Mutual fund investors are selling low again as markets slow

It’s another sad twist in the “buy low, sell high” investing doctrine: stock markets are dropping in a correction (or worse) and anxious investors press the sell button.

Canadian investors pulled nearly $5 billion from mutual funds last month, according to the latest tally from the Investment Funds Institute of Canada (IFIC). It’s the first time in a year and a half that the IFIC has reported net mutual fund cashbacks, as concerns about inflation and rising interest rates drive down the value of major equity markets. For example, the S&P 500 is down about 15 percent so far this year.

It’s a stark reversal from the pandemic buying spree that started with the markets bullish starting in late March 2020, after a similar correction that also saw joint net cashbacks. As markets gain momentum in 2021, IFIC reports a jump of $111.5 billion in mutual fund sales; Nearly four times $29 billion in 2020, which is in line with average annual sales going back to 2000.

It’s hard to make money from mutual funds without falling into the emotional trap of buying high and selling low. Most Canadians invest in mutual funds for their retirement savings because they are the only investment products that provide professional management and diversification for medium-sized portfolios.

Annual fees often exceed 2 percent of the total amount invested — even when the mutual fund is losing money. This means that the owner of the mutual fund loses 12 percent when the investments in the mutual fund lose ten percent in a year; Which makes the loss worse.

Part of this fee goes to payment to the management team that selects the investments that go into the fund and the advisor who sells the fund to the investor. Not all mutual funds are bought through an advisor, but the role of the management professional should be to manage risk to limit losses, and a basic explanation of how investing works and why it’s a bad idea to sell when the markets are down.

When you eliminate fees, the performance of mutual funds tends to work in tandem with the benchmark indicators they track. In other words, a Canadian stock mutual fund will report gains or losses similar to the S&P/TSX Composite Index. Technology mutual funds often track, as another example, the S&P 500 tech index.

The close correlation between mutual funds and the indices they generally track means that mutual funds will recover when the broader markets recover. It is difficult to determine how close the correlation is, or what measure of risk management is applied, because mutual funds are not required to disclose much about the fund.

Most chests will list a few higher collectibles; But companies that provide them are only required to update disclosures periodically. Given that most mutual funds lag behind their benchmarks by roughly the same amount as the average fee, it can be assumed that many fund managers are only duplicating their holdings.

The largest mutual fund net redemptions in April, according to IFIC, were in balanced funds ($2.05 billion). Balanced funds tend to be more popular with novice investors because they mimic a balanced portfolio of stocks and bonds.

Extremely low interest rates and trough bond yields have been a drag on the performance of balanced funds – but this may change as interest rates rise and fixed income yields better payments.

By the same logic, the days should also be better waiting for bond funds, which oddly enough netted $1.75 billion in April. The value of many bond funds plummeted in nearly three decades of low interest rates as portfolio managers tried to trade their way to better returns in the bond market.

Thus, it is possible that investors who dumped bond funds in April were selling low.

Leave a Comment