Mutual funds face flood of redemptions in turbulent market

Canadian mutual fund companies are seeing fund redemptions begin to rise as the novel coronavirus rattles global equity markets, leaving panicked investors looking to hit the sell button.

CI Financial chief executive officer Kurt MacAlpine held a special call for analysts last week, saying the company’s total assets under management have been “directly impacted” by what’s happening in the markets.

After seeing improvements in net redemptions for the first two months of 2020, Mr. MacAlpine said March to date has been more “challenging." CI’s total net redemptions in the first 23 days of March were $350-million higher than the same March period in 2019.

“We have seen a differential of a couple hundred million dollars in net redemptions on a month-over-month basis for the retail business,” Mr. MacAlpine said. “Our business has been very resilient. … Of course, in market conditions like this, nobody is immune to redemptions.”

In a quarterly earnings call last week, AGF Management Ltd. president Judy Goldring told analysts the company had already seen a total of $65-million in new redemptions during the first 24 days in March, up from $22-million in outflows in all of March, 2019.

“We have seen, of course, a flight to safety for investors," Ms. Goldring said during the call. “Obviously [investors] are very nervous.”

Although official industry numbers for March will not be released until late next month, AGF executives outlined current conditions last week in response to questions from analysts.

“We usually provide guidance on when we expect AGF to return to positive net flows,” AGF CEO Kevin McCreadie told analysts. “It is difficult to offer a meaningful outlook when the precise impact and length of the COVID-19 pandemic remains unknown.”

As the coronavirus and its resulting COVID-19 disease continue to disrupt markets, the potential for a “tsunami” of mutual fund redemptions is getting closer, said Martin Pelletier, portfolio manager with Wellington-Altus Private Wealth Counsel Inc.

“While ETF [exchange-traded funds] investors have been hitting the panic sell button over the past few weeks, those in mutual funds may not have reacted yet as they likely have an adviser in the middle," Mr. Pelletier said. "My worry is what investors will do once opening their quarterly statements that are about to be sent out.”

Like many of its competitors in Canada, AGF is also facing a decline in its overall assets under management as tumbling markets drive down the value of stocks held in the company’s mutual funds.

The company reported assets under management of $33-billion as of March 24, a 12-per-cent drop from $37.6-billion for the quarter ending Feb. 29.

Market declines are also putting pressure on the revenue streams of mutual fund firms, as lower asset levels reduce the sales commissions paid by investors. Management expense ratios are typically lower on fixed-income funds than equity funds, says Marcos Alvarez, senior vice-president of global financial institutions at DBRS Morningstar.

“Investor behaviour might see many retail clients change their portfolio allocations from equities to fixed-income products,” he said. “This typically results in lower commissions for the fund companies.”

Prior to the COVID-19 outbreak in North America, Canada’s mutual fund industry had seen some positive signs in overall redemption levels. The latest numbers released by the Investment Funds Institute of Canada last week reported no net redemptions for the month of February for both mutual funds and ETFs.

Further redemptions by retail investors may not be felt by some fund managers until later in April, when some households under stress because of unemployment may need to liquidate.

“A lot of individuals are still processing what the government relief package means for their personal financial situation as well for those with small businesses, and that can have an impact on whether someone decides to sell an investment fund or not right now,” said Mr. Alvarez from DBRS Morningstar.

Not all investors have the option to redeem their holdings in all types of investment funds. Several real estate funds have temporarily halted all investor activity in their Canadian real estate funds. The spread of COVID-19 has affected global property markets, making it difficult to value properties.

Both Canada Life Assurance Co. and Trez Capital have announced they are no longer allowing investors to redeem, contribute or transfer funds in several of their real estate funds.