The Canadian mutual fund industry had its worst month ever in dollar terms in March as it saw more than $14.1 billion in net redemptions — the equivalent of 83 per cent of its total net sales in all of 2019.
According to the Investment Funds Institute of Canada (IFIC), the total assets in mutual funds also decreased by 10 per cent — or $159.9 billion — in one month. The ETF industry similarly saw its asset values decrease, by 9.5 per cent, but still recorded $2.9 billion in new inflows.
The top Canadian providers of mutual funds led the way in losses, according to Morningstar data. Royal Bank of Canada shed $2.8 billion, while Toronto-Dominion Bank, Fidelity and CI Investments each lost more than $1 billion. None of the providers in Canada’s Top 10 reported inflows.
The redemptions may have been the result of market-wide portfolio rebalancings that saw investors trade in fixed income to buy equities, according to industry experts. The outflows, according to IFIC, were led by funds with strong exposure to fixed income. Balanced funds saw $11 billion in redemptions, while bond funds shed $6.6 billion.
“Things were about as ugly as they could possibly be in March”, said James Gauthier, head of product research and oversight at IA Securities. “It doesn’t surprise me because historically when markets are hit in a material way in a short period of time, there’s going to be panic selling with retail investors.”
Mutual funds and ETFs that had exposure to corporate credit struggled in March, as spreads aggressively widened and a host of credit downgrades were issued.
Before the U.S. Federal Reserve calmed these markets by announcing it would buy corporate credit, the only fixed-income funds trading positively were those made up of cash and U.S. Treasuries, according to Mark Noble, Horizons ETFs senior vice-president of ETF strategy. And while corporate credit is supposed to be a part of the conservative portion of an investor’s portfolio, the panic led to the asset class trading more similarly to equities.
This led to fixed income ETFs having one of their worst months ever for net outflows, Noble said, though it was even worse for mutual funds.
“There was extreme concern around the viability of corporate America and corporate Canada,” Noble said. “People thought they had more protection in their fixed income than they actually did.”
People thought they had more protection in their fixed income than they actually did
Mark Noble, Horizon ETFs
Historically, ETF flows have been positive when equity markets are selling off, Noble said. When equity markets were approaching a bear market in December 2018, the ETF industry reported inflows of $2 billion. One of the industry’s best years of all-time, Noble said, occurred in 2009.
When there’s a turn in the market, investors who are looking to rebalance turn to ETFs for their broad-based index strategies, he said. Those who are already in them tend to hold on to their investments longer than those buying individual stocks because they generally have a longer-term view. That happened again in March, according to IFIC, as ETF equity inflows reached $4.1 billion.
Noble points to simple S&P 500-based ETFs, S&P/TSX Composite Index-based ETFs and those that implement leverage as being the firm’s most popular funds in March and helping it post $59 million in net inflows.
Mark Raes, the head of product at BMO Global Asset Management, noticed a similar trend as global equity ETFs became a strong source of inflows while fixed-income mutual funds lagged. BMO’s mutual funds, according to Morningstar, lost $25 million in redemptions but its ETFs saw net sales reach $135 million.
There’s no indication, Raes said, that BMO is experiencing crossflows that would occur when investors pull money out of mutual funds to pump into ETFs.
Even though the numbers are negative, most of the damage in the mutual fund industry occurred before March 23, Raes said. After the markets bounced back following the passage of the U.S. government’s US$2 trillion stimulus bill, mutual fund inflows began to improve.
“It was a little bit of a tale of two months,” Raes said. “Things were looking quite drastic and then we had an interesting recovery. If that trend continues, we’d expect to see mutual fund flows rebound alongside it.”