The slow return of billions of parked investment dollars continued last month as long-term mutual fund mandates experienced another strong month of net sales, according to data from the Investment Funds Institute of Canada (IFIC).

While overall net sales were down for the industry, the run-up in market valuations seems to help total mutual fund assets grow by $4.3 billion during the month of September to a total of $582.7 billion. The bull market has helped mutual fund assets increase by 2.7%, or $15.1 billion, since January, IFIC reports.

The really good news is that investor money is coming back to long-term fund assets. The mandates that advisors typically make money on have increased by 3.6%, or $17.9 billion, in September to end the month at $520.9 billion. Long-term fund assets have increased by $117.9 billion, or 29.3%, since hitting their low point in February.

Total net sales for the industry were -$733.9 million and were made up of -$2.71 billion in money market fund redemptions and $1.97 billion in long-term fund sales. Total net redemptions were up from August (-$462.6 million) but were well below the total last September, which saw $4.23 billion in redemptions.

Advisors need to be cognizant of what investors are buying — which is overwhelmingly balanced funds or fund-of-fund mandates. Fund-of-fund sales represented $1.02 billion in sales alone. Meanwhile, virtually all the equity mandate categories suffered redemptions, points out Rudy Luukko, investment funds editor with Morningstar Canada.

“Equity categories remained some of the most avoided in terms of making new commitments. The redemptions trend in equities seemed to cut across all of the major equity categories,” Luukko says. “Year to date, domestic equity categories have suffered $1.7 billion in net redemptions when the median Canadian equity mandate as tracked by Morningstar is up 28.1%. Global equity mandates have not done as well because of currency depreciation vis-à-vis the Canadian dollar. The median global equity fund is up 12.9%.

Luukko adds, “To the extent that investors are willing to make new commitments to equities, they are doing so through balanced and portfolio funds, and that trend continues this month.”

Investors’ mass exodus from money market funds does not mean their appetite for risk has completely returned. Fixed income fund categories saw considerable inflows in September, where a much higher yield could be obtained over money market funds for only a marginal increase in risk.

Domestic Fixed Income funds led the way in net sales in September, with sales totalling $1.42 billion, up from $838.7 million in August and -$42.7 million in September 2008.

Domestic Fixed Income funds also have net sales year to date at $5.62 billion, compared with net sales of $305 million at this point last year. Specifically, the Canadian Short Term Fixed Income fund category had the highest sales year to date at $4.04 billion, up from -$555.2 million at this point last year.

The Canadian fixed income category has a pretty respectable gain of 6% [over the last year]; that hasn’t been a bad place to be,” Luukko says.

Whereas the nine-month return for the median money market fund has been 0.3%, Luukko says, and only 0.7% on the year.

“Money market yields have been so bad, it makes the latest issue of Canada savings bonds look competitive,” he says. If investors and advisors look at these yields, and if it’s money that’s not immediately needed, it’s really incumbent on the advisor to suggest alternatives.

He adds, “Based on the strong inflows we’re seeing in fixed income funds — which have higher yields and might seem to be an alternative for investors to accept a moderate degree of risk in exchange for picking up some yield. There is significant yield to be gained by moving up the maturity curve. The median yield on Canadian short-term fixed income is 2.9% versus 0.3% for money market funds. That is a risk-reward trade-off that many investors appear willing to make.”