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Mutual funds suffer record redemptions


Canadian investors, rattled by plunging stock markets and worried about the safety of their money market funds, yanked a record $4.6-billion from mutual funds in September.

It was the largest month for net outflows since the Investment Funds Institute of Canada (IFIC) began collecting data in 1990. The second highest month was April, 2003, when investors pulled $1.7-billion.

"Given what has happened in the markets, people are terrified," said independent fund analyst Peter Loach. "People who are approaching retirement have seen a significant amount of their retirement savings disappear."

Stock markets have tanked in the wake of a severe U.S. financial crisis that has led to venerable institutions like Lehman Brothers failing, while a credit squeeze has led to fears of slowing global growth.

The S&P/TSX composite index plummeted 15 per cent in September, for a year-to-date loss of 17 per cent to the end of the month. (It fell a further 7 per cent yesterday.) In the United States, the S&P 500 index has a year-to-Sept. 30 loss of 21 per cent. The index dropped 4 per cent yesterday.

September was the first time the industry has seen net outflows since August, 2007, when investors withdrew $1.5-billion on fears about money market funds holding troubled asset-back commercial paper (ABCP). The outflows stopped after fund companies bought back the tainted paper.

The net redemptions for last month are estimated to be between $4.4-billion and $4.9-billion, according to preliminary figures released yesterday by IFIC. Half of the outflows are in money market funds.

Some Canadian investors have become spooked about holding money market funds after seeing a wave of U.S. investors withdrawing cash from these investments south of the border last month.

Some U.S. money market funds were hit with losses and redemptions because they held commercial paper of troubled financial firms like Lehman Brothers.

Investors fleeing money market funds in Canada stems from the fact they may not be aware that the bulk of them are invested in Canadian securities, said Dennis Yanchus, IFIC's manager of statistics.

While the U.S. government announced measures to backstop U.S. money market funds, Canadian securities regulators may be fuelling some anxiety by launching a review of domestic money market funds to see whether they are exposed to bad debt.

"There is no indication that there is any problem [in Canada]," Mr. Yanchus said. "It sounds to me like it's all fact finding. They are sending questionnaires to the fund companies."

RBC Asset Management, Canada's largest fund company, which also owns Phillips Hager & North Investment Management, suffered from nearly $1.3-billion in net outflows last month, including $1-billion in money market funds.

RBC spokesman Chris Dobson said that the firm's money market funds "are not holding any U.S. paper or an U.S. short-term securities at all."

It's not surprising that RBC had a lot of redemptions in its money market funds given that it has attracted "the lion's share" of these parking vehicles for cash in recent times, he said.

Some of that money is going into other long-term RBC funds, but some of it is going to guaranteed investment certificates (GICs) or high-interesting savings deposits with attractive rates, he added.

With a 50-to 100-basis point increase in GIC rates over the past couple of months, investors can get 4.25 per cent for a two-year term and 4.5 per cent for a four-year term, he noted.

Among the other banks, TD Asset Management had net outflows of nearly $1.2-billion, while CIBC Asset Management posted net redemptions of $536-million.

Among independent fund companies, Invesco Trimark Ltd., formerly AIM Funds Management Inc., suffered from $510-million in net redemptions; Franklin Templeton Investments Corp., $346-million; IGM Financial Inc., which owns Investors Group and Mackenzie Financial, $182-million and AGF Management Inc., $167-million.

Despite the market volatility, some fund companies still managed to attract net sales. CI Financial Income Fund took in $152-million; Fidelity Investments Canada ULC, $134-million; and Dynamic Mutual Funds Ltd., $70-million.

© 2007 The Globe and Mail. All rights reserved.

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