The worst may be over for mutual funds according to a report from CIBC Word Markets, but the firm doesn’t foresee a big boom any time soon.

The report, Some Reduction in Risk Aversion written by economist Benjamin Tal, notes that investors may be ready to take a little more risk with their investments. “Recent trends in the holdings of financial assets by Canadian households suggest that there has been some easing in the level of risk aversion among retail investors,” writes Tal.

The report cites evidence that the, “growth in cash positions is softening dramatically, following an unprecedented increase in 2001 and early 2002. Furthermore, the pace of net redemption of equity mutual funds is slowing.”

“For now it seems that the worst is over”, writes Tal.

The report notes that mutual funds suffered $300 million in net redemptions in December, despite a 5.2% increase in the TSX index. “This was the seventh consecutive monthly decline. At the same time, the net decline observed in December was half the size seen in previous months, possibly indicating some improvement in sentiment.”

Net sales of bond mutual funds rose by over $330 million in December 2002. “For the fourth quarter as a whole net sales rose by over $630 million following a decline of close to $200 million during the third quarter. The inflow into bond mutual funds is a reflection of some apprehension in the market.”

Money market mutual funds continue to see a decline. “Investors have been redeeming their money market mutual funds for the past ten months. During the fourth quarter of the year, net sales of money market mutual funds fell by over $1.4 billion following a $590 million drop in the third quarter.”

“There are clear signs that the rush into liquid assets due to increased risk aversion among investors is ending,” Tal notes. “After rising by over 20% (year-over-year) for most of 2001 and the first half of 2002, cash in personal chequing and deposit accounts is now rising by only 10.5%. This along with the ongoing redemption of money market mutual funds and the 11% drop in cash positions in brokerage accounts during the past three quarters suggests some reduction in risk aversion among investors.”

Fixed-term deposits are absorbing some of the cash leaving liquid assets, Tal observes. “After declining for most of 2002, balances in fixed-term deposits (GICs) are starting to rise, with November seeing a 2.1% (year-over-year) growth in balances. However, given the current very low interest rate environment, it is difficult to see any significant acceleration in this investment vehicle in the coming quarters.”