The days of clients cowering in cash are winding down with financial markets on firmer ground and economic recovery appearing to take hold. Although there is still a high aversion to risk, clients are venturing farther out on the risk curve in search of better returns.
The financial advisors surveyed for this year’s Dealers’ Report Card report that mutual funds accounted for 64.7% of their total product distribution, up from 59.5% last year. The shift appears to have come at the expense of managed products such as wrap programs, both proprietary and third party, which have fallen to 3.9% of total product distribution from 9% last year. Interestingly, most of the mutual fund net sales are in balanced funds and funds-of-funds, in which tactical and strategic asset-allocation decisions are made on behalf of unitholders.
“Balanced funds and funds-of-funds lead to better investor behaviour,” says Dan Hallett, director of asset management with Oakville, Ont.-based HighView Financial Group. “Investors don’t see separate equities and fixed-income components moving around and are less likely to react to the ups and downs of any individual asset class, as overall performance is smoother.”
Recent Investment Funds Institute of Canada figures support this trend. Long-term fund net sales (excluding money market funds) for the first quarter of 2010 were $12 billion, a dramatic turnaround from net redemptions of $348 billion in Q1 of last year.
March 2009 was the last month in which long-term funds were in redemption — and that coincided with the low point in Canadian and U.S. stock markets. Beginning in April 2009, investors began to return to long-term funds and move out of money market funds, the latter of which have been in heavy redemptions since because of their miniscule returns.
Long-term fund sales are currently concentrated in the balanced and fixed-income categories, as inves-tors wary of too much volatility continue to avoid straight equity funds. Balanced fund net sales for Q1 2010 were $9.4 billion compared with net redemptions of $152.7 in Q1 2009, while fixed-income fund sales totalled $3.1 billion in Q1 2010 vs $1.8 billion a year earlier.
The desire for built-in diversification has led long-term funds-of-funds to greater popularity than stand-alone funds, with fund-of-fund net sales totalling $6.4 billion in Q1 2010 vs $5.7 billion for stand-alone funds. In fact, fund-of-funds sales have outpaced stand-alone fund sales since September 2009.
@page_break@Balanced funds and fund-of-funds portfolios leave the allocation decisions up to fund managers. By sticking to predetermined asset mixes and rebalancing regularly, the managers are automatically adding to undervalued asset classes and taking profits when asset classes become expensive and overweighted.
“It’s a pension-like approach to investing,” says Dennis Yanchus, IFIC’s manager of statistics and research. “Investors are able to obtain a diversified portfolio of assets. When the markets were crashing, to sell fixed-income and buy equities would have been awfully hard for most people. It’s easier when the fund manager does it for them.”
There are stronger sales in the conservative fund-of-funds portfolios than before the downturn, he says, while aggressive, equity-oriented portfolios are less popular.
“On the equities side, there’s more reluctance,” Yanchus says, “although certain segments have done well, such as dividend and income equities. People tend to be accessing equities through balanced products, which is more indirect.”
Fear of volatility has also led to growing popularity of segregated funds, as advisors report they represent 34.6% of insurance sales, up from 28.7% last year and 24% in 2008. Helping to stimulate interest in seg funds are products with guaranteed minimum withdrawal benefits. The guarantees on assets or income these products provide allow clients to gain some equities exposure with the benefit of a safety net.
“There is a lot of momentum in the GMWB products,” says Hallett. “The initial products introduced in the category enjoyed early success, and that drew in other entrants with new twists. By offering downside protection, the products shift some of the risk away from the investor and provide comfort.”
The guarantee on seg fund assets in the event of death is becoming increasingly important as clients age, Hallett says: “If clients die, at least they are able to pass on what was put into the product.”
On the banking products side, principal-protected notes, guaranteed investment certificates and term deposits are increasing their market share at the expense of high-interest savings accounts, which dropped substantially to 20.3% from 40.3%, advisors report.
“We are seeing a consistent pattern of investors using GICs for laddering strategies,” says Judy Chu, assistant vice president at B2B Trust in Toronto, which offers banking products to advisors.
IE