BMO takes a holistic approach to investing

No one has ever accused GICs of being exciting, but BMO Financial Group says they might be the perfect investment vehicle to sex up a conservative portfolio.

Investors have included GICs as part of conservative portfolios for years, but BMO wanted to quantify the values of GICs to see if added any value. And according to a BMO-commissioned study conducted by Sigma analysis and Management, they do.

Historically GICs were thought of as being a simple substitution for money markets and other fixed income instruments, says Keven Prins, a senior product manager with BMO, but there are benefits of holding both types of investments.

According to the study, about 45% of investors hold term and mutual fund products in their overall investment plan.

But, Prins adds, GICs have a low correlation to other assets, including bonds and money markets. As a result, the study found holding GICs along with other investments increased diversification and helped lower risk within a portfolio. And hopefully, without sacrificing return.

“The benefits here are a combination of reducing risk plus return,” he says. Prins continues by pointing out that by adding GICs to a portfolio there is an advancement of return and a decline of risk, the combination of two help the investor.

Those returns would be higher than money market instruments and lower than bond instruments, he says. Or, looking at some of the five-year GICs BMO markets online, an investor could expect a return varying between from 2.67% up to 6.25%.

In its key findings Sigma Research said shorter term GICs can provide higher returns than other cash alternatives, while longer term GICs tend to have a low, and sometimes negative correlation with other investments.

The end result, BMO says, is a more optimal portfolio, which was the intended purpose of research. Before this study the bank argues there was a lack of research in this area.

Prins stressed, however, that this approach is intended for retail clients who tend to want a portfolio more conservative than a balanced investment.

While it’s fair to say GICs don’t add much of a pizzazz to a portfolio, they’re a lot safer than trusts.

Filed by Mark Brown, Advisor.ca, mark.brown@advisor.rogers.com