With everyone practising safe investing these days, it's hard to find something to get excited about in the financial world.
The hot spots of 2004 include principal-protected notes, a nanny investment if ever there was one, plus income-oriented mutual funds, income trusts and musty old dividend stocks. The dud category of 2004 was equity funds, even while the stock markets notched their second consecutive year of good gains.
Bulls and bears, meet a new breed of investor called the chicken.
The analysis firm Investor Economics has studied the product sales trends in the financial industry and identified a "risk management" theme that will persist in 2005. "Investors haven't really changed their desire, which is to increase wealth," says Earl Bederman, the firm's president. "But they are more conscious of protecting wealth."
The mutual fund business is experiencing this most acutely. If you total up the sales of dividend and income funds and then subtract redemptions, you're left with net new sales of $7.2-billion through the first 11 months of 2004, just more than double last year's $3.5-billion and by far the best performance of any fund category last year. Balanced funds, which mix bonds, stocks and, increasingly, income trusts, had net sales of $5.2-billion, good for second spot. Meanwhile, both the Canadian and global equity fund categories had net redemptions of more than $1-billion, even while taking in a respectable $13-billion and $11.4-billion, respectively, in new money.
The fund industry had some bad publicity to contend with in 2004, with four big companies agreeing to pay $156.5-million in fines after acknowledging they permitted a few favoured clients to engage in abusive trading that penalized rank and file unitholders.
Some in the financial realm believe that cumulative negative publicity has turned both investors and some advisers against funds. "If you want the top 10 issues of 2004 from market professional's point of view, numbers one through five would be mutual funds," said one wealth management executive. "Everyone hates mutual funds now."
That's an exaggeration, of course. While they're clearly ambivalent about equity funds, investors love -- LOVE -- diversified income funds that mix dividend stocks, income trusts and bonds, not to mention dividend and balanced funds.
"Right now, it really appears that investors are moving toward monthly income-type products," said David Feather, president of fund giant Mackenzie Financial Services Inc. "If you knock out Trimark Income Growth [a balanced fund] and you look at the other top-selling funds, they're all called monthly income."
Guaranteed investment certificates are the very soul of conservative investing and they moved well in 2004, too. Royal Bank of Canada reports incremental single-digit growth in the bank's GIC business, even while one-year rates averaged about 2 per cent in 2004 and five-year rates about 3.3 per cent. "A lot of people have jokingly asked, are GICs still around?" said David Birkbeck, RBC's senior manager for personal term deposits. "They are, they're still relevant and they appeal to conservative investors."
According to RBC, conservative investors are increasingly choosing longer GIC terms rather than falling back on the failed strategy of rolling over one-year deposits or using cashable instruments. In today's low-rate environment, people who renew GICs in a year always seem to get the same or less.
An increasingly popular alternative to both GICs and funds in 2004 was the principal-protected note, which offers the opportunity to make gains based on various stocks or stock indexes and, at worst, get your principal back. The costs of capital protection are such that a long-term investor would do better to simply buy stocks or funds. And yet, the idea of capital protection obviously resonates with investors.
"Some clients can't handle the volatility, they can't handle the risk factor," said Steven Marshall, president of Open Sky Capital, a major player in structured products like principal-guaranteed notes that is part owned by National Bank of Canada. "They want to know if there is a way to bring a sense of security, which is the capital guarantee, without losing too much of their return, at a reasonable price."
The price of protection has always been the weak spot with capital guaranteed products, but Mr. Marshall said that's slowly changing as the market develops. "Competition has forced many structurers to bring far more innovative products out there, with far cheaper fees," he said.
Mr. Marshall estimates that structured products, including principal-guaranteed notes and closed-end mutual funds that are listed on stock exchanges, have attracted roughly $13-billion in assets. He says asset growth of 50 per cent a year is possible as the structured product market widens to include new products in areas like fixed income.
The surprising thing about the safe investing trend is that it has taken hold during a two-year period in which the stock markets have turned in the best two years since the bull market of the late 1990s. Expectations of weak equity markets in 2005 mean there's no reason for the trend to wane, said Mackenzie's Mr. Feather. "I think you're going to see it prevail for quite some time," he said. "I really do."
© 2007 The Globe and Mail. All rights reserved.
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