Like other investments, mutual funds have been battered by the financial crisis. And, given the depth of the current chill and the level of consumer debt, it may be a while before consumers allocate existing savings to mutual funds, says a new report.
In its annual review of the fund industry, Investor Economics Insight points to the first year-over-year downturn in assets since 2002. Similarly, funds’ share of all financial wealth has declined to 27% from a year ago, repeating the earlier bear market pattern.
That will take a toll on mutual fund company operations, as revenues have fallen by 5.4%. Still, revenues — at $11.4 billion by the end of October — are much larger than they were in 2002, at $7.1 billion. Revenues are calculated using management and trailer fees but exclude operating expenses and GST.
Still, there are some divergences. Net flows into long-term funds are negative but are still positive for segregated funds, including guaranteed minimum withdrawal benefit products. In addition, reinvested distributions, which accounted for 1% of beginning assets, or $3 billion in 2002, are now estimated at $27 billion, or 4% of beginning assets.
Also, fund wraps are holding up better than stand-alone funds, with redemptions occurring at only half the rate of single-mandate funds. These now account for a quarter of industry assets. Fund wraps are likely to become more popular as investors shift to more conservative and balanced or moderate allocations to smooth volatility. This shift is already reflected in gross sales, with the lion’s share flowing to short-term investments, with upswings in balanced, equity income and bond categories. Indeed, Investor Economics remarks that the asset allocation of the industry itself increasingly looks like that of a conservative investor, as opposed to 2000, when 60% of total assets were in equities.
There are other signs of stabilization for mutual funds. Three-quarters are sold through the advice channel, roughly the same as five years ago. Also, funds have retained a constant 45% of RRSP assets. In both instances, investments tend to be stickier.
Still, funds do face a buyers’ strike. It’s not just that falling asset values have dimmed the desire to invest; it’s that many consumers may not have the money because of falling incomes and rising debts. But Investor Economics reckons that about $1 trillion is sitting on the sidelines in liquid assets — GICs, savings accounts and money market funds — and that some of that money will return to funds. Low interest rates will be one reason, but a second is the attractive dividend ratios stocks are now sporting.
(12/29/08)