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Foreign market funds are back on investors' radar screens

2006 sales at a pace not seen in years

MUTUAL FUNDS REPORTER; INVESTMENT FUNDS INSTITUTE OF CANADA

International investing is back in vogue with Canadians snapping up foreign market mutual funds at a pace not seen in years.

Investors bought a net total of $6.6-billion in all foreign common share funds last year, the Investment Funds Institute of Canada reported yesterday. That's a dramatic shift from net redemptions of $5.5-billion in 2005. It's the asset class's best sales year since 2000 when investors bought $16-billion in foreign common share funds.

"Canada has reached fair value levels and we are seeing more opportunity in global and international markets," said Jonathan Hartman, vice-president of investment products at RBC Asset Management Inc. in Toronto. The mutual fund arm of Royal Bank of Canada oversees about $71.8-billion in assets under management.

Mr. Hartman expects foreign fund sales will continue to pull in new investment dollars in 2007, citing increasing opinion that Canada's four-year bull equity market may have peaked as well as the end of foreign content limits held in retirement plans.

Increasing sentiment that both the Canadian dollar and commodity prices may be in decline has prompted many investors to rethink their investment portfolios, said Chris Reynolds, president of Investment Planning Counsel Inc., a Mississauga-based wealth management firm with about 500 financial advisers.

"We are seeing a shift in asset allocation," Mr. Reynolds said. "Clients who had probably more Canadian content than they should are now rebalancing and getting back in to global markets."

Indeed, four international fund categories that posted dismal sales results in 2005 were back in the black last year, IFIC said. The global equity funds category had the most significant sales recovery, reporting $3.4-billion in net sales. That's up from $3.4-billion in net redemptions in 2005, IFIC said.

European and emerging market funds were the international investment regions of choice, said Gavin Graham, chief investment officer at Guardian Group of Funds in Toronto.

But not all foreign asset classes saw gains in 2006. Fund investors continue to shun the U.S. market. The U.S. equity fund category reported net redemptions of $573.4-million last year compared with net redemptions of $1.5-billion in 2005.

Concern about the strength of the U.S. economy has many in a skittish mood, Mr. Graham said. He advises investors to be on the defensive and limit their risk by buying U.S. equity funds that focus on export-driven blue-chip companies, he said.

"If you are worried a little bit about the U.S. weakening, look to firms with exports and overseas operations. In U.S. dollar terms, their earnings are going to hold up," he said.

The appetite for some income-generating funds cooled in 2006. Canadian income trust funds, facing the prospect of a new tax regime in 2011, reported net redemptions of $18.1-million last year, down from net sales of $2.8-billion in 2005. Demand for Canadian dividend and equity income funds, meanwhile, softened too with 2006 net sales falling to $5.7-billion, down from $10.4-billion in 2005.

Canadian bond funds saw the year's biggest sales, reporting net total of $6.4-billion, down from $7.1-billion in 2005. Fixed income funds are seeing "renewed interest" from investors, said Dr. Mohamed Ayadi, associate professor of finance at Brock University in St. Catharines, Ont. Recent research suggests investors are in a conservative mood and "rebalancing their portfolios to put more weight in fixed income funds," Dr. Ayadi said.

December's net sales for all funds totalled $3.2-billion, almost double the fund industry's December, 2005, performance when the sector reported net sales of $1.7-billion. The results indicate the current registered retirement savings plan sales season will trump last year's tally of about $10-billion, said Frank Hracs of Toronto industry research firm Canadian Mutual Fund Analyst.

The sales "surge has been welling up for most of 2006 and continues to argue for a superb [first-quarter] 2007 RRSP season," Mr. Hracs said.

Best-selling fund categories in 2006

Top 10 categories, sorted by net sales.

Net sales excluding reinvested distribution
Category20062005% change
Canadian bond$6,449,394 $7,062,104 - 8.7
Canadian income balanced6,436,8547,051,898- 8.7
Canadian dividend, equity income5,688,59510,361,703- 45.1
Canadian balanced3,751,9058,315,085- 54.9
Global equity3,375,036- 3,382,367+199.8
Global balanced2,834,659553,481+412.2
International equity2,386,43413,270+17,883.70
Specialty or miscellaneous1,330,990927,319+43.5
Emerging markets equity673,773- 2,866+23,609.20
U.S. small- to mid-cap equity591,873- 185,952+418.3

© 2007 The Globe and Mail. All rights reserved.

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