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Trading volatility for slim returns

What are we looking for?

The top-performing Canadian money market funds in the past three years.

These highly liquid mutual funds invest in short-term debt securities and can be a good resting place for cash. Low interest rates have put pressure on their returns - what is the outlook for these investments?

The screen

We searched for the 15 top performers over three years ended Oct. 31. U.S. dollar, segregated and duplicate versions of the funds were excluded. We also left out funds catering to one professional group, and those requiring more than a minimum investment of $10,000.

What did we find?

The SEI Money Market fund came through as the best performer in the chart with an annualized return of 1.15 per cent in the period.

For ultra-conservative investors money market funds can make safe investments, but with interest rates hovering at rock bottom, returns have been slim. These holdings may be part of an overall investment strategy, but lately, money has been flowing toward other assets classes such as balanced funds.

Money market fund assets have declined 8.5 per cent since this time last year, according to data from the Investment Funds Institute of Canada, but Canadians still have close to $28-billion invested in these funds.

"It doesn't surprise me to see people moving into the equity markets. However, they should have a fairly high degree of caution now that equity markets have had a nice run this year," said Scott Gives, Canadian fixed-income fund manager at SEI, noting that next year's gains may not be as steep.

The single biggest impact on these funds for the next three years will be central bank policy changes, Mr. Gives said. Canadian money market funds are tied to the Bank of Canada's key overnight lending rate, and any spike in the benchmark rate would cause them to underperform.

However, if the Bank of Canada were to increase its key rate from today's 1 per cent per cent to 2 per cent in steady increments over the next 12 to 18 months, this would have a limited impact on money market funds. That's because their investments in treasury bills and bank debt would roll over during this period, allowing money to be redeployed at those higher yields, Mr. Gives said. The Bank of Canada makes its next interest rate announcement on Wednesday.

Low fees can have a big impact on performance with these funds, so it's notable that the performers in the top half of the table generally have lower management expense ratios than the bottom half.



% return to Oct. 31% returnAssets
Fund1-yr3-yr5-yr10-yr2012201120102009($-mil)MER %
SEI Money Market-O1.*
Steadyhand Savings0.990.950.780.970.900.480.528.40.30
iShares Premium Money Market Com1.020.870.730.860.740.400.3762.50.25
Beutel Goodman Money Market-D0.640.810.691.750.980.900.310.4743.30.22
Front Street Money Market Cl-A0.840.800.500.820.750.29-0.417.40.25
Manulife Money Fund0.520.770.661.670.890.900.420.33814.10.44
Matrix Short Trm Income-CC0.800.770.810.710.810.450.821.40.44
CI Money Market0.620.720.571.450.850.690.450.19652.20.78
Mac Sentinel Cash Management0.780.670.631.720.660.600.200.67190.10.55
Renaissance Money Market0.570.670.581.480.620.750.380.37128.60.53
CI Short-Term Corporate Class0.480.650.721.460.750.690.391.1365.60.77
Stone & Co. Flagship Money Mkt A0.350.650.491.350.820.800.400.111.70.30
CIBC Money Market0.510.640.561.450.670.730.370.361,050.50.51
Investors Premium Money Market0.630.610.491.640.530.660.190.21656.50.52
FMOQ Money Market0.220.600.651.830.740.840.490.6844.10.40
DEX Universe Bond Total Return Index-0.053.846.035.443.609.676.745.41
*Other fees may apply. Source: Lipper

© 2007 The Globe and Mail. All rights reserved.

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