Canadian investors, rattled by headlines about money market funds exposed to troubled asset-backed commercial paper, yanked about $1.4-billion out of these investments last month.
And the Canadian fund industry, which has been enjoying buoyant cash inflows amid rising markets, suffered a total of about $1.5-billion in net redemptions in all funds - the first month of outflows since October, 2004, according to figures released yesterday by the Investment Funds Institute of Canada (IFIC).
National Bank of Canada - the only big bank to hold third-party backed commercial paper (ABCP) in its money market funds - saw $360-million in net redemptions in these investments, the worst month for money market redemptions since January, 2001, when investors withdrew $195-million.
While mutual fund arm of Toronto-Dominion Bank did not hold the controversial paper in its money market funds, it got stung the most last month with $457-million in outflows.
"It was investor nervousness that resulted in the large redemptions in money market funds," said Peter Loach, a vice-president and managing director of fund research at BMO Nesbitt Burns Inc.
"Although people really didn't have to be concerned in hindsight, a lot of investors just preferred to be conservative, and moved into something like Treasury bills," Mr. Loach said.
"It's a function of what they've read in the paper," he said. "Most people would not have understood the complexity surrounding the asset-backed credit market."
With the gyrations in stock markets last month triggered by global credit woes, investors typically would have been plunking cash into money market funds, Mr. Loach said. "It was definitely an anomaly."
Money market funds are typically used as a parking spot for cash, and have always been marketed by fund companies as a safe haven. August was the worst month for net redemptions in money market funds since investors withdrew $1.7-billion in April, 2003.
But some fund companies invested in non-bank ABCP in its money market funds, and this short-term debt backed up by packages of credit card, car and mortgage loans have faced a liquidity crisis. Players in this market, such as Toronto-based Coventree Inc., have fallen victim to a global credit crunch and have been unable to fund repayment of notes that have come due.
IFIC statistics analyst Dennis Yanchus said it wasn't surprising cash was withdrawn from money market funds given the newspaper headlines, and the profile of many of the investors.
"That is the most risk-averse portion of the population," Mr. Yanchus said. "But I think it is going to be temporary, and people will come back."
Many fund players have said they said they plan to buy back third-party ABCP from their money market funds. Last month, National Bank said it would buy back $2-billion of ABCP held in funds managed by the bank and its Altamira mutual fund subsidiary.
Groupe Desjardins, Industrial Alliance Insurance, Meritas Financial Inc. and Financial Services Inc., which owns IA Clarington Investments, also said they would buy back the troubled ABCP in their funds.
"Going forward, mutual fund companies are going to be looking closely at their money market funds, and whether or not they will want to hold this type of paper," Mr. Yanchus said.
Largest net redemptions for money market funds
Preliminary asset estimates for August.
RBC Asset Management Inc.: -$115-million
CIBC Asset Management: -$161-million
IGM Financial Inc.: -$186-million
National Bank Group: -$360-million
TD Asset Management: -$457-million
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