Managed Money Reporter Newsletter — Issue 140, October 1998

Editors: Carl Spiess & Allan McGlade

Is There Life Beyond Mutual Funds?

Delegating daily investment decisions to seasoned, professional portfolio managers has long been an appealing concept to investors. Traditionally however, this option has only been viable for large institutions and individuals who could afford multimillion dollar investment minimums. But nowadays, with the development of an increasing number of managed asset programs, the advantages of professional investment management are accessible to a broader range of investors -- and industry experts say the trend towards delegating investment decisions is growing quickly.

Managed asset programs for individuals with less than $100,000 in assets were introduced a decade ago in the U.S. For a small annual fee, these programs allow investors to delegate portfolio management to investment professionals. Often called wrap programs, these programs provide an investor with ongoing monitoring of their portfolio and detailed performance measurement normally not available with regular investment plans. These type of programs have attracted a wide range of investors - from those who don't feel comfortable making daily investment decisions to sophisticated investors who have the comfort level but not necessarily the time or the desire to be involved in the decision making process.

"Recommended List" Outperforms TSE

There is usually very little 'good news' in a down market, yet we are pleased to announce that our list of recommended funds has outperformed the stock market by 8.6% in 1998. A portfolio with an equal weighting of our recommended funds averaged a return of -7.98% compared to the TSE at -16.60%.

In these last few weeks of market volatility, many of our clients have made similar queries. Follows are some of the more commonly asked questions along with our responses to them and some strategies for a winning portfolio.

Is this a correction or a bear market?
Corrections are generally a decline of up to 20% from recent highs. A bear market is a significant decline of market returns over a prolonged period of time While we have seen the market drop to the 20% mark, we have also witnessed partial rebounds. With the ongoing volatility it is still difficult to determine with certainty whether we are within the realm of a bear market.

What has caused the correction?
There are a number of factors influencing the change in tone in the markets. People have started to realize that Asia's problems are not over and are not likely to be fixed in the near future. It has become apparent that Japan is in a serious recession. This has decreased the demand for commodity based currencies like ours. As a result, our dollar has weakened against the US dollar. Also, investors are letting go of the thought that corporate profits can keep increasing forever. The US market was recently near all time highs and analysts have been calling for a correction for years now. On top of all this, the dollar falling has caused uncertainty about the near term direction of interest rates.

Why is my latest statement value lower than the last few months?
Most clients have a balanced portfolio spread among many different asset classes (i.e. bonds, stocks, foreign) and investments spread among different mutual funds. The latest statement value as compared to previous statements will depend on your asset allocation. If big fluctuations upset you, then consider moving your asset allocation towards bonds. If your portfolio is 100% equities, then it is more vulnerable to movement similar to the correction in the TSE. If you have a component of bonds, foreign equities and Canadian equities, your portfolio has fluctuated less than the market as a whole.

Should I be selling anything in my portfolio?
Ask yourself whether your objectives are short term or long term. Make your decisions based on these objectives. We find that many investors make short term decisions when in fact, they should be making long term decisions, especially in an RRSP. In most cases people should not sell anything at this time.

What can I do to be more defensive?
One possibility is to switch mutual funds within the same mutual fund family to balanced funds. There is no cost for this service. Balanced funds tend to be less volatile than straight equity funds. Also, balanced funds are a good way to get single digit rates of return.

What rate of return can I expect over the next few years?
Until we pass the year 2000, the markets will continue to move sideways with brief up periods and brief down periods. We are telling investors that a single digit rate of return (0-9%) over the next 2 years is what to expect.

Am I able to switch back to equity funds within the same funds family when the market gets better?
Yes, at anytime, within the same fund family without any cost.

Will the market go up again?
Yes! Demographic charts and data suggest that the Dow Jones will reach 18,000 - 21,000 by the end of the next decade. This would be an 8% rate of return from this time. To say it another way, your portfolio should double over the next 10 years.

What specific recommendations do you have to make my portfolio more defensive?

Switch BPI Canadian Small Companies to BPI Income and Growth
Switch Dynamic Canadian Growth to Dynamic Partners or Power Balanced
Switch Elliott & Page Equity to Elliott & Page Balanced
Switch O'Donnell Canadian Emerging Markets to O'Donnell Balanced
Switch Spectrum United Canadian Growth to Spectrum United Canadian Balanced
Switch Trimark Select Canadian Growth to Trimark Select Balanced
Switch Trimark RSP Equity to Trimark Select Balanced
Hold Global Strategy Income Plus Fund
Hold Fidelity Canadian Asset Allocation Fund
Hold Fidelity International Portfolio Fund
Hold Templeton International Stock Fund
Hold Templeton Growth Fund

The above is not a full list. Please call one of the Investment Associates of the Mutual Fund Reporter Team at (416) 863-7777 or 1-800-387-9273 for a complete review of your investment portfolio.

Saving for a Child's Education

by Fred Jay Winterburn, Investment Associate

Budget cutbacks and rapidly rising tuition rates have heightened the importance of saving for a child's education. Saving early can lessen the financial burden and with recent proposed budget changes to Registered Education Savings Plans (RESPs) this has just become easier.

In the past, Informal Trust accounts were favoured because they permitted greater flexibility. Yet with the budget proposal which announced a 20% Canada Education Savings Grant would be provided for contributions up to $2,000, the RESP has become much more interesting. This means that the government would provide a grant of $400 on your $2,000 investment! This combined with the tax deferred compounding effect over many years, and the potential for the income to be received while the child is in a low tax bracket while attending a recognized post-secondary school, make the investment ideal. In addition, there are no foreign content restrictions so the potential for greater diversification and higher returns exists.

Contributions are limited, however, to a maximum of $4,000 per beneficiary, per year. While you may contribute up to 21 years to a lifetime maximum of $42,000 per beneficiary, the plan must be collapsed after 25 years. If one child does not attend school the beneficiary may be changed to another. If another beneficiary cannot be named it has been proposed that up to $40,000 of the RESP may be rolled into the subscriber's RRSP providing contribution limits permit. As a last resort, income that has not been paid out to the beneficiary can be returned to the subscriber and taxed at their marginal rate plus a surtax.

With the proposed changes, RESPs have become a much more attractive savings vehicle for parents saving for their child's education. If you would like more information or would like to receive an investor kit please Call your Investment Team at (416) 863-7638 or 1-800-387-9273.

Fund News

AGF has announced that pending a vote from shareholders, they will be merging AGF Canadian Equity Fund into AGF Canadian Growth Fund. The combined funds will be re-named AGF Canadian Stock Fund.

As a result of Scotiabank's integration with National Trust, the two families of mutual funds will be joined into one mutual fund family. The new fund family will be known as Scotia Mutual Funds.


Contact Us

T.  416.863.RRSP (7777)
F.  416.863.7479

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