Managed Money Reporter Newsletter — Issue 210, October 2004


Editors: Carl Spiess & Allan McGlade


Featured Articles



Understanding International Funds and the Canadian Dollar

The average global equity fund available in Canada has had a -2.2% return over the last 5 years (to Sept 30, 2004).  Many clients are second guessing their decision to invest abroad, after suffering half a decade of abysmal returns.  Is it time to give up on foreign funds, and why have global funds given up their luster, and what to do about it?

Foreign Funds Hurt by Rising Dollar and Weak  Markets

So why have foreign funds done so poorly of late? First, it is important to remember that a rising or falling Canadian dollar hurts or helps foreign investments by an equivalent amount.  In the early 1990s, the Canadian Dollar had been strong - over 90 cents US - and then began to decline (see chart, below). During the mid 1990s, when the Canadian dollar was falling, there was an artificial "lift" on foreign investments held by Canadians.  This is a key part of what generated the lofty returns on global funds in the late 1990s. A rising Canadian dollar has the opposite effect. Of late, the Canadian dollar has been gaining value relative to the US$ and other currencies, and that hurts your foreign funds.

The other reason that global funds have suffered, is due to the overall market conditions of the last 5 years.  The S&P/Citigroup World Equity Index, that we use to track the performance of the global funds, is down 2.0% average each year over the last 5 years, which the funds (at -2.2% after their management fees) have tracked closely.  There is no escaping the fact that overall, global markets have yet to regain their peaks hit in 2000.

Foreign Funds Still Important to Your Portfolio

So, in light of recent poor performance, should you keep all your money in Canada instead? No - global funds still make up an important component of your asset mix. They buffer your portfolio from the effects of potential weakness in the Canadian economy - just as your Canadian investments have protected you from softness in international markets.  For a very detailed technical review of International Investment correlations, please read "Is International Investing Dead" (.pdf 1.6mb) by Franklin Templeton Investments.

We cannot emphasize enough, the importance staying focussed on your long term goals. Avoid chasing the hottest trend and dumping what seems out of fashion to buy what has most recently been growing.  For example, in the 1990s, the returns on foreign funds so vastly exceeded Canadian funds, that a whole class of 100% RRSP eligible foreign clone funds were introduced to allow Canadians to go over their 30% foreign content limit.  We were never big fans of the RRSP clone funds. The funds were generally more expensive and had marginally lower returns than their original (non-clone) versions. There are not many clients whose circumstances would necessitate exceeding 30% foreign content within an RRSP. They allowed investors who did purchase them to over-expose themselves to hot foreign markets ... just as the tides turned on that sector. Enough said.

Maintain the Appropriate Regional Mix

So rather than being in or out of foreign markets, the key is to ensure you have the right mix of domestic and global investments. So how much should you have abroad?  It is impossible to precisely predict the future value of the dollar, although based on purchasing power parity and our analysts research, the dollar will likely remain over 80 cents US.  

Medium Risk Asset Allocation for 40 Year Old Investor Despite any short term trend in the dollar, we still feel that half of your total equity exposure (i.e. both in & outside the RRSP) should be international, and more so if you plan on retiring down south.  To the right is a typical recommended asset allocation for a 40 year old investor: 40% Bonds, 30% Canadian, 15% US, 15% International.

While the above is a typical example, your asset mix should be determined by your own financial goals and time horizon. That means it should be reviewed periodically and rebalanced, if necessary. Please call us if you would like a review of your overall asset allocation, or your exposure to foreign markets.

The Automatic Millionaire

Finding The Money

Scotiabank is featuring David Bach, #1 International best-selling author of The Automatic Millionaire* in a variety of free live and web features.  The theme is "You're Richer Than You Think" and no matter what your personal or business financial situation, this down to basics seminar can help you find the money you didn't know you had. Over half a million people across North America have attended David's seminars. 

We certainly concur with the themes of paying yourself first, paying down debt and avoiding living beyond your means.  The there is a lot to be said for the old saying "anyone who spends less than they earn, is rich."

See our website of the month link at the end of the newsletter for a link to the "Finding the Money" web-based tools.

Canada Savings Bonds vs. GICs

Canada Savings Bonds (CSBs) are on sale again, with rates posted at the the CSB site:  http://www.csb.gc.ca/home/. Even with the recent Bank of Canada key rate increase, CSB rates are not exciting.  The Canada Premium Bonds (CPB) offer Year 1 - 1.85%, Year 2 - 2.45%, Year 3 - 3.40%, for an annual compound rate of 2.56% if held for 3 years. The regular series Canada Savings Bonds S90 (1/11/04) Year 1 will yield 1.50%.  The CPB offers a higher rate of interest at the time of issue than the CSB and is cashable once a year, on the anniversary of the issue day and during the thirty days thereafter. The CSB is cashable at any time so your money is always available. Both bonds are fully backed by the Government of Canada.

If you are looking for something guaranteed but are not impressed by these rates, we suggest you have a look at Guaranteed Investment Certificates (GICs).  We offer 1 year cashable (after 90 days) GICs at 2.15%.  For longer terms, we shop the street for the best rate GICs.  Rates as of Oct 18, 2004 are shown  in the table, below.

We think you will agree that with most issuers offering 3 year GICs with rates over 3.5%, the Canada Premium Bond at 2.56% is not competitive except where the option of early redemption is a very important feature.

Fun with Numbers

Your Net Worth

Most investors have an idea about what their net worth is.  It is simply your assets minus your liabilities.  (If you don't, here is a link to a really simple web tool: http://cgi.scotiabank.com/cgi-bin/Scotiabank/Calculators/NetWorthCalc.cgi)

So you know your net worth: how does it stack up?  Here is a very simple rule of thumb attributed to Thomas J. Stanley and William D. Danko, the authors of "The Millionaire Next Door", to figure out if you have been saving enough:

Your Age x Annual income from all sources / 10 = One estimate of what your net worth should be

So a 35 year old making $40,000 should have a net worth of 140,000?  If you add up the equity in a partially paid for home, a car, and some RRSPs, that may be a realistic goal.  According to the rule, a 60 year old making $100,000 should have an overall net worth of $600,000, likely a low goal for someone approaching retirement.

Two other quick financial planning rules of thumb:  Your investment in cars, which depreciate, should equal 1/10 of the value of your home, which generally appreciates. Also, the average Canadian donates just under 1% of gross income to charity, significantly less than Americans, who donate over 2% of income on average.

TIP: You can use ScotiaOnline to track your net worth in real time, as it allows you to customize your home page showing RRSPs, RESPs, investments, mortgages, Visa cards etc., and then add offline assets like insurance policies, jewelry, artwork, and your home - all part of the big picture.  Life, money, we'll help you balance both.

Mutual Fund Reporter Recommended Website of the Month

If you can't make it to the Automatic Millionaire seminars, here are the web based tools for your convenience:

Find the money 

 



Contact Us

T.  416.863.RRSP (7777)
     1.800.387.9273
F.  416.863.7479
E. carl.spiess@scotiawealth.com
    allan.mcglade@scotiawealth.com

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