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Mutual Fund News

A fund forecast: Income will rule

Demographics suggest security is key

MUTUAL FUNDS REPORTER

Powerful banks, the quest for yield and risk management -- odds are, 2007 will look a lot like 2006 did for the mutual fund industry.

2006 -- the good, the bad and the ugly

Once again, Royal Bank of Canada was the dominant player among the major fund companies. RBC Asset Management Inc., the bank's fund arm, reported $70.7-billion in assets under management as of Nov. 30, up from $56.9-billion in November, 2005. That's a year-over-year increase of 24.2 per cent, well above the industry average of 16.2 per cent.

The simple ingredients are the right products and a crack sales team. The RBC Monthly Income Fund, RBC Balanced Fund and the RBC Canadian Dividend Fund are all well-regarded, multibillion-dollar funds meeting investors' demands for income and yield.

President and chief executive officer George Lewis has built one of the largest sales teams in the country to tell the story. There are about 7,500 working in bank branches, another 1,000 bank advisers pursuing high-net-worth clients and, finally, some 500 "mobile planners" who cold-call customers on the road.

At the other end of the spectrum, AIC Ltd. of Burlington, Ont., reported $8.4-billion in assets under management as of Nov. 30, a 3.2-per-cent decline from $8.7-billion 12 months earlier. That's down dramatically from a peak of $15.4-billion four years ago.

During the same period, the S&P/TSX composite index was up 16 per cent in value while AIM Funds Management Inc., the fund company with the highest net redemptions in 2006, actually eked out a year-over-year gain of 7.9 per cent to $47.7-billion on the money it retained.

The asset class of the year was, without a doubt, precious metal equity funds, up 53 per cent during the first 11 months of the year. Top of the heap is the Sentry Select Precious Metals Growth Fund, up 67 per cent as of Dec. 20 this year. Kevin MacLean, fund manager since 2004, has a knack for picking fast-rising junior and mid-tier firms.

Japanese equity funds, the country Merrill Lynch dubbed "everyone's favourite 2006 trade," was the underachieving asset class of the year. As of Nov. 30, they were down 4.3 per cent year to date.

As recently as May, fund managers were bulking up on the land of sake and sushi. For example, the RBC O'Shaughnessy International Equity Fund cranked its Japan weighting to 33 per cent; only six years ago, the U.S. version of the fund held close to zero.

What's coming in 2007

Demographics dictate that the thirst for yield and income will continue. Recent launches provide a sense of things to come. In October, Manulife launched Income Plus, a guaranteed income fund that has rapidly gained acceptance in the U.S. market. The insurance giant reports Canadian sales have far exceeded expectations, an early indication investors are willing to pay a premium fee to lock in gains.

Investors are in a defensive mood, said Don Reed, Franklin Templeton's president and chief executive officer. He expects an increasing number of products will tackle tax concerns or seek income from new sources, including U.S. corporate bonds and global securities with higher yields.

Finally, there's expected to be much soul-searching among the many boutique money managers that have made the most of the income trust boom. The asset class will lose its tax-free status in 2011, a reinvention deadline for firms with major trust exposure, including Sentry Select Capital Corp., Acuity Funds Ltd. and Mavrix Funds Ltd.

© 2007 The Globe and Mail. All rights reserved.

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