More Canadians Move Their Money Into Mutual Funds
CANADIAN baby boomers, worried about the lowest interest rates in 30 years, have fled from the safety of guaranteed deposits to mutual funds. And many Canadians are choosing to move their money into mutual funds that invest in the stock market.
Steve Tonon of Downsview, Ontario, is a typical middle-class mutual fund investor. He has four mutual funds, all in his retirement plan. ``The best return last year was 58 percent on my Royal Trust Energy Fund,'' Mr. Tonon says.
When the market started to drop in September, however, he moved his money. ``I switched to bond funds, which have only done about 6 percent since then.''
Sales of equity-based mutual funds in Canada were up by 163 percent last year.
Canadians showed even more confidence in foreign markets: Sales of foreign equity funds rose by 178 percent in 1993, according to the Investment Funds Institute of Canada.
Even the number of funds increased last year, rising to 633 from 549.
While five-year term deposits (the traditional favorite of retirement plans) have been returning just 5 percent, the returns from Canadian-based equity funds have been impressive. Canadian markets were up 29 percent last year, and most equity-based mutual funds reflected that rise.
Last year's top runner, the Multiple Opportunities Fund, returned 159.28 percent. That outperformed the top international fund. Even the best performing bond fund, run by Altamira, returned 21.59 percent. With those numbers, it is little surprise that Canadians are rushing to mutual funds.
``To a large extent, the current flow into funds has just partially redressed the unhealthy imbalance which built up in short-term instruments, like treasury bills and one-year GICs [guaranteed investment certificates] over the past decade,'' says Elizabeth Tuck, a mutual fund specialist, writing in the RBC Dominion Securities Mutual Fund Report.
Planning for the future
Mutual fund assets at the end of 1993 were $114.6 billion (Canadian; US$86.55 billion), up 70.3 percent from the end of 1992, when Canadians had $67.3 billion stashed away in mutual funds. Many of the funds are based in registered retirement savings plans (RRSPs), the Canadian equivalent of tax-deferred individual retirement accounts in the United States.
Royal Trust Corporation, which runs a bank, a trust company, and a family of mutual funds, says its research shows 60 percent of the RRSP contributions this year will go into mutual funds, stocks, or bonds. The safe long-term investment certificate just does not pay enough.
But investment professionals say that investors should be aware that what goes up can come down.
``Performance numbers for 1992 and '93 for most funds were above average,'' says John Bridgman, senior vice president at brokerage house Richardson Greenshields in Montreal. ``Investors should be cautious if they expect those types of gains to continue.''
Timing is everything
One investment manager says he thinks he has found a way to beat the odds through a system of market timing.
``We were out of the market for the crash in 1987 and again in 1990,'' says Jean-Pierre Fruchet, who owns and manages Guardian Timing Services Inc. of Toronto, which manages several mutual funds. ``If you rode out the crash of '87, it took you almost six years [on the Toronto exchange] to make your money back. In a bear market you are better to be out altogether.''
Mr. Fruchet describes himself as a conservative investor. Right now his mutual funds are fully invested, but he is cautious.
``We are now in the midst of one of the most overvalued stock markets in history, based upon dividends, earnings, cash flow, and book value,'' Fruchet says. ``There are great opportunities to make money in the next bear market by selling long positions and shorting the market when the indicators are right.''
Mutual funds are widely held in Canada; 26 percent of Canadians own at least one fund, up from 13 percent in 1989. Many of these investors are new to the game, so when the stock market sneezes and their mutual funds drop in value, they get nervous.
Tonon, the mutual fund investor from suburban Toronto, has only owned funds for two years. His reasons for investing in them are simple: ``The rate of return is so much better.'' He says he will be buying more mutual funds this year for his retirement plan. He has also switched out of the bond funds.
``I'm back into a gold fund and an equity fund,'' says Tonon, who checks the prices of his investments in the paper every morning. ``I'll let the professionals make the decisions about when I should be in or out.''