Apr 1, 2022
Pandemic continues to drive investors to active management
By Dale Jackson
Choppiness will provide opportunity for active managers to find dislocation in the market: Strategist
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If the latest numbers from the Investment Funds Institute of Canada (IFIC) are any indication, the pandemic has created a resurgence in active management.
Investors who rushed to beat the March 1 registered retirement savings plan (RRSP) contribution deadline pumped nearly $10 billion into mutual funds in February alone, according to IFIC.
As of March 1, total mutual fund assets reached $2 trillion in Canada. A big chunk of that came from a $111.5-billion bump in mutual fund sales in 2021. That’s nearly four times the $29 billion in mutual fund sales in 2020, which was in line with average annual sales going back to 2000.
In comparison, sales in passively-managed exchange-traded funds (ETFs) totaled $4 billion in February, bringing total assets to $317.7 billion by March 1.
BALANCED FUNDS LEAD THE WAY
Over half of February’s mutual fund sales went into balanced funds, which have been the funds of choice throughout the pandemic. Like the name implies, balanced funds attempt to strike a balance between equities and fixed income.
Those funds are popular with novice investors because they mimic personal portfolios by offsetting equity market risk with the safety of fixed income. Considering fixed income yields are near zero, they also tend to temper equity market gains. That’s the price you pay for safety.
Fees are a further strain on balanced fund returns. The annual management expense ratio (MER) varies depending on the provider, but is typically about two per cent.
Fees on segregated balanced funds, where the principal investment is insured, are typically three per cent.
Most mutual fund providers offer Canadian or global balanced funds.
EQUITY FUNDS A CLOSE SECOND
Equity mutual funds ranked a close second to balanced funds in terms of new sales in February and total assets under management, according to IFIC.
But while balanced funds generally have a broad focus, equity funds tend to focus on specific sectors or geographic regions. Global equity funds scour the world for stocks, while international equity funds exclude Canada and the United States.
Canadian and U.S. equity funds tend to be staples in Canadian investment portfolios; but investors can diversify their holdings with funds that track specific geographic regions like China, or specific sectors like technology.
Fees on equity mutual funds are normally a bit higher than balanced funds because equity investments require more hands-on management.
INVESTORS COOL ON BOND FUNDS
As of March 1, $253.3 billion was invested in bond funds, which was the only major asset class to experience a net redemption in February as assets declined by $155 million, according to IFIC.
The only difficult thing to understand is why investors would wait so long to pull out of bond funds. Rock-bottom yields caused by rock-bottom interest rates, combined with annual fees, have caused many bond funds to lose money.
It’s likely that many investors confused bond funds with bonds, which are held to maturity. It’s also likely that some investment advisors see bond funds as the only alternative to fixed income that can generate fees for them.
Payback Time is a weekly column by personal finance columnist Dale Jackson about how to prepare your finances for retirement. Have a question you want answered? Email dalejackson.paybacktime@gmail.com.
