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Investors flee mutual funds, yanking $1.1-billion in July

Rattled investors yanked $1.1-billion from mutual funds in July, according to an early estimate, and observers say the struggling fund industry could suffer further if stock markets don't recover quickly.

"Fund sales follow markets," said Erwin Go of the Investment Funds Institute of Canada. "If markets in August drag like they did in July, sales will be affected."

The $1.1-billion of net redemptions in July matched the $1.1-billion in net redemptions in June, according to the funds institute. The July result is down sharply from last July's $1.7-billion in net sales and pushes the industry's losing streak to four months -- the worst slump since 1994.

Industry assets slid to an estimated $400-billion, the lowest level since last October, in the wake of the Sept. 11 terrorist attacks.

North American stock markets stumbled badly in July. The domestic benchmark S&P/TSX composite fell 7.6 per cent, its fourth consecutive monthly decline. In that time, Canadian stocks lost 16 per cent of their value.

U.S. stocks as measured by the Standard & Poor's 500 index were down 7.9 per cent in July, also the fourth consecutive monthly decline, pushing the April-July fall past 20 per cent.

Still, observers suggested the bulk of the money was pulled from low-yield money market funds, meaning investors have mostly resisted the urge to abandon hard-hit stock funds.

"I think the majority came out of money market funds," said James Gauthier, a mutual fund analyst at Dundee Securities Corp. in Toronto.

"But there's probably going to be higher equity redemptions because markets were so tough."

In June, net redemptions also reached $1.1-billion but only a 10th of that was taken from stock funds.

While investors haven't sold many stock funds, they haven't put new money in either -- and if they don't change their tack, a sustained market climb as predicted by a number of Bay and Wall street observers may not happen.

"We won't go higher until the retail investor feels more confident and puts new money in," said Fred Ketchen, head trader at Scotia Capital Inc. in Toronto.

"The retail investor is still very worried where this market is headed."

Stocks of fund companies have fared better than the broader market even as the industry has been plagued by net redemptions.
Investors Group Inc., C.I. Fund Management Inc. and others only tumbled 14 per cent in April, May, June and July -- two percentage points better than the S&P/TSX composite.

Among the companies offering funds, including the major Canadian banks, almost all posted net redemptions in July, according to initial estimates. TD Asset Management Inc. took the hardest blow, suffering net redemptions of $236-million. Investors Group had net redemptions of $24-million, while C.I. Fund Management reported net redemptions of $123-million.

AIM Funds Management Inc., however, reported net sales of $62-million, the only heavyweight to record a positive month.

In the United States, investors have pulled cash directly from stock funds for the past eight weeks, according to Thomas McManus, a strategist at Banc of America Securities LLC in New York. Stock funds saw $21.1-billion (U.S.) in net redemptions in the two weeks ended July 24.

"Domestic equity mutual funds have been pummelled with net redemptions, including a devastating one-two punch over the past two weeks," Mr. McManus said in a recent report.

Yet unlike the difficult experience of the 1970s, Mr. McManus said funds are not stumbling toward a massive disaster. That, he said, is mainly because inflation in the United States is less than 2 per cent annually, compared with about 10 per cent in the mid-1970s, the last time mutual funds experienced constant redemptions.

"Without a credible alternative, we believe most equity fund investors are likely to sit tight, even if that means accepting lower annual returns than previously anticipated."

© 2007 The Globe and Mail. All rights reserved.

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