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Money market funds magnet for RRSP cash

Old habits die hard, and Canadians continued to dump money into their RRSPs at yesterday's deadline despite a devastating bear market that shows no signs of letting up.

But rather than buy equities, many temporarily parked their cash in money market funds, leaving them with billions to invest later.

Hsi Chang stashed more than $10,000 in his retirement savings plan in January, but left all of it in a money market fund - which pays little interest but provides a higher level of safety - at a discount broker.

"I wanted the tax slip," said the 41-year-old Toronto-based software consultant. "My wife and I are just waiting for the markets to recover. We also sold our exchanged-traded funds last year, and put that cash into money markets too."

The amount of assets in money market funds climbed to a record high of $72.3-billion at the end of January, and is expected to grow when the Investment Funds Institute of Canada releases its preliminary figures for mutual fund sales today for February.

Over the past year, investors have been in shock as global markets have been hammered because of the global credit crisis. Over the past year, the Canadian and U.S. markets have shed more than 40 per cent. But after months of redemptions at Canada's mutual funds, investors plowed $1.2-billion into funds in January - up 39 per cent from last year.

The bulk of that cash, however, flowed into money market investments. Buyers aren't interested in equity investments, said Dan Richards, president of Strategic Imperatives Corp., a firm that offers advice to financial advisers. "It's going to take a year or more of good returns for a lot of investors to come back into the market."

William Holland, chief executive officer of CI Financial Corp., expects the January-to-March RRSP season will "probably go down as the worst one ever" for the Canadian fund industry in terms of the more profitable higher-fee stock and bond funds.

"I wouldn't be surprised if there were significant net redemptions in long-term funds in February," Mr. Holland said. "The fear level is way too high without extraordinary incentives to get people to invest."

RRSP sales were steady this season but not overwhelming, said Patricia Lovett-Reid, senior vice-president at online brokerage TD Waterhouse Canada Inc. In addition to money market funds, many investors are parking their RRSP money in triple-A corporate bonds or cash.

"For now, the confidence isn't there," she said. "The fear is, if you put it in [the stock market], it might go lower."

Judy Thomson, director of mutual funds for Bank of Montreal, worries that investors will lose out on potential gains when the stock markets rebound. While investors are advised to make decisions based on their own financial circumstances and tolerance for risk, Ms. Thomson advised investors not to drop equities from their investment portfolios altogether. "It's not a time to make decisions strictly on emotion," she said.

The eventual stock market recovery, when it comes, will provide investors with the opportunity to recover some of their earlier losses. "By putting into a savings account, it's going to take you how many years before you get your money back?"

© 2007 The Globe and Mail. All rights reserved.

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