There is no doubt that the Canadian mutual fund industry has had a difficult year so far. The decline in the stock markets, interspersed with short periods of recovery, is making the headlines, and interest rates are climbing at a speed rarely seen. Inevitably, the industry reacts, and new trends appear. Overview.
Posted at 8:00 a.m.
The correlation changes
If there is one fact that has changed and is shaking up portfolio management strategies, it is that the inverse correlation between stock prices and bond prices has completely changed, explains Léon Garneau Jackson, Director, BMO Global Asset Management. We were used to seeing bond funds offer attractive returns when equity funds faltered, and vice versa. In a way, one protected the other, which was the attraction of balanced funds. But this inverse correlation has disappeared over the past year, and the performance of bond funds is no more enviable than that of equity funds. Both categories suffered heavy losses.
Numbers
As of July 31, assets under management in the Canadian mutual fund industry were down 6% from the same date last year. However, a glimmer of hope appeared in July, when the amount of assets under management was 4% higher than the previous month. Gross sales for their part declined by 23% compared to the previous year – which had, however, it must be remembered, been a record year. Given market volatility in 2022, the majority of sales were in money market funds and global balanced funds.
Low Volatility Stocks
To mitigate the effect of abrupt market movements on the portfolio, low-volatility equity funds are becoming an increasingly popular vehicle for investors, explains Léon Garneau Jackson. The choice of securities that will make up these funds is made on the basis of volatility measures, including beta, or the correlation that exists between the price of a share and the market in general. The fund therefore includes securities whose beta has been among the lowest over the past five years. BMO Asset Management manages a low-volatility U.S. equity fund, and the methodology used seems to be proven, as this fund has shown a positive return of 8.7% over the past year, despite the high volatility that has engulfed stock markets since January.
Dividend funds with covered options
Among the increasingly fashionable funds are dividend funds with options. This involves holding stocks of companies that have a good history of paying dividends and for which the manager sells call options short. The strategy is designed to provide the investor with two sources of cash flow, namely the stock dividend and the option premium, explains Léon Garneau Jackson. These funds often include bank stocks, which have an enviable track record of dividend growth.
Alternative strategies funds
For those who still doubted it, the past year has shown that traditional bond funds are a very risky investment in periods of rapidly rising interest rates, recalls Daniel Lanteigne, Senior Partner, Reverber Integrated Financial Strategies. The creation of alternative strategy funds to replace fixed income funds is under way and should continue, according to him. He encourages savers and investors to ask their advisers about these new products, which sometimes seem complex, but which, in fact, reduce portfolio risk.