BUSINESS

Shifting fortunes

The stampede into mutual funds is accelerating

JOHN DALY February 15 1993
BUSINESS

Shifting fortunes

The stampede into mutual funds is accelerating

JOHN DALY February 15 1993

Shifting fortunes

The stampede into mutual funds is accelerating

For many individual Canadian investors, February is the most confusing month of all. With the annual deadline for contributions to registered retirement savings plans approaching, banks, trust companies and other financial institutions are mounting last-minute advertising blitzes. Among the most exotic are the campaigns by sellers of mutual funds, the fastest-growing segment of the RRSP market. (Mutual funds pool investors’ contributions and invest them in stocks, bonds or other securities). One firm’s television commercial shows its bespectacled president in a helicopter, swooping over office towers. A rival company’s TV ad features a pair of hands chiselling its logo into stone. In newspapers, one dealer’s ad features a drawing of a tiger prowling through the underbrush, searching for “growth opportunities for your RRSP.” Another shows a cartoon turtle staring into a crystal ball. All are attempts to catch the eyes of consumers who, sparked by recent declines in interest rates, are shifting their RRSP money from guaranteed investment certificates (GlCs) and other fixed-return instruments into mutual funds. But even fund manag-

ers who are attempting to tap into that shift say that inexperienced investors should be cautious with their retirement savings.

Despite those warnings, the stampede appears to be accelerating. At the end of 1992, Canadians had $67 billion invested in mutual funds, compared with just over $4 billion in 1980. And many industry executives predict that the total will double over the next three years. The main attraction of the funds for investors is the possibility of big gains. The value of a unit in any fund fluctuates with the value of the stocks, bonds or other assets that it holds. Unlike most bank or trust company deposits (up to $60,000 in a single institution), however, mutual funds are not covered by the federal Canada Deposit Insurance Corp.

For the institutions that sell and manage mutual funds, especially Canada’s major banks, the funds have one clear advantage: they provide steady revenues from fixed management fees, rather than the often unpredictable spread between the revenues those institutions earn from loans or other investments and the interest they pay to depositors. For that

reason, some critics charge that the banks and other sellers are encouraging the stampede without taking investor needs into account. But bank executives insist that the shift is customer-driven. Said Bruce Walters, president of Royal Bank Mutual Fund Services Inc.: “It certainly is not being rammed down the consumer’s throat.

It’s the opposite.”

Indeed, with interest rates on GlCs and savings accounts languishing in the low single digits, the double-digit returns posted by Canada’s top-performing mutual funds look dazzling at first glance. The leader, Toronto-based Altamira Investment Services Inc.’s Resource fund, posted a 64-per-cent return last year, fuelled by its soaring energy and mining stocks. But while many funds offer the chance of high returns, they also entail greater risk. Last week, two real-estate-based funds, managed by Counsel Trust and the Metropolitan Financial Group, suspended withdrawals by investors.

The worst performing Canadian mutual fund last year, however, was Vancouver-based Sagit Investment Management Ltd.’s Cambridge Special Equity fund, which owns stocks in small, new Canadian companies. It declined by 27 per cent (compared with a 2.2-per-cent decline in 1991). But Sagit chairman Raoul Tsakok shrugged off that decline by noting that

his company manages 13 funds worth $92 million, and one of them, Cambridge Resource fund, posted a 32-per-cent gain last year. And like many fund managers, Tsakok said that “No one has done well every year.”

Aside from consumers’ often unrealistic expectations, some investment advisers say that they are concerned about the aggressive promotion of mutual funds as retirement savings vehicles. Tom Delaney, for one, a Torontobased investment counsellor and author of Tom Delaney’s Buyer’s Guide to RRSPs, claims

FUND: Phillips, Hager and North US Equity Fund

FUND’S ASSETS: $190 million

J1 STRATEGY FOR 1993: Invest

in U.S. equity markets, in betterthan-average growth companies. Concentrate on the U.S. financial

industry, particularly bank stocks, and have only a minimum exposure to utilities and energy company stocks.

BEST CALL IN 1992: Sold Home Depot Inc. of Atlanta (retail warehouse stores and building supplies) for 12 times the price he bought it for five years ago. Sold IBM Corp. stock just before its plunge.

WORST CALL IN 1992: Airborne Freight Corp. of Seattle (an air express courier)

that the Big Six banks, in particular, are pressuring branch employees to sign up new mutual fund customers.

But bank executives say that they are merely responding to the exploding consumer demand. Walters, for one, said that two-thirds of his bank’s customers deal with other financial institutions as well, and that if the bank does not provide them with all the services that they want, they may take their business elsewhere. But an assistant manager at one Toronto bank branch, speaking on condition of anonymity, said that his bank is sending out mixed signals. One of the bank’s stated top priorities is to expand its mutual fund business. But the employee added: “The word from the top is to be cautious. Older clients are complaining that they have lost money.”

Regardless of whether they think Canadians should invest retirement savings in mutual funds, most fund managers have similar advice for those who do: older investors who need steady incomes should stick to relatively stable bond or money market funds. Younger investors with savings to spare can risk a greater proportion in equity funds. In theory, larger funds should be less volatile because they spread their investments. Consumers should look beyond the tigers, turtles and other gimmicks and examine a fund’s long-term performance. But as with any investment, the past is not always a reliable guide to the future.

JOHN DALY