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'Emotional response' sends money-market sales soaring


Cash is king for now.

Sales of money market funds hit a record high - of $10.7-billion - for first quarter of 2008, compared with the same three-months in any year over the past decade, according to the Investment Funds Institute of Canada (IFIC).

In March, all of the $2.6-billion in net mutual fund sales flowed into money market investments as was the case for the January inflows. Last month, long-term funds suffered $66-million in net redemptions.

"It's an emotional response to one-year negative returns on their [fund] statements," said Peter Loach, managing director of fund research at BMO Nesbitt Burns Inc.

It is not uncommon for Canadian investors to make a bee line to money market funds when North American stock markets are volatile, but the degree to which they did so in the first quarter was unusual, Mr. Loach acknowledged.

While a good chunk of the money might have flowed into foreign stock funds in the past, those investments have been hurt by a strong Canadian dollar, unless they were hedged, he said.

In Canada, the S&P/TSX Composite index tumbled 4.9 per cent in January. While the market bounced back in February with a 3.25-per-cent gain, it fell 1.7 per cent in March.

"That drop in the TSX during January, accompanied by news for the past few months before [about global credit woes and U.S. recession] kind of woke people up to the fact that risk is still out there," said IFIC statistics analyst Dennis Yanchus.

George Vasic, chief strategist for UBS Securities Canada Inc., also noted that money market funds now exceeds $66-billion - $2.5-billion above their peak in December, 2001.

"Investors remain cautious about the fragile state of the equity markets," Mr. Vasic said. "They are parking their money for now with the eventual redeployment into the various asset classes once they feel more comfortable with the market outlook."

Frank Hracs, chief economist at Credo Consulting Inc., noted it was the big five banks that aggressively sold the money market investments instead of long-term stock or bond funds.

"It appears that money market funds currently represent the course of least resistance for bank sales forces, while the non-bank firms, as a whole, are not selling much of either category," Mr. Hracs said.

But it is still "not clear" that the cash parked in money market investments is ultimately destined for long-term mutual funds, or if it will head to other investments such as individual stocks, he indicated.

© 2007 The Globe and Mail. All rights reserved.

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