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Investors look for safe havens; Money-market funds got most new investment Rising short-term interest rates add to the allure

Thu 26 Oct 2006
The Toronto Star

If it's true that fear and greed rule stock markets, fear seems to haveclearly gained the upper hand among mutual fund investors in September.

Last month Canadians purchased $1.1 billion worth of mutual funds, down39 per cent from a year ago when they bought $1.8 billion in funds,leading market watchers to say investors are sitting fearfully on thesidelines.

That analysis is also backed up by what investors did buy last month.Most of the new mutual fund money flowing into the market in September,$852 million or 77 per cent, was earmarked for lower-risk money marketfunds, according to data compiled by the Investment Funds Institute ofCanada, whose members control most of the country's mutual funds,

"The last time monthly money market sales were this high was inDecember 2001," said Joanne De Laurentiis, chief executive officer ofIFIC.

Money market funds have proven attractive because of investoruncertainty, competition among fund providers that has resulted in moreand better fund product as well as rising short-term interest rates,which have added to the money market allure.

"The money market funds sales have been picking up past the long-termfunds since last August," said Erwin Go, IFIC's manager of statistics.

Go says they are two reasons that long-term funds have been drying up"The markets have been volatile, and ... the interest rates have beenfairly good across the board."

Caution seeped into the mutual fund market as early as last June, wheninvestors parked nearly $90 million into money market funds. That grewin July and by August $396 million went to those funds before thewhopping $852 million allocated to money market funds last month.

Highly liquid and characterized by having investments in debtinstruments such as short-term commercial paper and treasury bills,lower-fee money market funds are typically used by investors as a placeto store cash before deciding where to invest it for the long haul.

Another option for investors is to do nothing, which is in fact whatthey did in September, according to Morningstar Canada investment fundseditor Rudy Luuko.

Sifting through the IFIC month report, he found "little buying activityof any kind by retail investors," noting that net sales of long-termfunds totalled just $159 million last month "a disappointing figure forthe industry, both in terms of recent months and by comparison withearlier years." By comparison, mutual fund investors plowed nearly $2billion into long-term funds in September 2005.

Rather than picking up after the Labour Day holiday, as it has in pastyears, sales of long-term funds are actually weaker than in August andSeptember, when sales of all categories other than money market fundscame to total $330 million and $678 million respectively.

Luuko found that three-quarters of the new sales of money market fundsracked up last month came from just two funds TD Premium Money Marketwith $349 million in sales and RBC Premium Money Market with $335million. Those two funds are hardly the investment vehicle of choice ofthe average retail investor as both require minimum investments of$100,000.

Of the investors willing to purchase long-term funds, the most popularcategory was Canadian income balanced funds that enjoyed net new salesof $328 million.

That category was followed by international equity funds with net newsales of $167 million, Canadian dividend and equity income with $131million and Canadian bond funds with $119 million.

"People are seeing more volatility in the markets than they have seenin a while, and there is just a lot of caution and pessimism rightnow," said Chris Reynolds, president of Investment Planning CounselInc. in Mississauga.

"The money flow is still there, but it is going to what they think are safe havens."

Reynolds chalks up investors' fear and uncertainty to the slump of theU.S. housing market, inflation fears south of the border and theuncertain future of commodity prices, especially energy.

He expects the hundreds of millions parked in money market funds to eventually find its way to long-term funds.

"We have been building up cash recently in our own portfolios becausewe think there will be some other opportunities that come available inthe next couple months. We are just waiting to see what they are.

"Everyone is waiting for some sort of catalyst," said Reynolds. "If wesaw a pullback in the market ... you would see more allocation of thatmoney market to more longer-term types of investments."

© 2006 Torstar Corporation

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