Investors have no way of knowing whether their mutual funds contain telltale signs of market timing activity.
A mutual fund's annual report contains such information as average assets for the years as well as sales and redemption figures. But that is only part of the picture.
Report on Business used monthly breakdowns of sales, redemptions and transfers in and out of a fund within the same family. Fund companies provide these figures to the Investment Funds Institute of Canada (IFIC), the industry trade group.
IFIC compiles these statistics into a lengthy, monthly statistical package titled Details By Fund Type Report. At one time, IFIC made these reports available to the public by publishing them on its website.
But as of April, 2001, IFIC has restricted access to these reports to mutual fund companies and other IFIC members. For everyone else, IFIC charges $1,000 for a year's worth of data. (Report on Business obtained the reports for April, 2001, through to December, 2003, from industry sources.)
John Murray, head of research at IFIC, said its board of directors decided to start charging for the report as part of a recruitment drive. They wanted to encourage fund companies that were using its services but were not members to join IFIC, he said.
In the process, the public lost access to a rich source of timely data that reveal what's behind a mutual fund's churn rate -- a measure of sales, redemptions and transfers relative to average assets.
IFIC now publishes bare-bones information every month, including a ranking of fund companies, measured by assets under management, and total assets, sales and redemptions for the industry.
Investors can get more information on their fund by wading through its annual report. There, using such data as the table of change in net assets, they can find enough information to calculate an annual churn rate.
But the annual reports do not disclose enough information to allow an investor to differentiate one fund with a high churn rate from another.
The IFIC data used by Report on Business revealed that many fund companies with high churn rates had patterns of monthly transfers in and out that were roughly similar.
In the annual reports, transfers are lumped in with sales and redemptions, so there is no way of seeing how much cash flows in and out of funds within the same family. There is also no monthly breakdown of activity.
Two examples illustrate the point. In the Ethical International Equity Fund last year, cash flows in and out were six times average assets of $3-million, for a churn rate of 606 per cent.
At first glance, the rate appears high. But the fund was excluded from the group singled out by Report on Business because further scrutiny revealed that nearly all of that activity came from sales, which totalled $17.2-million.
Figures for the Templeton Growth Fund, the second-largest mutual fund in Canada, told a different story. Cash flows totalled $11.5-billion in 2002, roughly 1.5 times average assets of $6.4-billion, for a churn rate of 142 per cent. It made the list because sales were only $380-million, while much of the action was from transfers in ($4.9-billion) and transfers out ($5.1-billion).
© 2007 The Globe and Mail. All rights reserved.
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