as Europe. But people are less interested in emerging markets.”

Many Canadian clients had been shying away from equities during the past few years, Strachan says, hiding out in the safety of cash and fixed-income investments; now, they’re venturing back. Many clients were caught off guard by the rapid ascent of U.S. stocks last year, when the S&P 500 composite index soared by 29.6% – its best year since 1997.

“People didn’t expect the U.S. market to recover so quickly,” says Strachan. “Now, they want to get in – and get in front of the next wave if the recovery spreads overseas.”

Although there’s no mad rush into equity funds, they’re garnering more sales than they did last year. (See story on page 12.) The most popular products are balanced funds and funds-of-funds or other packaged products that give clients exposure to a mix of equities and fixed-income assets.

Plain-vanilla bond funds are falling out of favour due to recent poor performance after talk of the U.S. reducing its quantitative-easing measures. Such “taper talk” has sent interest rates higher and bond prices lower.

The latest numbers from the Investment Funds Institute of Canada show net sales for equity funds in 2013 of $5.7 billion, a major swing from net redemptions of $14.1 billion in 2012. Within this category, domestic equity saw net redemptions of $2.1 billion in 2013, while global and international equity funds garnered positive sales of $2.1 billion and U.S. funds saw even stronger net sales of $7.6 billion. Balanced funds had net sales of $40.4 billion in 2013, significantly higher than the $27.4 billion a year earlier.

Although bond funds overall fell into net redemptions of $4.2 billion in 2013 – a sharp reversal from net sales of $19 billion in 2012 – the global segment of fixed-income saw positive net sales of $3.2 billion last year.

Despite ordinary Canadian bond funds being shunned, diversified income funds that offer a mix of income-generating securities – such as mortgages, dividend-paying stocks, corporate bonds, global government bonds and real estate investment trusts – continue to be big sellers. The search for yield remains an ongoing preoccupation for clients close to or already in retirement.

Next: Drawn to U.S. exposure
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Drawn to U.S. exposure

“Put together the desire for U.S. exposure with the desire for income,” Strachan says, “and we’re seeing an appetite for funds such as Fidelity U.S. Monthly Income and Fidelity U.S. Dividend.”

Mary Taylor, executive vice president, product and marketing, with Toronto-based Mackenzie Financial Corp., says 2013 was the best year for fund sales since the pre-crisis year of 2007 – and 2014 began on even stronger footing.

The three most popular Mackenzie funds this RRSP season are two seasoned equity funds, Mackenzie Ivy Foreign Equity Fund and Mackenzie Cundill Value Fund, as well as Mackenzie Floating Rate Income Fund, a new fund that invests in floating-rate bank loans and other securities in which the interest rate follows market rates. Floating-rate vehicles are less vulnerable than longer-term bonds if market interest rates rise.

Toronto-based Manulife Financial Corp. also reports strong interest in some sophisticated income funds, including Manulife Strategic Income fund and Manulife Floating Rate Income Fund.

A hunger for exposure outside Canada also has fired investor interest in Manulife U.S. Monthly High Income Fund, as well as in Manulife’s U.S. and global balanced and equity funds.

“Investors are turning to funds,” says Derek Saliba, assistant vice president, Manulife Mutual Funds, “for exposure to sophisticated fixed-income strategies and for the greater depth and breadth of markets outside Canada.”

Rising interest rates

Losses in ordinary bond funds have come as a shock to many who thought bonds were a safe haven. The DEX universe bond index dropped by 1.2% last year – and the returns for many bond funds fell by even more due to management fees.

“My sense is that people are becoming more comfortable holding a portion of stocks,” says Dan Hallett, vice president and principal with HighView Financial Group of Oakville, Ont. “But by the time that comfort level sets in, they’ve missed the early gains. Floating-rate income funds will be popular this year, and there’s a huge marketing push by providers of the product. However, while floating-rate funds address the risk of higher interest rates, advisors must be careful of other factors, such as the higher credit risk relative to government bonds.”

Client awareness of the effect that rising interest rates may have on bond portfolios is growing, says Jolene Laing, branch manager and assistant portfolio manager at ScotiaMcLeod Inc. in White Rock, B.C. She sees that as an opportunity to encourage portfolio diversification, including more equities. She has increased the equities/bond mix in her average client account to 60/40 from 50/50.

“It’s my job to make sure clients are aware of the effects of potential interest rate moves,” Laing says. “Clients are more open to taking advice, and I’m getting little to no pushback on the idea of greater diversification. We’re encouraging more equities exposure outside Canadian borders and are going to different parts of fixed-income we weren’t in before, including some floating-rate notes and senior-mortgage investment corporations.”

Guarantees

Lise Andreana, a certified financial planner and partner with Continuum II Inc. in Burlington, Ont., finds that products with guaranteed minimum withdrawal benefits (GMWB) are a good way to protect clients against both unpredictable interest-rate and equities market moves. She recommends GMWBs as a useful component of a diversified portfolio, and likes to use them in sufficient quantity to cover a retiree’s minimum living expenses. GMWBs with exposure to equities have allowed her clients to participate in stock market gains while resting easy with the guarantees of income.

“The guaranteed products,” she says, “put a floor on income and remove the uncertainty.”

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