Playing it safe

“There’s continuing uncertainty and that is reflected in the flows,” says Steve Donald, president of Toronto-based Assante Wealth Management (Canada) Ltd. “The area attracting the most interest is the ‘income’ space, which includes a combination of corporate bonds, dividend-paying stocks, preferred shares and other income-paying securities. Although there has not been a vast rotation to cash, there’s been a significant slowdown in traditional Canadian equities.”

Income products are attractive, Donald says, because their distributions, usually in the form of interest or dividends, offer the promise of some return even if financial markets decline.

Many income-paying investment funds hold a mix of fixed-income and equities, and are often diversified globally. That built-in diversification tempers the volatility, relative to funds that are concentrated in a single asset class, and also relieve clients of the decision about whether it’s a good time to be buying any particular type of securities.

“The risks in the marketplace can’t be ignored,” says Donald, “but, at the same time, investors realize that cash is not an avenue to success. Investors are making conservative choices rather than operating from extreme fear or optimism. The mood is actually better than when markets are strongly up or down.”

The final four to five months of 2011 saw equities markets losing ground and refreshed clients’ memories of the losses they suffered in 2008, says Gordon Forrester, executive vice president, product and marketing, and head of retail with AGF Investments Inc. of Toronto.

“Investors are worried about the European debt situation and the outlook for U.S. and global growth,” Forrester says. “There’s a lot of watching and waiting going on, and people are wary. Income and balanced funds have protected them for the past few years, and that’s where they’re focusing.”

Ernie Eng, senior economist with the Investment Funds Institute of Canada, says this RRSP season shows that trends established in 2011 are continuing, as clients struggle to find some return in this environment of low interest rates while also trying to manage the volatility roller-coaster.

In 2011, the biggest-selling mutual fund category was global balanced funds, with $16.9 billion in net sales. The runner-up was domestic balanced funds, with $10.8 billion; followed by domestic fixed-income funds ($5.5 billion) and global and high-yield fixed-income funds ($3.4 billion).

Categories experiencing strong outflows include domestic equity funds, global and international equity funds, and money market funds.

Although some of the fund-management firms say the 2012 season started off more slowly than last year’s, Toronto-based RBC Global Asset Management Inc. has seen the RRSP season get off to a strong start, with almost $1 billion in net sales in its long-term funds (excluding money market funds) in the month of January. RBCGAM’s top-selling funds include RBC Select Portfolios, PH&N Bond Fund, RBC Canadian Equity Income Fund, RBC Canadian Short-Term Fund and RBC Managed Payout Solutions.

“If something is conservative and it offers income, it’s popular,” says Doug Coulter, president of RBCGAM. “The majority of our sales are in the Select Portfolios, which is a fund-of-funds product. There’s built-in asset allocation and exposure to a variety of assets, including short-term bonds, U.S. equities and emerging markets.”

The search for yield has led clients to be a little more adventurous on the fixed-income side, Coulter says, by branching out beyond the Canadian bond market to put money into international bond funds such as BlueBay Global Monthly Income Bond Fund, which includes exposure to global corporate and emerging-market sovereign debt; RBC Global Corporate Bond Fund; and RBC Emerging Markets Bond Fund.

With the recent pickup in the U.S. stock market, Coulter adds, RBCGAM also is seeing some interest in U.S. equity funds. “People are getting a sense that the U.S. market may have bottomed,” he says, “and are starting to dip their toes in.”

Toronto-based Dynamic Mutual Funds Ltd., a division of Toronto-based Bank of Nova Scotia, is experiencing strong client appetite for income funds. Its bestsellers include Dynamic Strategic Yield Fund, Dynamic Advantage Bond Fund and Dynamic Equity Income.

Jordy Chilcott, head of Cana-dian funds with Scotiabank’s global asset-management division and executive vice president of Dynamic, is also seeing the beginnings of interest in equity funds, with strong sales for Dynamic Value Fund of Canada, which now is being run by vice president and portfolio manager Cecilia Mo, who replaced longtime manager David Taylor last year.

“Volatility is the new normal,” Chilcott says. Dynamic, he adds, has been working with advisors on how to structure diversified client portfolios in which a complementary fund mix can increase returns without increasing risk.

Dynamic, through a program it calls Volatunity, has put together five portfolio strategies, called insulation, preservation, automation, acceleration and relocation, to help make the most of opportunities in volatility. These strategies include an appropriate cash “wedge,” a diversified mix of products, automatic asset allocation, non-correlation of assets and exposure to growth.

Adrian Mastracci, president of Vancouver-based KCM Wealth Management Inc., agrees that an appropriate asset mix helps keep clients on a disciplined path of investing regularly and smooths out the bumps. For example, while the broad Canadian index fell by 9% in 2011, this was offset by gains in fixed-income and high-dividend stocks.

“When there’s new money to be invested,” says Mastracci, “we look at which asset class needs to be topped up, and rebalance when necessary. The plan eases concerns about picking the right time to invest.”

Mastracci says ETFs are useful tools for diversification, both across asset classes and individual securities within those classes: “Clients understand why the mix makes sense, and they take well to the strategy. A balanced portfolio gives them exposure to Canada, the U.S., global and emerging markets.”

Although the S&P/TSX composite index dropped last year, it might go still lower. And the fixed-income category, which has performed well for the past several years, may be sent reeling by a rise in interest rates.

To help clients get over the worry of picking the wrong time to add to asset classes that fluctuate, Mackenzie Financial Corp. of Toronto has come up with a dollar-cost averaging plan. Mackenzie’s One-Step Dollar Cost Averaging program allows clients to invest a minimum of $1,000 in a Mackenzie-branded money market fund and then automatically transfer the monies in equal weekly instalments during the course of a year into one or more of 38 eligible Mackenzie mutual funds.

“Some people have been staying out of financial markets, or making choices out of fear that can actually shrink their assets,” says Mary Taylor, senior vice president, products and marketing, with Mackenzie.

“[Guaranteed investment certificates] are paying less than inflation, so those types of investments are not a sustainable course,” she says. “The DCA plan helps people invest in a disciplined way and to take advantage of the higher, long-term returns offered by Mackenzie’s funds.”  IE