In times of market volatility, policymakers are understandably concerned that mutual fund redemptions could pose a risk to market stability and the financial system. Does a triggering event like a sudden market downturn lead to panic-driven selling by fund investors, and could this behaviour transmit stress to the broader market? Our research shows it does not – investors in equity and bond mutual funds do not “run for the exits” during market turmoil.
IFIC has analyzed detailed asset and sales data collected directly from Canadian fund companies, and we have found that there is no evidence to support the theory that extreme market volatility leads to redemption runs on bond or equity funds.
Here are three of the examples we analyzed:
- During the Asian financial crisis in August 1998, the S&P/TSX composite index declined by 20.2%, but Canadian equity fund sales saw redemptions of only 0.9% of total equity assets under management.
- At the height of the dot-com bubble, between March 2000 and October 2002, the S&P/TSX composite index declined by 31.6%. Over the same period, the industry actually sold more equity funds than were redeemed, with positive sales totaling 13.2% of equity assets.
- In the 2008 financial crisis, the S&P/TSX composite fell by a dramatic 42.4%, while the industry saw redemptions of 3.2% of total industry equity assets.
IFIC found similar patterns through our analysis of corporate bond funds over three volatile periods: the 2008 financial crisis, the 2013 Taper Tantrum and the oil price shock of 2015.
The data reveal that Canadian corporate bond funds experienced net outflows in 2008 and during the Taper Tantrum, but those outflows were very small — $840 million in December 2008, or 1.9% of assets; and $177 million in October 2013, or 1.6% of assets. There were actually net inflows during the oil price shock in 2015. We also found that investors did not dramatically increase their redemptions or halt their purchases of Canadian corporate bond funds during these periods.
While it is early in the current crisis, we are seeing evidence that this difficult time is no different. February and March 2020 showed incredible market volatility and a historic rapid decline in equity markets. Between February 20 and March 23, the S&P/TSX composite index fell by 37%. Despite this unprecedented market plunge, net sales were positive in February, bringing in $8.2 billion. March saw $14.1 billion in net redemptions, but this amounted to only 0.9% of equity mutual fund assets. And despite the stressed liquidity conditions experienced in the bond market in March, bond mutual funds saw net redemptions of only 2.9% of total assets.
That investors in stock and bond mutual funds do not “run for the exits” during market turmoil is due to a number of factors, including the role of financial advisors. We know from the 2019 Pollara Mutual Fund & ETF Investor Survey that the majority of mutual fund investors are long-term investors building retirement savings. Eighty per cent of mutual fund investors purchase their funds through an advisor and typically benefit from the advice to stay the course through market downturns. We also know that almost two-thirds of Canadians’ RRSP assets are held in mutual funds. The tax consequences for early withdrawals from RRSP funds provide a further incentive for investors to stay invested.
As a newer product type, ETFs in Canada have not been tested by volatile markets over time to the same extent as mutual funds. However, there is evidence that ETF investors are behaving similarly to mutual fund investors. In fact, ETFs recorded net sales of $8.5 billion in February and $3 billion in March. IFIC will be examining how ETFs behave in turbulent market conditions in more detail in the coming months.
It is important to strengthen our understanding of investor behaviour and its impact both on achieving Canadian investors’ financial goals and on overall market stability.