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Wary investors turn to cash

Money markets top asset class in Sept.


Investors are in a cautious mood, pouring hundreds of millions of dollars last month into safe-harbour money market funds.

A lot of people fear that stock prices have peaked, said Chris Reynolds, president of Mississauga-based Investment Planning Counsel Inc. "It's very volatile right now. Money is flowing in but people are looking for those safe havens."

Money market funds were far and away the asset class on investors' shopping lists last month. About $849.9-million poured into Canadian money market funds in September, the Investment Funds Institute of Canada reported yesterday. Canadian income balanced funds, with diversified holdings, were in distant second place, reporting $327.7-million in net sales.

Net sales by all funds totalled $1.1-billion in September, down from about $1.8-billion a year earlier, IFIC reported. Total industry assets under management reached $610-billion last month.

Peter Loach, fund analyst at BMO Nesbitt Burns Inc., said money market funds represented the overwhelming bulk of sales last month at many mutual fund companies, including Investors Group Inc., CI Financial Income Fund and CIBC Asset Management Inc. Competition for investment dollars in that asset class is increasing, as fund companies continue to sweeten rates of return, he said.

There's been a reversal of fortunes for money market funds, the "wait-and-see" place where investors typically park money to ride out market uncertainty.

Since 2002, investors have steadily withdrawn money from short-term money market funds and switched to long-term equity funds, especially income and balanced products geared to meet retirement needs of aging baby boomers. In January alone, investors pulled $884.5-million from money market funds, and stowed $964.9-million in balanced funds.

But the tide shifted in June, when investors placed $89.7-million into money market funds. Momentum continued through the summer months, reaching $396-million in August before demand doubled again last month.

Many investors are uneasy, said Vancouver financial adviser Adrian Mastracci, noting that falling commodity prices, interest rate worries, and fear of a slowing U.S. economy have investors on edge. "A lot of people are taking some equities off the table." For risk-averse clients, he shuns potentially higher-cost money market funds in favour of treasury bills and government bonds with a guaranteed rate-of-return of about 4 per cent.

"A lot of clients are saying for a year or so, that's not bad. I could do worse . . . If you are going to get clipped, you won't get clipped that much," Mr. Mastracci said.

The current "exaggerated degree of fear" is not bad news for the fund industry, stressed Frank Hracs of industry research firm Canadian Mutual Fund Analyst. He expects the lion's share of dollars now in short-term funds will eventually flow into long-term funds, asset classes more lucrative for fund companies when it comes to fees.

"The surge in money market demand, which is concentrated among the banks, may very well represent the start of a new up-leg in fund demand," Mr. Hracs said. "The money market assets may very well filter into long-term funds over the next several months as, ultimately, there has not been any particular improvement in the relative unattractiveness of short-term funds as far as returns are concerned."

© 2007 The Globe and Mail. All rights reserved.

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