RRSP season investment fund flows falter to weakest level since 2009 as investors opt for cash

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Investment fund net flow figures from the first quarter of the year show a lacklustre registered retirement savings plan (RRSP) season of $3.7-billion, the worst since the global financial crisis of 2008-09, according to a new report from Investor Economics, an ISS Market Intelligence (ISS MI) business.

Market volatility, interest rates and rising inflation also played a role in investment funds closing in net redemptions for the month of January, says Carlos Cardone, managing director at the Toronto-based firm.

However, as markets rebound, investment fund net flows are improving thanks to interest in stable products offering yields of 4 per cent or more, such as guaranteed investment certificates (GICs), exchange-traded funds (ETFs) that have a high-interest savings account (HISA) component, and money market funds.

“For a long period of time, these products were not a great option because interest rates were very low. But that has changed,” says Mr. Cardone. “It’s a different environment compared with what we’ve seen in the past 10 to 12 years.”

Take net flows in money market funds, which according to the report, are up 564 per cent from Q1 2022. Mr. Cardone attributes the growth to investors considering product options in which they don’t have to take on risk.

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After both equity and fixed-income markets experienced substantial drops in 2022, he says investors parked their money in products they deemed safe. But he notes the shifting of money extends to an investor’s cash holdings as well.

“Money market as a category has not been selling since the financial crisis. But now there are ones available to clients that pay 4.5 per cent and more depending on the amount of money you’re moving into the funds,” Mr. Cardone explains.

“[It’s appealing] to have money market funds, which are very liquid by nature, providing higher interest rates than your average deposit.”

‘Dont feel comfortable investing’ yet

Christine Van Cauwenberghe, head of financial planning at IG Wealth Management in Winnipeg, says ISS MI’s numbers correspond with her firm’s findings. Many clients feel “paralyzed by the uncertainty in the market,” she says.

“They may still have made an RRSP contribution but perhaps left it in cash,” she notes. “They don’t feel comfortable investing it yet.”

Ms. Van Cauwenberghe says a constant challenge for advisors is clients who want to try to time the market by waiting to invest.

“But by then, it’s often too late,” she says. “Too much in cash means they could be losing out on potential growth. So, they need to be dollar-cost averaging to have the benefit of long-term growth.”

Clients think it’s an all-or-nothing decision, she says, adding her practice advocates for gradual growth.

She says she understands clients’ wanting cash for a short-term needs such as purchasing a vehicle or for a down payment for a house. But when it comes to investing for the long term, she says clients could lose out on the upside because prices go up significantly while they make up their minds about re-entering the market.

This year is the ‘exact opposite of last year’

Andrew Feindel, portfolio manager and investment advisor with Richie Feindel Wealth Management at Richardson Wealth Ltd. in Toronto, has also seen clients’ reluctance to get back into the market. He says moderate investors might choose to pay down debt instead of investing because they believe they’ll get a better return on their money and expect a repeat of last year’s returns.

“Meanwhile, if you look at the results this year, they’re the exact opposite of last year,” he says. “The Canadian/U.S. markets are up more than 7 per cent, respectively. No matter someone’s debt level, they would have been better off buying the market on Jan. 1, but a lot of them didn’t.”

As for his high-net-worth clients’ cash holdings, Mr. Feindel has advised them on the high-interest options available.

“They might have $50,000 to $100,000 in cash as a safety net for their business or personal use,” he says. “But why have it at the bank paying 1 per cent when we could get something that pays 4 percentage points higher?”

The ISS MI report notes that the industry is turning its attention to more income-oriented products to entice investors. Covered-calls strategies, private credit and alternatives are buzzwords that keep cropping up, Mr. Cardone says. He also sees a renewed interest in environmental, social and governance funds in all types of products.

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