Gyrating financial markets have led many advisors and their clients to reassess their attitude toward — and appetite for — risk.
Many have realized that a little less risk may be in order, even if it means sacrificing some of the potentially higher returns that investing in equities has historically provided. This less adventurous approach is translating into a growing appetite for conservative investments, such as balanced funds, bonds, money market funds, segregated funds and high-interest savings accounts.
Although equities still make up a large piece of the portfolio pie, advisors feel most clients are best served by balanced portfolios. This diversified approach has led to the popularity of wraps and fund-of-funds that combine asset allocation with automatic rebalancing — and take a lot of decision-making out of advisors’ hands.
“Experience has shown a high correlation among equities markets, and this is bringing advisors back to the basics of portfolio construction,” says Dan Hallett, president of Windsor, Ont.-based Dan Hallett & Associates Inc. “There is a lot more attention being paid to asset mix, and people are rediscovering bond and balanced funds in their asset allocation.”
Statistics released by the Invest-ment Funds Institute of Canada reveal that gross year-to-date sales of equities funds for the period ended April 30 are down by about 47% from a year earlier, while bond fund sales are up by 33%. Money market funds now comprise a healthy 14.4% of the $517.7 billion in total fund assets; equities funds make up 37% of the total; balanced funds, 37%; and bond funds, 11%.
“Sales in the long-term category have been dominated by bond and balanced funds, especially in the early part of this year,” says Dennis Yanchus, IFIC’s manager of statistics and research.
But as stock markets recovered in March and April, there was some movement of assets back into equities, he says: “People are more encouraged to move out of cash and into long-term funds.”
Although various types of cash stashes have been popular since the problems arose with asset-backed commercial paper in the summer of 2007, the paltry interest rates on short-term investments offer little growth or protection against inflation.
Some clients have turned to guaranteed investment certificates, but high-interest rate savings accounts have become increasingly popular because of their flexibility. The problem with GICs is that funds are locked in for a defined term — and the long term is difficult to predict in uncertain conditions. Most clients want the flexibility to move out of deposits if interest rate yields or stock market conditions improve.
Advisors surveyed for this year’s Dealers’ Report Card say GICs accounted for 54.6% of their banking product revenue, down from 58.2% in 2008, while revenue from high-interest savings accounts rose to 40.3% from 26% a year earlier.
“We have a lot of investments in high-yield savings accounts at this time,” says Gordon Martin, senior vice president of Toronto-based DundeeWealth Inc.’ s retail division. “With these market conditions, they have been very popular.”
Hallett says the introduction of tax-free savings accounts this year has also stimulated demand for interest-paying products that allow clients to earn interest tax-free.
Insurance products such as seg funds — including those offering a guaranteed minimum withdrawal benefit, such as those offered by Manulife Financial Corp. and Sun Life Financial Inc., both of Toronto — are also growing in popularity.
Advisors say seg funds account for 28.7% of their insurance revenue, up from 24% last year. Hallett’s estimates, based on all funds tracked by Morningstar Canada, show seg funds enjoying total net sales of $5.4 billion in the year ended March 31, while all other funds saw total net redemptions of about $12.8 billion.
“Guarantees are hot,” says Joe Canavan, chairman and CEO of Toronto-based Assante Corp., adding that the safety and security they provide is contributing to the popularity of GMWB products. IE