News: Investors yank even more from mutual funds

Jamie Sturgeon | Financial Post | 11.05.08

September's record rush for the exits by Canadian mutual fund investors grew to a full-on stampede last month as they pulled more than $8.2-billion of their savings out of volatile financial markets, preliminary data showed Tuesday.

Net redemptions from mutual funds for October are estimated to total between $8.2-billion to $8.7-billion, the Investment Funds Institute of Canada said, far exceeding the $4.5-billion redeemed in September.

IFIC estimated that net assets across the mutual fund industry fell 10% to $633.6-billion.

The news Tuesday came just hours after new data from mutual fund research firm Morningstar Canada showed virtually every mutual-fund category suffered sharp declines of 10% or more in October.

"These are some of the ugliest numbers," said Philip Lee, a fund analyst for Morningstar, who said most fund categories suffered their worst drops since the Russian financial crisis in 1998 and market crash of 1987.

"Some of the funds could have been uglier if we didn't get that big currency move."

All but four of 43 fund indexes -- a basket of mutual funds within one category such as U.S. equity or real estate-based funds, for example -- tracked by Morningstar suffered losses, as markets tumbled and credit circulation "came to a grinding halt," Morningstar said in a report measuring the change in funds' net asset values per share.

Twenty fund categories in all declined more than 10% over the 31-day period.

Indeed, a rally to the U.S. greenback followed by some respite on American equity markets in the last four trading sessions of the month staved off even deeper declines in some categories, Mr. Lee said.

The historic run-up in the interbank lending rate, or Libor, through the first half of October exacerbated investor anxiety, Mr. Lee said, triggering massive sell-offs among mutual funds. "Credit essentially came to a grinding halt in the middle of the month," he said.

Indexes that tracked financial funds - once the definition of stability in equities - as well as other blue chip stocks absorbed declines between 13-18%, Morningstar's data showed. The domestic financial services index fell 15.1% led by an almost identical fall in the category's biggest fund, the iShares CDN Financial Sector Index.

Precious metals and other commodity-laden fund indexes witnessed declines of 30% or more in October as investors fretted that demand in energy and base materials was evaporating. "[The declines] certainly didn't play out well for the Canadian equity market, which is heavily influenced by energy and materials stocks," Mr. Lee said.

Not surprisingly, the four fund indices that did not lose ground were global fixed-income, which actually earned 4.5% "primarily on currency moves" in the month, Mr. Lee said; Canadian short-term fixed-income, advancing 0.6%; and Canadian and U.S. money market funds, with almost negligible returns of 0.04% and 0.02%, respectively.

The 12.9% rise in the greenback against the Canadian dollar in October benefited "any fund that owned a U.S. bond," Mr. Lee said. "You're getting that currency kick."