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Mutual Fund News

Wary investors pull money out of mutual funds

Firms register net redemptions last month for first time in more than two years

INVESTMENT REPORTER; With files from reporter Shirley Won

For the first time in more than two years, Canadians last month pulled more money out of mutual funds than they put in as investors sought better returns than those available on low-yielding money market funds and remained wary about investing in stocks.

According to statistics released yesterday by the Investment Funds Institute of Canada, investors withdrew $262.6-million from funds in April. That was the first time the funds were in net redemptions since November, 1999, when worries about Y2K and the general health of the stock market sent investors fleeing.

But net redemptions that month in 1999 were a relatively modest $50-million. The last time there were net redemptions of more than $100-million was in February, 1995.

The figures exclude reinvested distributions.

Dan Richards, president of Strategic Imperatives, a Toronto-based financial services consulting firm, said the results can be interpreted "as absolutely dreadful, or you could look at it and say, 'Well, it isn't perfect, perhaps, but it is not that terrible, either.' "

Include the $1.3-billion in net withdrawals from Canadian money market funds in the tally and the numbers "look fairly grim," he said.

Unnerved by the turmoil in the equity markets, many investors bailed out of equities in late 1999 and 2000 and parked their money in money market funds, causing the sums in those funds to soar.

But last year, central banks aggressively cut interest rates, bringing them down to levels that many investors see as too low to stomach.

"This is certainly the biggest outflow of money market funds we have seen historically, in absolute terms," said George Vasic, strategist and chief economist at UBS Warburg Inc.

But even if the money market fund totals are excluded, the resulting figure isn't anything to celebrate, according to Mr. Richards. The $1-billion in net sales for non-money market funds is down sharply from March.

But there is a "glimmer of hope" in the numbers, he said. Investors are increasingly turning to balanced funds and dividend and income funds, which are more conservative than pure equity funds, he said. Also, there is good news in the fact that redemptions weren't larger than they were.

Since equity funds sales weren't particularly strong, that raises the question of just where the money taken out of money market funds went. Peter Loach, mutual fund analyst at BMO Nesbitt Burns Inc., offers this explanation. "I think it is going into real assets," he said.

"People feel right now that real estate is a better investment than the stock market," he said. So "with rates where they are and with home sales the way they are going, I would guess that a whole of that money has gone for the purchase of . . . cars or new houses or such."

Last month, among bank-owned fund companies, TD Asset Management Ltd. had net redemptions of $385-million; RBC Funds Inc., $219-million; Scotia Securities Inc., $150-million; CIBC Securities Inc., $149-million; and BMO Mutual Funds Inc., $63-million.

Among other companies, Altamira Investment Services Inc. had net outflows of $62-million while StrategicNova Mutual Funds Inc. posted net redemptions of $28-million.

© 2007 The Globe and Mail. All rights reserved.

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