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Greenback gains spur some profit-taking

FUNDS REPORTER

There was a silver lining for some investors who yanked a record $8.4-billion in mutual funds in October.

About $1.5-billion flowed from U.S. money market funds where investors were taking profits as the American greenback rose 13 per cent last month versus the Canadian dollar, according to the Investment Funds Institute of Canada (IFIC).

"Last fall, when the Canadian dollar hit all-time highs - around $1.10 (U.S.) - we saw a lot of purchases of U.S. money market funds," Dennis Yanchus, manager of statistics at IFIC, said yesterday.

There were $537-million (Canadian) in net sales of U.S. money market funds in October, 2007, and $669-million in February of this year.

"Now that we have seen a spike in the U.S. dollar, we see people redeeming out of U.S. money market funds."

There were also continuing withdrawals from Canadian money market funds as investors found better yields elsewhere, such as in bank guaranteed investment certificates, Mr. Yanchus added. Total net redemptions in all money market funds climbed to nearly $1.9-billion.

The selling binge last month in mutual funds - largely attributable to panicky investors stampeding for the exits amid the stock market collapse - was the worst since IFIC started collecting data in 1990. That sent year-to-date net sales tumbling to $2.2-billion from $30.2-million in the same month last year.

Investors fled mutual funds as the S&P/TSX composite index plunged 17 per cent in October, bringing the loss for the first 10 months to 29 per cent.

The stock market collapse in October also triggered net redemptions in the underlying funds of a large number of principal protected notes (PPNs), Mr. Yanchus added.

(PPNs offer a way for people to invest in stocks, mutual funds, hedge funds or commodities without the danger of losing any of the money they started out with.)

When PPNs experience so-called "protection events" in falling markets, the fund is sold with proceeds then moved into a fixed-income product such as zero coupon bonds. This contractual institutional selling was a big contributor to net redemptions in October, according to IFIC.

Based on a sample of members representing about 60 per cent of industry assets, IFIC estimates that more than $1.4-billion, or 17 per cent of the total net redemptions last month, were a result of institutional sources like PPNs.

CI Financial Income Fund, which had long-term net sales of $10-million last month, indicated that its $340-million in net redemptions in October was related to PPNs.

That means that nearly $3-billion of the $8.4-billion in net outflows were not necessarily attributable to investor fears, Mr. Yanchus said.

Industry assets under management fell 9.8 per cent to $571.3-billion at the end of October from the previous month. The asset decline stems from both net outflows and falling market value.

Mutual fund redemptions

Year-
$millionOct., '08Sept., '08Oct., '07to-date
Domestic equity- $1,332.4- $733.6$25.20 - $6,792.6
Global & international equity- $1,176.1- $344.9$398.80 - $4,574.2
U.S. equity- $83.7$66.50 - $7.1- $369.1
Sector equity- $136.8$19.90 $25.20 $290.30
Domestic balanced- $1,613.4- $493.6$214.50 - $529.0
Global balanced- $1,122.7- $368.8$720.50 $2,360.90
Domestic fixed income- $783.1- $109.2- $230.3- $751.7
Global & high yield fixed income- $222.7- $31.1- $27.1- $317.7
Specialty funds- $48.0$4.30 $79.30 $993.80
Long-term funds total- $6,518.9- $1,990.4$1,199.00 - $9,689.2
Money market funds- $1,880.7- $2,462.2$1,213.30 $11,854.30
TOTAL- $8,399.5- $4,452.6$2,412.30 $2,165.10

DOUGLAS COULL/THE GLOBE AND MAIL // SOURCE: INVESTMENT FUNDS INSTITUTE OF CANADA

© 2007 The Globe and Mail. All rights reserved.

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