There is no doubt that the Canadian mutual fund industry has had a difficult year so far. The slump in the stock markets, interrupted by brief recovery phases, makes the headlines and interest rates are rising at a speed rarely seen. The industry inevitably reacts and new trends emerge. Overview.
Posted at 8:00 am
The correlation changes
If one fact has changed and is turning portfolio management strategies upside down, it’s that the inverse correlation between stock prices and bond prices has changed completely, explains Léon Garneau Jackson, Director, BMO Global Asset Management. We were used to bond funds offering attractive returns when equity funds faltered and vice versa. In a way, one protected the other, which was the appeal of balanced funds. But that inverse correlation has disappeared over the past year, and bond funds’ performance is no more enviable than stock funds’. Both categories suffered heavy casualties.
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 assets under management were up 4% month-on-month. For its part, gross sales were down 23% compared to last year, which was albeit a record year. Given the market volatility in 2022, money market funds and global balanced funds accounted for the bulk of selling.
Stocks with low volatility
Léon Garneau Jackson explains that low-volatility equity mutual funds are becoming an increasingly popular vehicle for investors to mitigate the impact of abrupt market movements on the portfolio. The securities that make up these funds are selected based on measures of volatility, including beta, or the correlation that exists between a stock’s price and the market in general. The fund therefore contains securities whose beta has been among the lowest over the past five years. BMO Asset Management manages a low volatility US equity fund and the methodology used appears to have worked as this fund has shown a positive return of 8.7% over the past year despite the high volatility that has gripped equity markets since January Has.
Dividend fund with covered options
Among the mutual funds that are gaining popularity are dividend mutual funds with options. This includes holding stocks of companies that have a history of paying good dividends and on which the manager sells short call options. 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 that have an enviable track record of dividend growth.
Alternative Strategies Fund
For those who still doubted it, the past year has shown that traditional bond funds are a very risky investment in an era 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 underway and he believes should continue. He encourages savers and investors to ask their advisors about these new products, which sometimes seem complex but actually reduce portfolio risk.