Canada mutual funds post record redemptions as COVID-19 worries grow

Few industry sectors were spared from the pandemic's economic toll

May 01, 2020

Investor worries amid the coronavirus pandemic sent Canadian mutual funds reeling in March in both assets and sales. Few sectors of the industry were spared as the economic toll of the virus mounted during the month.

The numbers tell the story: The Investment Funds Institute of Canada (the Institute) reported a staggering $14.1 billion in net redemptions in March alone, one of the largest single-month declines in Canadian mutual fund history.

That figure is even more staggering when compared to the $16.9 billion in net sales that the industry posted in 2019, according to the Institute. And it all happened in March, with the redemptions wiping out the combined net sales for January and February.

Among fund classes, balanced and fixed-income funds suffered the most, posting net redemptions of $11 billion and $6.7 billion, respectively, according to the Institute.

This pandemic has created a huge demand for cash relative to supply, resulting in the widening of liquidity premiums of fixed-income products, especially ones with medium-term and long-term durations. This makes fixed-income positions riskier to hold in the current environment from a liquidity perspective.

Investors and fund managers appeared to have rebalanced their portfolios, to a certain extent, as investment vehicles geared toward capital preservation with short-term durations, such as money market funds, still managed to post net sales of $4.1 billion in March, according to the Institute.

Equity funds were not affected as much, posting net redemptions of $702 million in March, the Institute reported, since the marketwide decline in stock prices also provided opportunities to own equity positions at attractive prices.

Total net asset value stood at $1.45 trillion at the end of March 2020, a sharp drop of 11.3 per cent, or $184 billion, from the end of 2019, according to the Institute. The March redemptions offset the year’s net sales to date, so the drop in net assets mainly represents the cumulative mark-to-market losses as of that date. A portion of these losses has now been realized as mutual funds had to unload investment positions to pay out redemptions.

Among asset classes, equity funds posted the biggest drop in net assets year to date with a $16.8 per cent decline, or $89 billion, followed by balanced funds with 11 per cent, or $90 billion, according to the Institute. These declines mirror the collapse of Canadian stock markets as the S&P/TSX Composite Index spiraled down by 21.6 per cent, to 13,379 points, at the end of March, from 17,063 points at the beginning of the year. Bond funds performed better, dropping by 4 per cent or $8.9 billion, according to the Institute.

But the mutual fund story in March was about net redemptions. Making those declines all the more striking, Canadian mutual funds, in fact, posted strong net sales in January and February of $8.2 billion and $6 billion, respectively, according to the Institute. Prices of stock and fixed-income investments, however, started falling in the third week of February. The S&P/TSX Composite Index peaked at 17,944 points at one point in February, but shed 1,681 points by the end of the same month. The plunge in investment prices prompted investors and fund managers to adjust their strategies in favor of short-term, less volatile investments, including those with a potentially substantial upside.  

On a positive note, low-cost, passively managed exchange-traded funds (ETFs) performed strongly as they often do during a financial crisis as investors turned to broad-based strategies to maximize diversification while scouring for baskets of investments with robust fundamentals at cheap prices, particularly equities.

Canadian ETFs posted net sales of $3 billion in March and $15.2 billion in total net sales for the first quarter of 2020, according to the Institute. Equity ETFs took the biggest bulk of the new inflows in the first quarter, with $10.4 billion of net sales, the Institute reported. The bond ETFs, like their mutual fund counterparts, were not spared, reporting net redemptions of $1.2 billion in March, but still registering $3.1 billion of net sales during the first quarter, according to the Institute.

RSM Canada’s National Financial Services Industry Leader, Mike Zenteno, shared his thoughts on the current challenges faced by the financial services industry, and the measures implemented by the key stakeholders.

“The market reactions are as expected in a crisis of this magnitude characterized by panic selling, search for upside and portfolio rebalancing,” he said. “I think that the regulators have responded well to address the liquidity crunch, particularly in bond markets, and to help investment funds manage redemptions.

“Bank of Canada’s commitment to keep interest rates low and to buy up to $60 billion in provincial and corporate bonds definitely helps to inject liquidity—we are just not certain at this point whether it would be enough, and that might be dependent on how long this crisis will drag down. The Canadian Securities Administrators’ decision to provide temporary relief increasing the short-term borrowing limit from 5 per cent to 10 per cent of net assets is a big boost for mutual funds looking for ways to manage redemptions, especially balanced and bond funds, which have been hit hard.

“Our RSM Canada Financial Conditions Index for the first quarter of 2020 indicates that Canada’s equity and bond markets are between 4 to 10 standard deviations below normal levels, which suggests disturbing circumstances, to say the least. It remains to be seen whether the measures implemented to date, including the stimulus package rolled out by U.S. and Canadian governments, will be enough to prevent the country from slipping any further. We are seeing positive indicators such as the S&P/TSX Composite Index going back up to the 14,400-point level to date, and we would like to see that continue.”

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