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Investors flee funds in 'month of fear'

Record $8.45-billion pulled from mutual fund market; index up almost 20% from October low

Mutual fund investors embarked on their biggest selling binge on record in the month of October, when the spiralling global financial crisis drove stock markets to one of their most dramatic drops in history.

Panicked investors in Canada yanked a record $8.45-billion from the mutual fund market in a stampede for the exits. It was the worst month for net outflows since the Investment Funds Institute of Canada (IFIC) began collecting data in 1990, and nearly doubled the previous record posted in September, which saw net outflows of $4.5-billion.

"October was an absolutely brutal month," independent fund analyst Peter Loach said yesterday. "People are still taking refuge in cash and money market funds."

Even as the market continues to rally into November, the net outflows of about $13-billion over the past two months are expected to spur more layoffs and industry consolidation, observers say.

Norman Bambrick, a 72-year-old retiree in Port Perry, Ont., was part of the wave in mutual fund selling last month. He bailed out of his bank fund after seeing his $200,000 investment in two accounts take a $12,000 haircut in 10 months. "The funds didn't work out for me and I cashed them," Mr. Bambrick said.

He now has most of his savings in guaranteed investment certificates and bonds.

As he watched the unit price of the bank fund plunge, he also worried about the security of his investment.

"I had a feeling that they were headed for a disaster," he said. "I had no confidence in them."

Investors headed for the exits as the S&P/TSX composite index lost 17 per cent in October after bouncing back from a 27-per-cent slide. The index has posted a 29-per-cent decline for the first 10 months of the year. The S&P 500 composite index also plunged 17 per cent last month for a more depressing 10-month loss of 34 per cent.

"It was a record month of fear," said Frank Hracs, chief economist with Toronto-based Credo Consulting Inc. "October was way worse in terms of market psychology than September."

But investor psychology is improving in Canada as the S&P/TSX index is now up almost 20 per cent from its lowest point last month, Mr. Hracs suggested.

"It appears that a lot of the ingredients for more stable financial market conditions have been put in place with lower interest rates, bailout packages and a U.S. election [which creates uncertainty] out of the way."

Besides retail investors, there were also institutional investors leaving money market funds for better yields in short-term investments elsewhere, said Dennis Yanchus, manager of statistics for IFIC.

Two bank-owned fund giants took the biggest hits.

RBC Asset Management Inc., which also owns Phillips Hager & North Investment Management, suffered from nearly $2-billion in net redemptions, including $902-million in higher-margin "long-term," or non-money market funds.

CIBC Asset Management saw nearly $1.4-billion in net outflows, while TD Asset Management Inc. posted $1.1-billion in net redemptions. "Many investors opted for guaranteed term products during the month," said Tim Pinnington, president of TD Mutual Funds.

Among large Canadian public fund companies, IGM Financial Inc., which includes Investors Group and Mackenzie Financial, suffered from $489-million in net redemptions; CI Financial Income Fund, $340-million; AGF Management Ltd., $232-million; and DundeeWealth Management Inc., which owns Dynamic Funds, $171-million.

Invesco Trimark Ltd., formerly AIM Funds Management Inc., had $537-million in net outflows and Franklin Templeton Investments Corp. posted $465-million.

Companies like AIC Ltd., Sentry Select Capital Corp. and Fidelity Investments Canada, meanwhile, were handing out pink slips to employees last month.

"There will likely be more layoffs," Mr. Loach predicted in an interview. And there will be more pressure on fund companies with less than $10-billion in assets to consider options like strategic alliances, whether it be a merger or a outright sale, he said.

On Monday, DundeeWealth said it struck a deal to sell its Quebec mutual fund and insurance sales force - including 340 advisers with $2.6-billion in assets - to Industrial Alliance Insurance and Financial Services Inc.

When Mavrix Fund Management Inc. reported a third-quarter loss yesterday, it said that total assets under management tumbled 45 per cent at the end of Sept. 30 to $395.8-million from a year earlier.

That included assets in mutual funds and resource flow-through limited partnerships.

Mavrix chief executive officer Malvin Spooner said his firm, which is half controlled by its employees, has been approached by potential buyers, but described them as "not serious" proposals.

"Should something fall into our lap, we would certainly examine it," Mr. Spooner said. "But our intention currently is get through this market, which has put a lot of pressure on our valuation."

© 2007 The Globe and Mail. All rights reserved.

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