Advisors confident as RRSP season shifts into high gear

(January 24, 2005) Advisors are anticipating another healthy RRSP season, with some suggesting that this year’s mutual fund sales could be even better than 2004, when net sales for the first two months of the year were close to $7 billion.

“I would hope to see more of the same this year,” says Bill Morrow of WKL Financial Consultants. “Mutual funds should be the avenue of choice for the average Canadian for numerous reasons — at the very least, funds offer diversification outside individual stocks or bonds.”

Morrow says he’s seen no real fallout from the recent market-timing settlements, in which four fund companies agreed to pay millions of dollars in penalties. “I’ve questioned the fund companies’ malfeasance, but clients haven’t mentioned it at all,” he says.

The Toronto-based CFP considers himself somewhat of a contrarian when it comes to investments, seeking out smaller funds that haven’t yet hit the radar screen. “They maybe don’t have a lot of assets but do have a good management team.”

“There’s a rule that once a fund reaches a certain asset base they can’t purchase more than 10% of the underlying issue of one stock, so they have to go to their second or third choices,” he explains. “But a small fund just starting out can get their primary choices and that’s ideal.”

Duane Francis, a financial planner and investment advisor with Berkshire Securities, says he’s really not sure how the mutual fund market will perform this year and is not too worried about sales, since his practice is not run solely on that one product.

“If fund sales do take off, that’s great, and good for my clients too, but I want to protect them with different strategies,” the Ottawa-based CFP says. “If I can also buy other products outside of that, alternative strategies that will protect their capital, I’m looking at that avenue too.”

“I keep a long-term focus and gear all my investment decisions to a financial plan,” Francis adds. “I’ve been very happy and, more importantly, so have my clients.”

One other reason for optimism this RRSP season is the lacklustre returns offered by bank-deposit instruments, such as GICs, notes Rudy Luukko, Investment Fund Editor at Morningstar Canada.

“Rarely have GICs been as unattractive for long-term investors as they are in today’s low-rate environment,” Luukko wrote in a recent online report on historic GIC returns.

Although GICs can’t be beat in terms of safety, Luukko notes that their yields are barely keeping pace with inflation. “And if you’re holding GICs outside a registered plan, taxes are likely to leave you with shrinking purchasing power because their interest income is fully taxable,” he adds.

GICs have been in a downward spiral for more than 20 years, Luukko points out, reflecting general interest rate trends. But the bank instruments look even worse today than they did in the 1990s, when those low returns fuelled mutual fund sales. “Based on after-inflation yields over the past 15 years, the three most recent years have been the poorest years for five-year GIC returns.”

The worst year was 2002, when the after-inflation one-year return on five-year GICs was -0.4%. There was a slight recovery to 1.5% in 2003, but GIC returns fell again last year to 0.5%, after inflation.

Investors in Canadian Bond funds have done much better, Luukko adds, with Morningstar’s Canadian bond fund index beating GICs in nine of the last 10 years.

Bond funds also outperformed Morningstar’s global equity, U.S. equity and European equity indexes over the last 10 years. But Luukko calls this an anomaly that likely won’t last. “With the prospect of rising rather than falling rates, bonds have far less potential to produce capital gains right now, and may well have capital losses instead.”

Still, not everyone believes that interest rates will be climbing, at least not in the short term. In a report released last week, CIBC World Markets argued that the Bank of Canada will actually have to reduce rates to keep the soaring Canadian dollar in check.

“Not only is the Bank of Canada unlikely to match further interest rate hikes by the U.S. Federal Reserve Board, but it will soon be pushed into a rate cut this year in order to prevent an already overvalued Canadian dollar from moving higher and deep-sixing the country’s manufacturing and export sectors,” said Jeffrey Rubin, chief economist at CIBC World Markets.

The central bank has an interest rate announcement scheduled for Tuesday. Analysts expect the key overnight lending rate to remain unchanged at 2.5%.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com