Banks lead mutual fund industry sales with wraps and conservatism

By Martin Beaudry | October 19 2004 06:14PM

Banks have led the investment funds industry this year on the strength of their fund of funds products and their income funds. Confronted with lack of knowledge, time, and a taste for self-directed investing, investors have been moving strongly towards the fund of funds concept.

The seven banks in the top 20 mutual fund companies lead the industry this year with an average 35.6% increase in gross sales, according to September 30 data from financial services research firm Investor Economics (IE). The industry average increase in gross sales for the year to date, by comparison, was 18.3%.

The strong bank performance is the result of them having been in the right place at the right time and with the right product, says Goska Folda, senior consultant and managing director at IE.

Banks have traditionally always been in income and bond funds, they had already made a significant move toward providing wrap accounts, and they have ramped up sales through in-branch financial advisors, something Ms. Folda refers to as a new type of emerging sales force.

Instead they’ve sought out the relative security of income funds and bond funds, and they appear to have committed themselves to longer investment horizons. Redemption rates have been falling, says Ms. Folda, particularly so for banks.

Just as mutual funds themselves were once seen as an easy way to diversify investments and thereby decrease risk, now it seems that wrap accounts, better known as fund of funds accounts, are taking that role. Rather than needing to invest in several different mutual funds, investors can create much the same effect by buying into a fund of funds.

Pierre Trepanier, senior manager for global asset management at RBC Investments, says the last three years have seen the fund of funds concept take on an increasing amount of importance. RBC was ready for the trend, too, since it has offered wrap accounts since 1985.

He also points out that income funds have taken a strong role in the past year, something shown in the IE report as well. Net sales of equity income funds and of Canadian bond funds rose 18.4% and 12.2% respectively in the year to date at the end of September. By comparison year to date net sales of Canadian equity funds fell 0.2%. Banks generally have always had a strong presence in income funds, so again they reaped a benefit from the trend.

Another bit of good news for the banks is that the trend toward income funds may be one that stays with us for a good while to come. With an aging population, particularly one nearing pre-retirement, and continuing low rates of return, Mr. Trepanier says this trend may even be here for the next ten to twelve years.

There has also been a trend toward no-load funds. That is all that banks usually serve up, though, so the popularity of that load structure is not surprising. In every fund category, net flows toward no-load funds in the year to date to September were more than double the increase in percentage of beginning assets toward load funds.

Segs gain ground

The IE report also shows that segregated funds have been enjoying a surge in investor interest. As a whole, segregated fund assets have grown 4.3% since the beginning of the year, outshining the mutual fund market, which has grown 3.5%.

With segregated funds the exodus has been toward balanced funds. Those grew 11% in assets from the start of the year to the end of September. Equity funds advanced 1.8% and bond funds fell 0.4%.

Ms. Folda says segregated Canadian balanced funds outsell Canadian segregated equity funds as a whole because of the poor overall market environment. If markets return, though, a return to equity is expected.

The fastest growing asset class in segregated funds after international balanced funds is equity income. Its net sales have powered assets to a 23.2% increase since the year’s beginning. Segregated U.S. equity funds, in the meantime, have shrunk 13.9% as a percentage of assets under management at the beginning of the year.

Ms. Folda notes there has been a big shift from individual segregated funds to wrap accounts. For insurers who – like the banks – had products readily available to meet investor demand, the trend has reaped rewards.

London Life, for one, has had a great year to date. Four of its segregated funds – equity, bond, balanced profile, and moderate profile – have made it into the top ten long-term fund this year. The company has not been an out-performer in terms of asset growth, but then again long-term segregated fund assets as a whole have grown just 0.5% since the start of the year.

London Life was also the winner in the segregated balanced fund category, placing three of its funds in the top ten. None did better than the average 4.1% in asset growth, but each had stellar net sales that out-did the average 11.5% growth since the year’s start.

In terms of segregated equity funds Maritime Life is the big winner this year, placing four of its funds in the top ten for that category. Like London Life, the company has not been an out-performer by asset growth, but the category itself has been poor, losing 1.6% of it assets since the year’s beginning.