(October 2007) For years, stand-alone mutual funds have been the investment of choice for investors looking to reduce risk, but it appears that the days of this investment option are numbered.
Traded funds, or funds of funds, are becoming increasingly popular compared to their standalone counterparts. In his monthly magazine View bulletin, Toronto-based research firm Investor Economics says the freeze of funds accounted for 45% of industry profits in the first half of 2007. That’s up from 34% in 2006.
Through the first six months of the year, net fund sales were $20.2 billion, just $435 million less than last year’s total.
Investor Economics says fund management companies “enjoy a retention advantage compared to standalone funds,” citing as evidence August sales data that showed inflows had virtually stopped. This month, standalone funds were $2.3 billion in the red, while funds of funds were $800 million in the red. “This excellent way of holding funds – even more than the ability to generate higher sales volumes – is responsible for the high share of funds in the overall net sales of the industry” – we read in the monthly View report.
Why all this madness around? Investor Economics says that because assets are more diversified across classes than individual funds, they have a “stabilizing effect on selling activity across a broad range of asset classes.”
Investor Economics continues to say that fund sales can help less popular asset classes, citing core Canadian stock funds as a recent example. “Fund close-out flow was positive and stood in stark contrast to the overall net redemption experience in this category,” the report said.
To see how far funds of funds have come, Investor Economics goes back six years to 2001. At that time, fund assets were $55 billion; in mid-2007 they amounted to $170 billion. Over the past five and a half years, the asset base has grown at a compound annual growth rate (CAGR) of 23%.
At the end of June, 21% of mutual fund assets were in fund wraps, almost double the 2001 level. Since 2001, packaged products have seen a CAGR of approximately 23%, while the overall CAGR for standard mutual funds has been 9.3%.
Over the last year and a half, net sales for the entire fund industry totaled $74 billion. Standalone funds, which represent almost 80% of the asset base, contributed 45% of new sales, while funds of funds, which represent approximately 20% of total assets, contributed 55% of sales.
In its report, Investor Economics looked at three types of fund wraps – high end fund wraps (HEFW), segregated funds of funds (SFoF) and mutual funds (MFoF). The latter dominates the segment, accounting for 56% of fund packaging. Over the past five and a half years, 26 new programs have been launched, bringing the total number of MFoF offerings to 63.
Since 2001, SFoF assets have increased 162.5%, from $8 billion in 2001 to $21 billion at the end of June. Over the past six years, the product offering in this category has more than doubled, from 11 to 24 in mid-2007.
However, HEFWs, or scarves requiring a minimum investment of $25,000, have seen the greatest growth in the number of programs, with 28 new offerings introduced since 2001. The share of assets in this category is at the same level as six years ago – 32% – but in dollar terms it has tripled to $55 billion.
The success of the funds means that the places where you can buy them also enjoy increased sales. Banks hold the most fund-related assets, totaling $75 billion. “(This) figure shows the extent to which they have managed to collectively implement their individual long-term product and distribution combination strategies,” the report says.
Bank assets are divided into two categories; Branch Direct – purchasing the product directly from branch staff – and Branch Advisory – using a Branch Advisor to purchase. The former’s assets have increased from $13 billion to $26 billion over the past three years, while the latter accumulated $49 billion between January and June this year, up from $25 billion in mid-2004.
Financial advisors have leveraged the fund-of-funds structure, bringing $67 billion in assets to the category. This is an increase of 103% compared to three years ago. “The growth reflects the achievements of several independent complexes whose products have gained popularity in networks of independent advisors,” explains Investor Economics.
The full-service brokerage has been the fastest-growing channel over the past three years. The fund’s assets grew from $11 billion in 2004 to $26 billion last June. The report attributed the growth to an industry-wide shift to paid offerings.
Some of the most successful mutual funds in Canada are purchased primarily through funds of funds. RBC Bond Fund, the nation’s best-selling mutual fund, has approximately $2.5 billion in assets in MFOFs, representing 63% of the fund’s total assets. RBC US Equity, the fourth largest investment fund, commits almost $2.1 billion to MFOF, representing 79% of the fund’s total assets.
With such large numbers coupled with the industry’s rapid growth, could the fund closure craze continue? Investor Economics says we’ll have to wait and see how market volatility develops over the past three months. Still, things are looking good for the future of fund closings. “While one month does not constitute a trend, the diverging net flows in August are instructive and encouraging,” the report said. “If this trend continues in the face of volatile financial markets, fund wrapping will prove to be a risk management solution not only for investors but also for the industry.”
Posted by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com
(18/10/07)
