Mutual Funds Come Off Terrible October

October was one of the worst months in history for the mutual fund industry. While the S&P/TSX composite index fell 16.9%, mutual funds saw net redemptions skyrocket to C$8.5-billion, according to preliminary estimates from IFIC.

The scale of this bearish trend is best demonstrated by the surge in redemptions, almost doubling from C$4.4-billion in September. At the same time, industry assets under management [AUM] declined 19.6% year-over-year and 9.9% in October. Just a year ago, the industry saw net sales in positive territory at C$2.4-billion.

GMP Securities analyst Stephen Boland told clients:

Though the market has showed signs of a turn-around in the early days of November, we remain cautious with our outlook for the industry as we believe that only sustained positive market performance and increased certainty in the world economy will be able to stem the recent flight of capital out of mutual funds.

He noted that DundeeWealth Inc. reported net redemptions of C$206-million and AUM down 14.9%. CI Financial Income Fund (CIXUF.PK) had net sales of C$10-million in long-term funds but net redemptions of C$340-million and AUM fell 11.2%. AGF Management Ltd. [TSX:AGF.B], meanwhile, saw C$232.4-million of redemptions and its AUM declined 12.6%. Led by C$482.4-million in net redemptions at its Mackenzie division, IGM Financial Inc. (IGIFF.PK) reported redemptions of C$456.4-million and AUM fell 9.0%. Despite these staggering figures, Mr. Boland said the AUM decline experienced by these companies was less than anticipated.

Money market funds, meanwhile, reported net redemptions of C$2.7-billion in October, up slightly from the previous month, while net sales were C$1.2-billion a year earlier. However, this money likely won’t leave the banks entirely. “We expect a good portion of money market net redemptions to flow into bank deposits,” Scotia Capital analyst Kevin Choquette said in a research note.

As for long-term funds, which saw net redemptions climb to C$5.8-billion from C$2.0-billion in September, Royal Bank of Canada (RY) registered the largest redemptions at C$902-million. CIBC (CM) was next at C$711-million, followed by Bank of Montreal (BMO) with C$681-million.

The lack of any risk appetite has been strong elsewhere as well, no surprise given that global equities suffered their weakest two months of performance in 40 years.

“Selling pressure has been intense,” said Robert Buckland, chief global equity strategist at Citigroup. Outflows from equities have totaled $190-billion, bond redemptions are at least $42-billion, and cash allocations have increased by $209-billion, the investment bank said in a report.

Investors pulled a record $56.15-billion from equity mutual funds in September, topping the previous all-time high set in July 2002. And so far in 2008, total stock funds have suffered a cumulative outflow of $124.64-billion.

Hedge funds saw their first outflows since 1994 with assets under management at dipping 11% in the third quarter.

And the prospects aren’t looking up for fund flows anytime soon. “Institutional and retail fund flows tend to lag stock market recoveries,” Mr. Buckland said, noting that during both the tech sell-off and Asian crisis flows turned positive six months after the markets bottomed.

However, the dismal market trends of 2002 have now fallen off five-year mutual fund performance figures. Investors pay close attention to these numbers, so this could produce a pick-up in U.S. fund flows, which Citigroup suggested could be potential catalyst for market appreciation.