Managed Money Reporter Newsletter — Issue 240, September 2007

Editors: Carl Spiess & Allan McGlade

Featured Articles

Canadian Dollar Hits Par!

By Carl Spiess, CFP, CIM, FMA, FCSI, MBA, Director

The financial issues in the US housing market (referred to last month), prompted the Federal Reserve in the US to lower interest rates by 1/2 of a percent. This surprisingly large move sent stock markets and the Canadian dollar higher. For investors, the high Canadian dollar dampens returns of US stocks and funds, but presents opportunities for investors (and shoppers) looking for bargains in the US.

Does anyone remember the 1991 Second City show in Toronto called "Shopping off to Buffalo"? That was the last time that Canadians were doing a lot of cross-border shopping in the US. Then for the few years on either side of Y2K, Toronto was filled with tourist buses filled with Americans coming to see our shows downtown since the Canadian dollar was so cheap. The point at which goods and services cost the same in both countries is called Purchasing Power parity.

Chart of value of CDN$ vs. US$

Purchasing power parity suggests that the dollar should be around 88 cents, since at that price many goods are priced equally in the two countries. We argued for many years in the late 1990s and up to 2004 that the Canadian dollar (remember when it was called the Canadian Peso) should be higher (85 to 90 cents). It took a long time to get there, and then promptly shot right through that reasonable estimate of value! So trying to predict currencies seems useless short term, as even when you are right, it can take years to see the effect and then it might vastly overshoot the target.

So the Canadian dollar is overvalued relative to the US dollar but no one knows when we will stop seeing demand for Canadian resources slow down and let the dollar adjust. And relative to other currencies, the Canadian dollar has held its own so it is probably just a matter of waiting for the US dollar to find its proper level. We do not expect significant Canadian interest rate rises in the future though, as this would just drive our dollar even higher. The best advice is generally to hold your investment in the currency you expect to spend in the future.

And for those of you who are heading south this winter, at least travel to the US will be affordable for Canadians for the foreseeable future.

More on currencies and purchasing power parity

Important Changes to RESP Rules

Earlier this year, the Federal Government announced several important changes to the rules surrounding RESP contribution limits and grant payments. Many clients were holding off on making their RESP contributions or adding a top up contribution until the process for getting the grants was clarified. Here are the new rules and the process for getting additional Canada Education Savings Grants (CESG).

Starting this year on a go-forward basis, the government will continue to pay 20% to you as a grant however the maximum annual CESG amount has been increased to $500 from $400. Annual contributions of $2,500 instead of $2,000 will be required to maximize the available grant room going forward. The lifetime maximum CESG limit has not changed; it remains at $7,200 per child.

The $4,000 annual contribution limit has also been eliminated and the lifetime contribution maximum has been increased from $42,000 to $50,000 per child.

HRSDC has confirmed that their systems will not be processing "extra" grant payments until December 2007 however, the new rules will allow contributors to receive up to $1,000 this year if there is unused grant room from previous years.

Here is how it works. If your child was born in 2005 and you have not made any contributions to your RESP you are entitled to CESG of $400 for 2005, 2006 and $500 for 2007. Because the new CESG limit is $1,000, you will not receive $1200 this year rather the remaining $300 unused grant will be carried forward to future years.

Unused grant room from 1998-2006 will still be available, but at the $400 level. Going forward unused grant room will accumulate at the $500 level.

This flexibility offers individuals an opportunity to maximize the tax-sheltered environment that RESP account offer and take advantage of compounded growth, though through larger contributions earlier in the plan, CESG payments may be forfeited.

An interesting debate arises on which strategy makes more sense: larger contributions early in the plan vs. maximizing CESG payments over time. For an interesting comparison on the math behind these strategies, please review the attached article by Jamie Golombek of AIM Trimark, below.

If all of this is sounding complex, never fear - that is why we are here. We are happy to go over your personal situation with you to ensure you are getting the most out of this great tool for saving for your children's education.

More on RESPs

Canada Savings Bonds

Canada Savings Bonds (CSBs) will be on sale until November 1st. As in recent years, the rates are not exciting, but of course Canada Savings Bonds are safe and secure. At 3.5% we do have to say that the rate is not really competitive with other options that are available.

For conservative investors, we also offer GICs from a wide variety of issuers to ensure you get the best rates:

For clients with Maturing CSBs, we will be in contact about your options. Or please contact us if you are considering adding guaranteed investments to your portfolio.

More on CSBs

If It Bleeds, It Leads...

The old saying about headlines on the local news is just as true when it comes to financial reporting. As advisors, we have often noticed that clients hear many more news articles about how the markets have gone down, or are going to go down, than articles about how the markets go up.

The fact of the matter is that the current market is always set at a level where half of the investors think the market is going up, and half of the investors think the market is going down - that is how market prices are determined. In the short term, markets go up and markets go down but if the long term trend of the market over decades has always been up, it may make sense to question whether the negativity in the media is warranted or just noise.

The Globe and Mail had an article September 6th, ironically titled: Stop the Presses - This just in: The media play up negative stories while ignoring everything else. We definitely think it is worth a read.

Ethical Investing Goes Mainstream

We have written about Socially Responsible (SRI) or ethical investing for years, and it is now growing to be a major theme for Canadian investors. Read on to find out more...

Ethical and Northwest Fund Families to Merge

The Ethical Funds Company (run by Canada's Provincial Credit Union Centrals) and Northwest Mutual Funds Inc. (owned by Desjardins Group) have joined forces to increase growth of and acceptance of the Ethical Family of funds. The new partnership with 5.6 billion in combined assets is poised to become a significant force in the SRI marketplace.

Royal to offer SRI Funds

RBC Asset Management has partnered with Jantzi Research, the Canadian leader in SRI, to promote the RBC Jantzi Funds. Three funds will be offered, the RBC Jantzi Canadian Equity Fund, the RBC Jantzi Balanced Fund and the RBC Jantzi Global Equity Fund.

Please contact us if you would like to consider socially responsible investing for your portfolio.

More on Socially Responsible Investing

Foreign Content Reporting Removed from Statements

Beginning this month, the section reporting foreign content holdings and limits has been removed from your ScotiaMcLeod account statement. Government legislation no longer limits foreign investments in registered retirement savings / income accounts. Please let us know if you would like a review of your overall asset allocation, including how much is in bonds, Canadian equities and international equities.

Mutual Fund Reporter Recommended Web site of the Month

A recent Statistics Canada article reports that over the last few decades, indeed the rich got richer, while the rest of the population are just keeping up. Those top 5% of Canadians earned 25% of the country's total income, and paid 36% of total taxes collected. You can find more facts at:


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