More RRSP ideas
Foreign picks to consider
We're into the last seven days of the RRSP sales season. March 1, 2002 is the last day to make a RRSP contribution and have it deducted from last year 's taxable income. Investors' natural tendency to procrastinate often leads them to making rushed investment decisions. While last week's article suggested some good Canadian funds to consider for your RRSP, this week's focus is on some of my favourite foreign funds.
Foreign content limits
No discussion of foreign fund picks is complete without first summarizing the foreign content limits. Very simply, no more than 30 per cent of the book value of any RRSP, RRIF, or any variation thereof can be held in foreign content investments. An investment's book value (BV) is synonymous with its adjusted cost base (ACB) for tax purposes. Hence, they're calculated in the same fashion but on an individual account basis. Basically, BV includes not only original purchases, but also distributions that are reinvested in additional units of a fund. For a more detailed discussion of ACB calculations, revisit this March 2001 article.
How much foreign content should you have? How do you exceed the limit if needed? Check out this older article, which addresses these issues.
There are a couple of ways to implement your desired foreign content.
The simplest way to gain foreign stock exposure is to buy one fund with the flexibility to buy any company, in any country, and in any industry. This type of fund is a global stock fund. Here are some of my favourites in this category.
AGF International Value, Templeton Growth, and Trimark Fund SC are three of my favourites in this category. Each of these is a good, broad-based global fund that does not exhibit style extremes (i.e. not strict value, not pure growth - but near the middle with a value tilt); emphasizes larger companies; is run by a strong and deep management team; and trades relatively infrequently. Don't buy all three - just pick one and use it as the core of your global stock exposure.
One other fund to consider that shares all of the above characteristics (except that it is a strict value fund) is Mackenzie Cundill Value C. I highlight is separately because its extreme value style usually requires more patience than most people have. However, investors should be handsomely rewarded over long periods of time.
If you're more aggressive, you may prefer a global fund that has similar characteristics, but invests in smaller companies offering potentially better growth opportunities. In that case, Templeton Global Smaller Companies and Saxon World Growth may be of interest to you. There isn't much choice for global small cap funds, but these two are quality offerings.
A more customized approach
A more customized approach to global stock exposure may appeal to some investors. There are a few ways to do this depending on your needs, the contents of the rest of your portfolio, and your comfort level with risk.
If you already have lots of North American stock exposure through your Canadian balanced and stock funds (many of which maximize foreign content) or other industry specialty funds (which often focus on the U.S.), you may prefer an overseas or international stock fund.
Alternately, you may feel that the U.S. stock market is so large and liquid that simply earning what "the market" earns will be better than most funds. In other words, you may want to invest passively in the U.S. (via index funds) but retain the expertise of a money management team for overseas stocks. In such a case, you might opt to buy CIBC U.S. RRSP Index, TD U.S. RSP Index, an exchange-traded fund or a regular foreign content index fund from one of these or other firms. This type of efficient exposure to the U.S. market would fit nicely with a fund that is mandated to invest strictly outside of North America.
Finally, more aggressive investors might simply want to aim for higher returns and good style diversification by focusing their U.S. stock exposure on the smaller cap segments. Good U.S. small cap funds like AGF Aggressive Growth, CIBC U.S. Small Companies, CI Signature American Small Companies, and Elliott & Page Mid Cap would nicely compliment most Canadian and overseas stock funds while adding return potential to a portfolio.
AGF International Stock, Mawer World Investment, and Templeton International Stock are superb choices for exposure to larger companies outside of North America.
Integrating specialty funds
My definition of specialty funds includes everything from funds investing in specific countries or geographic regions, to funds emphasizing specific industries or segments. Bear in mind that these choices are only suitable for those investors who are a bit adventurous, even if it is only with 5% or so of the total portfolio's value.
Good regional funds include CI Emerging Markets and Spectrum European Growth. The latter is a European stock fund providing exposure to medium sized companies. Both of these funds are great compliments to most global and overseas funds.
Industry funds worth a look include CI Global Consumer Products, Dynamic Global Real Estate, Standard Life Natural Resource, and Talvest Global Health Care.
Countries vs. industries
We've always been told to diversify by geography because Canada makes up 2.5 per cent of the world's stock markets. As the global economy has become just that - more global in nature - academic research has noted the increasing importance of industry diversification relative to spreading portfolios around to different countries/regions. What has been confirmed is that diversifying by industry is now equally important as geographic diversification.
When technology started taking off in 1998, it wasn't just in Canada or the U.S. The industry boom grabbed other developed nations in Europe and the Pacific Rim along for the ride. The tech bust also dragged down stocks in the industry in all developed nations and, to a lesser extent, in emerging markets.
The body of research, however, has concluded that emerging markets countries are the exception to that general rule since political issues often trump the importance of industry trends.
Does this mean you should go out and buy a bunch of industry funds? No, because most investors couldn't handle the volatility present in each. Rather, a more effective way is to diversify by geography, asset class, and investment style.
Since most growth managers have a bias toward technology and health care; and value managers have a bias toward financial services and (for now) energy; the industry diversification will likely result quite naturally from choosing funds with truly different management styles.
While I have no magical answers, I hope these last two articles help in sifting through the universe of investment options during the next seven days.
Dan Hallett, CFA, CFP is the President of Dan Hallett & Associates Inc. in Windsor Ontario. DH&A is registered as Investment Counsel in Ontario and provides independent investment research to financial advisors. He can be reached at email@example.com
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