Managed Money Reporter Newsletter — Issue 196, June 2003

Editors: Carl Spiess & Allan McGlade

Featured Articles

The Summer RRSP Top-Up 

Since our last issue we have noticed an increasing number clients who are making their 2003 RRSP contributions.  Your exact 2003 RRSP room is indicated on your 2002 notice of assessment (your recent tax refund) and reflects the newly proposed $14,500 maximum RRSP contribution limit.

Making your contribution early in the year has always been a recommended strategy. We can't help but think though, that the improved tone of the equity markets over the last couple of months has in some way influenced the increasing number of contributions.  Unless you are already on a monthly pre-authorized plan, we would like to encourage you to contribute now if you have not done so already.

Often clients will ask "How am I doing?" in terms of their overall savings pattern.  First, only 2% of Canadians have made complete use of all their RRSP room accumulated since 1991.  If you have been maximizing your RRSP each year, congratulations, you can be proud to be in that exclusive group of Canadians.

A good rule of thumb is that you need to be saving 10% of gross pay to be able to retire comfortably at age 65.  Earlier retirement, or a super-luxurious retirement like we see in the TV commercials, will require additional savings during your peak earning years.

One dilemma many of us face is whether to focus on paying down the Mortgage or investing in the RRSP.  With mortgage rates so low now, many people are refinancing and have lower mortgage payments, so it makes sense to revisit this question. ScotiaMcLeod clients who have signed up for online access and asked to get additional mailings, would have received an article this month outlining some of the considerations regarding paying down the mortgage or reaping the tax savings of an RRSP. 

Personally, I still recommend the following order of priorities for most people:

  • the RRSP first (due to the 40% tax savings)
  • Mortgage 2nd (due to the long term interest cost savings)
  • then RESP (a 20% grant)
  • and last place for non-registered savings (where it is harder to get growth due to taxation)

For a quick retirement calculator, please visit Scotiabank Reality Check

As personal situations will vary, please contact us about your specific financial planning priorities.  We welcome your questions at any time regarding your investments.

A Closer Look - Bank Stocks

A significant portion of the S&P TSX 60 composite index is made up of the shares of the big five banks.  With interest rates so low, a curious situation has arisen that may help illustrate why we feel owning shares in banks is more financially rewarding than lending them your money through GICs.

CIBC is the 4th largest of the big five banks, and let's use it as a good proxy for the average bank.  Like most banks, its stock price has appreciated nicely in the last year, as their earnings and dividends have increased.  Based on CIBC's June 24th share price of $53.50 and its earnings of $1.88, its price to earnings (P/E) ratio seems high at 28.5x.  This means that at $1.88 a year in earnings, it takes almost 29 years for you to get back the $53.80 you invested to buy a share of the bank.  Historically, P/Es have been 10-20x, but are currently high across the board.

But another way to look at it is that the Bank's annual posted dividend of $1.64 (they pay out the majority of their earnings to shareholders) equals a yield of 3.05% on your investment.  If you go to the bank as a customer, they'll likely pay you 2.5% for a 1 year term deposit.  As a shareholder you make more, which makes sense if you think about it - as an owner of the bank, you should earn more than you pay your customers, otherwise, why bother running the bank, you could just be a customer!

While there is no guarantee on the future price of a bank's shares, they do have the ability to change their dividend payout over time and historically banks have raised not lowered their dividends.  This is why a large number of Canadians, and the vast majority of Canadian equity funds, own bank shares.

FYI, ScotiaMcLeod is owned by Scotiabank, other disclaimers can be found here.

If there any information on a specific security that you are looking for, please contact us at

Fun With Numbers - LSIF Returns

Labour Sponsored funds have had mixed reviews of late.  Morningstar published an article reviewing the current research.  And market conditions for venture capital in general have suffered a setback since the end of the technology boom.  

While management fees on LSIFs are coming down due to consolidation of some funds, they are still high, and that does impact the posted returns on the funds.  All else being equal, we'd love to get tax money back without having to invest anything or take any risk.  But what is important to keep in mind, is that for most investors in LSIFs, the tax savings were significant and make a big difference to the net return, even over the long term.

Below, we have taken the returns of the best and worst performing funds over the last 8 years, and shown what the net return to the investor is after an 8 year holding period.  Interestingly, the best and worst case projections, are not far off the +/-5% figures we have traditionally used as examples.

LSIF Investment Tax Refund Rate = 30% +RSP Total Cash Invested Growth Rate* Years Held

Investment  at End of Period

RSP Redemption Tax Rate Final Value Investor's Avg. Annual After Tax Return
$5,000 78% $1,100 6.0% 8 7,969 48% $4,144 18.0%
$5,000 78% $1,100 -5.1% 8 3,289 48% $1,710 5.7%

* Growth Rate based on actual 8 year historical returns for the best and worst performing LSIF funds available in Canada for the period ending May 31, 2003, source Morningstar/Bellcharts.  Analysis by Carl Spiess, ScotiaMcLeod.

Comparable Index performance over the same period is 6.3% for the BMO NB Small Cap Index, and the average (non-LSIF) small cap fund averaged 5.8% over the same time frame.   While future performance will continue to vary, there will still likely be a place for LSIFs in investors' portfolios, as long as the tax breaks continue to be generous.

Fund News - StrategicNova Name Changes & Consolidation

As we reported in Issue 188, October 2002, Dynamic acquired StrategicNova in the fall of 2002.  As a result, a number of the StrategicNova funds will be changing to Dynamic funds allowing investors more options for switching within the fund families.  For more details visit Dynamic's information page..  The proposed mergers will combine similar funds and eliminate some very small funds, which will improve cost-efficiencies that should flow through to unitholders in the form of lower MERs.

Mutual Fund Reporter Recommended Website of the Month 

A good place to get information on the mutual fund industry is the Investment Funds Institute of Canada site: 


Contact Us

T.  416.863.RRSP (7777)
F.  416.863.7479

ScotiaMcLeod is a division of Scotia Capital Inc., member of CIPF.

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