Facts, Facts and More Facts: Maturing Market-linked GICs Face Retention Challenge

Market-linked GICs (MLGICs) added $1.9 billion in the first half of 2012, reaching a total of $34.1 billion. While in the past three years nearly all issuers enjoyed positive growth, not all players saw their book of MLGICs expand in 2012. After years of tepid progress, balances in MLGICs swelled in the aftermath of the 2008-2009 market downturn and amidst the continued market volatility of the ensuing years. The first half of 2012 marked the first cohort of maturing three-year certificates sold during the worst of the market downturn (the bulk of certificates are sold with three- or five-year maturities). If history is any indication, the retention—or the re-direction—of the MLGIC business will emerge as a priority in the next two years, just as was the case when the original batch of MLGICs matured between 2001 and 2003. The lesson of history is that delivering on the downside risk protection promise might not be motivation enough for clients to re-up their commitment to MLGICs. Rather, investors and advisors are likely to consider a wide array of alternatives and take into account their outlook for the capital markets. While the more recent batch of MLGICs may have performed as designed, the perception that market returns have flattened out in the past several months may well deter investors from renewing their investment in MLGICs. The cited metrics are derived from Investor Economics’ database which tracks the holdings of Canadian market-linked GICs. For more information on news and developments concerning Canadian deposit industry, please see the latest issue of Deposits and Fixed Income Advisory Service http://investoreconomics.com/issue/deposit-and-fixed-income-advisory-service-2. Posted by Bonnie Ho Bonnie@iei.ca.