Canadian investors, many who have turned to safe, money market investments this year, are poised to dive back into stock and other long-term funds, market observers say.
With the S&P/TSX composite index hitting record highs and U.S. markets rebounding lately, investors will realize they've "missed the market," said Frank Hracs, chief economist of Credo Consulting. "Financial advisers are going to start throwing in the towel, and getting their investors back into mutual funds," he predicted in an interview.
That would be a reversal from April when investors stashed $560.8-million in mutual funds - mainly in money markets - compared with net sales of $2.5-billion a year earlier.
In the first quarter, all the $9.2-billion in net sales flowed to money market funds, according to the Investment Funds Institute of Canada.
A lot of the cash in money market investments in the first quarter won't necessarily go into long-term funds since it was also a parking lot for investors with maturing guaranteed investment certificates or bonds, Mr. Hracs said. But his optimistic outlook about new money flowing into long-term funds stems from the uptrend in his proprietary Canadian Mutual Fund Investor Confidence Index, which is based on the volatility in the U.S. options markets.
The index, which trended up in April and "especially May," indicates there will be a substantial increase in the demand for long-term mutual funds heading into the second half of this year, he said. "The level of confidence is consistent with mutual fund demand that is more in line with what we were seeing in late 2006 and early 2007."
The S&P/TSX composite, meanwhile, closed at a record high of 14,984.20 points last Friday with the help of a rally in resource stocks. The index, which has made a strong comeback from January lows, is up 8.3 per cent so far this year.
"If we keep pushing through to newer highs, historically you can expect more flows to go into equities," said Peter Loach, managing director of fund research at BMO Nesbitt Burns Inc. "You don't hear anybody really saying right now that the TSX is at new highs, and we expect a big pullback. Everyone is talking about the supercycle in commodities."
Toronto-based CI Financial Income Fund reported net sales of $170-million for April, including those in CI Investments and United Financial.
Derek Green, president of CI Investments, said that the firm's single biggest sellers last month were Canadian balanced funds - which invest in stocks and bonds - and that trend is continuing in May.
"The one thing we did notice was the drop in money markets in May ... and people are starting to buy more Canadian equities than in April," he said. "Investors are feeling better about the capital markets."
As of Friday, some CI Canadian equity funds have posted double-digit gains so far this year. CI Harbour, managed by Gerald Coleman, and the Cambridge Canadian Equity Corporate Class, run by Alan Radlo, are up 11 per cent, and 12.1 per cent, respectively.
Fidelity Investments Canada Ltd. reported new sales of $171-million in April after net redemptions of $11-million in its money market funds.
Fidelity spokeswoman Kim Flood said that the most popular funds in April and May continue to be Canadian balanced funds like Fidelity Canadian Balanced and Fidelity Canadian Asset Allocation.
"That has been a theme over the past few months," said Ms. Flood, noting that investors will move from money markets into the balanced category.
"It's not full exposure to the equity markets," she said. "They are looking for the comfort from full diversification as a hedge against the volatility that we are continuing to see."
The attraction of balanced funds is also a demographic trend propelled by aging baby boomers, Ms. Flood added. "As they get closer to needing that money, the volatility [of stock-only funds] is less and less appealing to them."
© 2007 The Globe and Mail. All rights reserved.
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