Managed Money Reporter Newsletter — Issue 151, September 1999
Editors: Carl Spiess & Allan McGlade
What exactly happens to the ownership structure of the company through demutualization?
Recently, many fund companies have introduced new 100% RRSP-eligible foreign funds to add to their already vast lists of available funds. These new funds give the investor the opportunity to invest a higher percentage of their RRSP portfolio in the global market without suffering major tax consequences.
What are these funds?
The general concept of the new RRSP-eligible foreign funds is that they are modeled exactly after existing funds that would count only as foreign content in a registered account.
How Do they Work?
Through a special arrangement with a major financial institution, these new RRSP funds are able to capture the same returns as the existing foreign funds while maintaining 100% RRSP eligibility. They can do this by holding a physical portfolio of T-Bills and other cash equivalents that act as collateral for the foreign forward contracts they hold. This now allows us to build a well-diversified global investment portfolio, which is balanced geographically, by asset class and investment style, using some of the best money managers and investing strategies in the world.
Are there any drawbacks?
There is a slightly higher cost to these funds (estimated to be 50-60 basis points per year). However, given the benefits to your RRSP, with historically better returns and potentially lower risk by having more foreign exposure, this extra cost should be considered reasonable.
Also, these 100% RRSP-eligible foreign funds are not appropriate for non-registered accounts. Holding them outside an RRSP/RRIF or LIF can have serious negative tax consequences, effectively turning any capital gain into regular income.
Why should I consider these funds as an investment for my account?
There is opportunity for higher returns, increased diversification and more rapid growth. Only a small percentage of the world's equity markets are concentrated in Canada, by having 80% or more of your portfolio in the Canadian markets you may be missing out on opportunities elsewhere.
Please keep in mind that this is not a recommendation to completely pull out of Canadian based equity funds. There are numerous companies of strong merit, which are publicly listed in this country that are worthy of consideration and investment. We do believe however that it is beneficial to expand beyond the 20% threshold to participate in the global opportunities these new funds can provide. The graph (at right) shows the returns of the TSE (Toronto Stock Exchange) 300 Total Return Index and the returns of the MSCI (Morgan Stanley Capital International) World Index. In the comparison it is evident that a balanced mix of Canadian and Global investments has the capability of producing higher returns.
Do I need to worry about maximizing my 20% Foreign content if I use these funds?
These funds are not a substitute for foreign content holdings in your RRSP. Due to the incremental extra cost of owning them, it is beneficial to make use of your 20% foreign content limit to invest in traditional foreign funds and to use these new funds to go beyond it.
Can I switch out of them or redeem them the same way I can with my other funds?
They are completely tradable and switchable like any other mutual fund available today.
How will these funds measure up to their clones?
Although these new funds should mirror the performance of their counter- parts, there are additional costs in administering the forward contracts that make them possible, therefore the returns should be slightly lower to compensate for the cost.
Top Picks - 100% RRSP-Eligible Foreign Funds
What companies are participating in this new trend?
In the coming months virtually every major fund company is expected to launch similar funds, and many are well down the path to making them available. So far Mackenzie, Templeton, AIC, Trimark, AGF and BPI are offering these funds or will be within the short-term.
For a complete list of the new 100% RRSP-eligible funds please contact our investor service centre at (416) 863-7777 or at email@example.com
There has been some recent concern with the decline in values of the AIC Advantage series of funds. Due to the decrease in value in the financial sectors of the market, a sector in which these funds are heavily weighted, the share prices have decreased. Historically, the financial services industry has been a relatively stable sector of the market. Therefore we are recommending that this may be an ideal time to buy the funds. Please remember that these are growth funds and are subject to volatility. They are meant to produce long-term results.
Dundee Investment Management & Research Ltd. has recently changed its name to Dynamic Mutual Funds Ltd. The name changes are as follows:
The Power Group of Funds have been renamed to the following:
The Mutual Fund Reporter team has had some recent changes. Barb Daley, one of our Investment Associates, has left the group and assumed a new position within the firm. Also, a new addition, Jennifer Hart has joined the team as an Administrative Associate.
Correction: In our last issue, on Demutualization, we specified the dates of the IPO (Initial Public Offering) of the insurance companies involved. This was misstated as being the PEO dates. We apologize for any confusion.
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The Spiess McGlade Team is a personal trade name of Carl Spiess and Allan McGlade.