Canadian Funds Brace for Massive Outflows

Canadian mutual fund companies face tough competition from other avenues as the hype of the 1990s bull market wears down, the Financial Post reports. With greater affinity toward high-yielding instruments such as income trusts and structured products, Canadian investors are likely to pull the plug on mutual funds.

"There is some concern in the market that the combination of the significant sales boom occurring in the late 1990s and 2000 and the recent relative slowdown in mutual fund sales may spell disaster for the mutual fund managers," said John Aiken, an analyst at National Bank Financial, in a research note on Monday.

Publicly traded firms such as AGF Management Ltd. and C.I. Fund Management Inc., whose fund data is available, are likely to be hit hard by the investor defection, Aiken said. He noted that the problem comes from the fact that during the bull market a number of years ago, investors poured money into back-end load funds, which charge redemption fees if they are redeemed in the first seven years. With those redemption-fee periods nearing an end, investors are expected to dump mutual funds.

A potential a mass exodus could prove to be damaging to mutual fund companies over the next four to five years, Aiken said, given the popularity of back-end load funds until three or four years ago.

While mutual fund sales have been growing over the past year, Aiken said the industry would need to continue to post strong sales to make up for weak sales in 2002 and 2003.