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Trusts failing to lure fund investors

One of last year's hottest asset classes sees dramatic decline in flow of new money

MUTUAL FUNDS REPORTER

Mutual fund investors have soured on income trusts.

New money flowing into one of last year's hottest asset classes has shrunk dramatically this registered retirement savings plan season as investors search for new means to generate cash flow. The poor showing of the income trust category is in stark contrast to the fund industry's strong performance so far this year that saw companies report $4.9-billion in February net sales.

A group of about 70 income trust funds reported net sales of $115.5-million in January and February this year, the Investment Funds Institute of Canada said yesterday. That's down a whopping 86 per cent from $838.5-million during the same two-month period last year.

Fund companies with significant income trust assets under management, a group that includes CI Financial Inc. and Franklin Templeton Investments Corp., reported a downturn in sales. Volatility stemming from the federal government's policy shuffle on the tax status of income trusts last fall was largely to blame, executives said.

"Income trusts have slowed in terms of their asset growth. . . . People are looking at diversification at this point in the cycle," said Roland Chalupka, vice-president and portfolio manager with Franklin Templeton Investments' private client group.

In September last year, former finance minister Ralph Goodale said the Canada Revenue Agency would no longer grant advance tax rulings to help companies become trusts, prompting a wave of retail selling in trusts and trust-heavy funds. Worry turned to relief in November when the federal government opted to leave the tax status of the asset class alone, and instead raise the dividend tax credit.

"People got a bad fright," said Gavin Graham, chief investment officer at Guardian Group of Funds Ltd., a trust fund pioneer that saw an estimated $50-million downward swing in year-over-year RRSP sales into the category.

"Everyone loves them [trusts] when they are going up but when they go down . . . what took them six months to do on the upside, they will do in six weeks on the downside," Mr. Graham said.

Fund companies with a hefty stake in the trust category have worked hard to diversify their product offering this RRSP season. For example, Sentry Select Capital Corp., a Toronto firm with about half of its $1-billion in retail fund assets invested in trusts, has had some success marketing principal-protected notes tied to the asset class.

PPNs are a basket of securities that, if held to term, guarantees the investor his principal investment plus any additional gains.

"There's still the demand for yield . . . but maybe now they're looking for more downside protection," said Michael Kovacs, Sentry's managing director of mutual funds. "The flows will continue into the income trust area but I think maybe the pace will slow down. . . . People are just being a little more cautious."

Mavrix Fund Management Inc., meanwhile, has been "aggressively selling" its small-cap and resource funds, said Mal Spooner, Mavrix president and chief executive officer. About one-third of the Toronto firm's $454-million in retail fund assets is invested in trusts.

"There is a shift taking place," Mr. Spooner said. He expects income trust fund sales will be "static" as investors sink money into more diversified equity-driven funds and "start looking beyond to try and capture some growth and capital gains."

Indeed, diversified balanced funds were February's biggest sellers, reporting net sales of $1.9-billion. Bond and income funds and dividend and income funds each reported about $1.2-billion in net sales last month, IFIC reported.

Net fund sales in January and February totalled $6.5-billion, compared with $6-billion for the same period in 2005. Strong March sales figures may push this year's RRSP tally above last year's $10.2-billion in net sales, analysts said.

Trust downturn

Despite a strong RRSP season, new money flowing into income trusts has dried to a trickle as investors search for other means to generate consistent cash flow.

FUND TYPE FEBRUARY YR.-OVER-YR. % CHANGE TOTAL ASSETS MONTH END
Balanced$1,872,624+35.0%$129,563,698
Canadian common shares238,088+12.5137,130,662
Foreign common shares770,605+3.394,302,428
Bond and income1,185,983+20.964,793,762
Foreign bond and income82,299-0.46,209,780
Dividend and income1,176,753+24.273,627,023
Mortgage-5.492+6.94,764,249
Real estate19,902+26.12,375,756
U.S. common shares260,985-4.031,981,587
Money market-689,678-11.242,408,663
Foreign money market-14,271-3.01,888,881
All funds$4,897,798+13.8%$589,046,489

© 2007 The Globe and Mail. All rights reserved.

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