More clients are warming to equities

“A number of clients who were running to the ‘safe and secure’ last year are much more optimistic this year,” says Bill Bell, president of Bell Financial Inc. of Aurora, Ont. “Last year, they wanted to talk about the interest rate on a five-year guaranteed investment certificate [GIC]; this year, they want to know about the U.S. equities market. Instead of saying, ‘Get me out’ after the good year we saw in equities in 2012, clients are seeing the benefits of staying on track with a diversified portfolio and are more willing to include equities exposure.”

Similarly, Steve Donald, president and CEO of Toronto-based Assante Wealth Management (Canada) Ltd., says that firm has been experiencing significant inflows into its mutual funds.

“Clients are willing to put more money to work,” he says. “We’re still seeing a preference for income-producing funds, as well as for balanced funds and portfolio solutions that include rebalancing among asset classes as part of the program.”

Bell and Donald agree that there’s less interest in guaranteed products, such as insurance annuities offering guaranteed minimum withdrawal benefits (GMWBs), this year. And most insurance companies have cut back on the benefits that these GMWB products offer, making them less attractive than when they were first introduced a few years ago.

One reason for this change in attitude among clients is that many appear to have a greater understanding of their own investment personality traits in 2013 and are more open to taking risks, suggests a recent poll by Franklin Templeton Investments Corp. of Toronto. The January survey found that 82% of respondents believed they had a specific investment personality, up from 68% in 2009. And the percentage of investors who identify themselves as “risk-taking” increased to 14%, up from a relatively steady 8% in the past four years.

“There are a lot of exciting differences this year,” says Ronice Barlow, head of strategic planning and business development at Franklin Templeton. “There’s been a lot of chatter about equities markets – specifically, the global equities space – whereas previously, there had been a lot of apathy.”

In fact, clients are examining their portfolios and realizing they may be overexposed to traditional fixed-income products, such as GICs and North American government bonds, Barlow says. It was difficult for many clients to buy equities in down markets, she adds, as they viewed all stocks through “bear market glasses.” But clients have been encouraged by the recent rebound in stock prices.

Clients also are recognizing that the real return on those fixed-income investments – traditionally considered safe havens – won’t be enough for them to meet their long-term savings goals, Barlow says. Thus, Franklin Templeton has introduced a campaign this year, entitled Time to Take Stock, that offers brochures and videos to educate clients about the benefits of global stocks.

@page_break@ In the month of January alone, the S&P/TSX composite index rose by more than 2%, the S&P 500 composite index in the U.S. grew by 5% and broke through 1500 for the first time since 2007 and the Dow Jones industrial average rose above its 2007 high of 14000. Particularly enthusiastic are clients who invest in U.S. mutual funds, who have stormed back into the market.

The inflow of money into U.S.-listed equity mutual funds and exchange-traded funds hit a record high of US$77.4 billion in January, eclipsing the previous record monthly high of US$54 billion in February 2000, when the high-tech boom was at its peak.

These recent gains in the stock markets have allowed clients to finally recoup their losses of 2008 and 2009, says Jolene Laing, branch manager and associate portfolio manager with ScotiaMcLeod Inc. in White Rock, B.C. Now that clients are seeing some upside to equities, they are realizing the benefits of having an equities component and holding the course in a balanced portfolio. News reports also are more positive, with the U.S. averting its “fiscal cliff” disaster and showing signs of economic recovery, and there is improvement in the growth outlook for China.

“We’ve had an exceptional start to the year,” says Derek Green, president of Toronto-based CI Investments Inc. “Gross sales are the best since 2001. Last year was a good year and finished strongly, so there is lots of positive momentum. People are looking at their yearend statements and seeing better returns than a year ago. When advisors are booking appointments, they’re finding clients in a much better frame of mind. They’re recovering from being scared and scarred.”

Ninety per cent of CI’s sales are going into income-producing fund products, Green says, with most of these containing at least some exposure to equities. Six of the top 10 sellers are balanced funds or diversified income funds. The top three funds are CI Signature Diversified Yield, CI Signature High Income and CI Select Income Advantage, the last a fund-of-funds portfolio.

“Many people are realizing they have not saved enough for retirement,” Green says, “and GICs and ordinary bonds won’t get them where they want to go.”

Another firm experiencing strong sales is Toronto-based RBC Global Asset Management Inc., which had its best January ever, with fund sales up by 20% from last year as clients become more active in seeking a higher return than they can achieve in traditional interest-paying investments, says Douglas Coulter, the firm’s president. RBC’s clients are leaning toward conservative, income-producing funds, investing in a mix of equities and debt, including dividend-paying stocks and corporate bonds. Popular funds include PH&N Monthly Income Fund, RBC Canadian Equity Income Fund and Blue Bay Global Monthly Income Bond.

Clients also seem more willing to diversify geographically this year. Darren Kosack, senior vice president with Excel Funds Management Inc. of Mississauga, Ont., says appetite is growing for both debt and equities investments in emerging markets such as Latin America, China and India – and a slice of emerging markets is often included by advisors as part of the predetermined asset mix in their clients’ diversified portfolios.

In an environment of low interest rates, the relatively higher yields on investment-grade emerging-markets debt are attractive. Clients also are benefiting from high economic growth rates in emerging markets and their strengthening currencies. Currently, Excel’s bestseller is Excel High Income Fund, an emerging-markets bond fund, followed by Excel Blue Chip, an equities fund that pays a tax-efficient 4% annual income on a monthly basis.

Toronto-based Fidelity Investments Canada ULC also is reporting strong sales for January, up by almost 20% from last year. About half of sales are U.S. funds, including Fidelity U.S. Dividend, Fidelity U.S. Monthly Income, Fidelity U.S. Focused Stock and Fidelity Small Cap America.

“Markets are hitting five-year highs,” says Jaime Harper, executive vice president at Fidelity, “and people are more comfortable dipping their toes in.”

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