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Spooked income trust investors hinder October mutual fund sales

$750-million in net gains thinly spread, but are a big improvement from last year

MUTUAL FUNDS REPORTER

October was a weird period in the mutual fund business.

Despite a weak month for the Canadian stock market, net sales continued with investors sinking an estimated $750-million into funds. But the gains were thinly spread as investors shunned income trust funds and fund companies and snapped up conservative fixed-income offerings touted by the banks.

"It was a strange month. It's hard to figure out what the retail sector is doing," said Peter Loach, a fund analyst at BMO Nesbitt Burns Inc. He estimates the industry's net sales for October will range between $650-million and $750-million.

Uncertainty about the future tax status of income trusts "caused a lot of concern in the sector and is reflected in the redemptions in those particular funds," Mr. Loach said.

The Investment Funds Institute of Canada said yesterday that last month's net sales will come in at between $550-million and $950-million.

That's up from a dismal $52-million in net redemptions reported in October last year.

Once again, RBC Asset Management, the fund arm of the Royal Bank of Canada, led the pack, reporting net sales of $461-million last month. Close behind was the fund operations of the Toronto-Dominion Bank, reporting $413-million in net sales. Bank of Montreal's BMO Funds was in third place with $257-million in net sales.

Eight of Canada's 20 largest fund companies lost ground in October. The worst performer of the group was AIM Funds Management Inc., reporting $191-million in net redemptions. CIBC Asset Management, the fund arm of Canadian Imperial Bank of Commerce, lost $179-million in client funds, while AIC Ltd. reported $167-million in redemptions.

Guardian Group of Funds Ltd., a Toronto company that pioneered the income trust market, reported a slender $1-million in October sales.

"It's an example of what happens in a volatile asset class. When you get volatility on the downside, then you will obviously get a month like this," said Gavin Graham, Guardian's director of investments.

Even fast-growing CI Fund Management Inc. did not escape the month unscathed. Canada's third-largest fund company reported October net redemptions of $33-million largely because of an asset allocation shift by two institutional investors, said chief executive officer Bill Holland.

On Sept. 19, Finance Minister Ralph Goodale said the Canada Revenue Agency would no longer grant advance tax rulings to help companies become trusts. There's widespread concern among investors that a distribution or capital tax targeting trusts may be coming early next year. The S&P/TSX Capped Income Trust index, a broad-based composite of Canada's largest trusts, has tumbled 13 per cent in value since Mr. Goodale's announcement.

Meanwhile, a pullback in the price of crude oil futures prompted a correction in many blue-chip oil and gas stocks. The energy sector makes up a hefty 26 per cent of the S&P/TSX composite index and was a chief contributor to the broader index losing 5.7 per cent in value last month.

Morningstar.ca, a mutual fund investment website, reported its Canadian Income Trust index fell 8.1 per cent in value in October, while its Natural Resources fund index was down 8.6 per cent last month. During the first nine months of the year, the trust index was up 17.5 per cent while the resource index rose 40.2 per cent.

"In the last month, we certainly did see a drop in the pure fixed income, specifically in the income trust side," said Chris Reynolds, president of the Investment Planning Counsel of Canada Ltd., a Mississauga company with about 550 financial advisers.

"Clients now realize that income trusts are not the same as fixed income," Mr. Reynolds said.

Strange days

Investors sank an estimated $750-million into investment funds in October, even as the Canadian equity market drifted and the outlook for income trusts grew cloudier. Last month gave investors their first real taste of the volatility that can occur in the trust sector, according to Chris Reynolds, president of the Investment Planning Counsel.

The winners

Fund companyOctober estimated net sales ($millions)Total assets under management ($billions)
1RBC Asset Management Inc.$461 $54.90
2TD Asset Management41341.4
3BMO Funds25723.3
4IGM Financial Inc.9188.3
5Phillips Hager & North Ltd.8115.1

The losers

Fund companyOctober estimated redemptions ($millions)Total assets under management ($billions)
1AIM Funds Management Inc.- $191$43.20
2CIBC Asset Management- 17943.4
3AIC Ltd.-1678.6
4Scotia Securities Inc.-12815
5AGF Management Ltd.-11021.8

© 2007 The Globe and Mail. All rights reserved.

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