What’s behind record redemptions in the Canadian mutual-fund space?

Net outflows across multiple fund categories might reflect a shift in investor appetite, says portfolio manager

What’s behind record redemptions in the Canadian mutual-fund space?

Among those paying attention to the Investment Funds Institute of Canada’s monthly fund statistics report, the most recent sets of statistics from the months of April and May are likely to raise eyebrows.

According to IFIC, mutual fund flows unanimously saw net redemptions across all fund categories in April this year.

Balanced funds saw $2.06 billion in net outflows, while equity funds shed $697 million. Fixed-income funds, meanwhile, saw net outflows of $1.75 billion, according to IFIC’s report, which draws from a direct survey of its members complemented by data from Investor Economics.

The pain deepened in May as balanced funds registered $5.3 billion in net redemptions, followed by equity funds and bond funds with $994 million and $882 million in redemptions, respectively. Overall, net outflows last month totalled $6.2 billion, compared to $4.9 billion in April.

Some of those outflows might be due to investors’ heightened cost-consciousness; against a backdrop of rising prices, Canadians could be shifting some of their asset exposures from mutual funds to lower-fee ETF equivalents.

But according to one Portfolio Manager from British Columbia, there’s likely another dynamic at work.

“If you look at the mutual fund outflows and the ETF flows, you’ll see they don’t net out to zero. It’s not a substitution,” Matthew Evans, Wealth Advisor and Portfolio Manager at Westmount Wealth Management Inc, told Wealth Professional.

“The money redeemed from those mutual funds could have gone to a different asset classes, like alternative investments and cash, or simply used to pay down debt in a rising-rate environment,” Evans says.

One possible explanation, he suggests, is that clients could be reacting to a shift in GIC rates versus mutual fund returns. Given the low rates offered by GICs over the past few years, yield-seeking clients might have moved into mutual funds with conservative and balanced mandates; this year, GIC rates are still low but moving higher, while mutual fund performance looks bleak as both stock and bond markets have been roiled by inflation and rising rates.

Read more about the difference between RBC GIC and RBC Mutual Funds here.

“As short-term rates moved higher, GICs have repriced, and now you can get a 1-year 3% GIC. With uncertainty in the markets, some conservative investors may have shifted to into these guaranteed products,” Evans says.

It may not only be self-directed clients moving to cash, but Portfolio Managers as well. In a survey released May, Bank of America found an “extremely bearish” sentiment among active fund managers representing just under US$1 trillion in assets. Those investors raised their cash levels to 6.1%, which was reportedly the highest cash holdings level in two decades.

The outflows from mutual funds might also be explained in part by a combination of portfolio rebalancing and early tax-loss harvesting. At Westmount, Evans says they did a rebalancing at the beginning of 2022 into their firm’s private and alternative asset options, which triggered some capital gains for their clients.

To offset some of those gains on their clients’ tax returns, he says some portfolio managers could consider some early-tax loss harvesting by selling an investment and purchasing back a substitution security.

“Typically, we’d be doing tax-loss harvesting towards the end of the year, because you have a clearer picture on what the tax ramifications are for the client,” Evans says. “But we feel it’s a good time to take the opportunity right now.”