IFIC looking for guidance on foreign content

(March 1, 2005) IFIC is asking Canada’s securities regulators for guidance in the wake of the federal government’s proposal to scrap the 30% foreign content limit for RRSPs and pension funds.

The mutual fund industry association held a meeting with fund managers on Monday and has contacted the Canadian Securities Administrators “to try to clear up key matters that affect investors and fund companies alike,” says IFIC vice president John Murray.

“It’s our obligation to seek clarification in an environment where there is none,” he added.

Fund companies are generally pleased with Ottawa’s proposal to scrap the foreign content limit, IFIC says (a measure included in last week’s federal budget), since it will provide investors with more flexibility. But many fund managers are expressing concern about moving too quickly, says Murray.

“These are complex issues,” he said in a statement. “Fund managers’ fiduciary duty requires them to carefully consider all of the ramifications for investors inherent in a change of this nature.”

For instance, the removal of the foreign content cap may mean suitability requirements have to be updated for the investor, IFIC notes. “Similarly, if the investment objectives of a fund change, fund managers want to know if the declaration of trust that set up the fund needs to be reworded and appproved by unitholders before moving ahead with removing the 30% cap.” Whether prospectuses need to be re-worded must also be considered, added Murray.

Rudy Luukko, investment funds editor at Morningstar Canada, expects the removal of the foreign content limit to lead to a flurry of activity in the fund industry.

“In the months ahead, expect a blizzard of merger announcements, prospectus rewrites and the capping and eventual elimination of obsolete products as fund companies begin to dismantle an industry segment that has grown to several hundred funds and an estimated $27 billion in assets,” Luukko says in an online report.

But when the dust clears, both investors and fund companies should be better off, he adds. “Redundant funds will be eliminated, creating economies of scale and easing some of the product glut that has made sifting through fund performance tables a daunting task.”

The bigger issue for investors, Luukko says, is what to do with their new freedom to invest anywhere in the world without restrictions.

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“But the ending of foreign content restrictions is really more of an evolutionary development,” he notes. “Long before it came crashing down in last week’s federal budget, the foreign property rule had been regarded as more of a nuisance than an effective barrier to investing outside Canada in registered savings plans.”

Financial author Gordon Pape says that while the removal of the foreign content limit opens new horizons for investors, they should proceed with caution.

“The worst thing you can do is to attempt a massive RRSP overhaul all at once,” he warns in a release issued by the Knowledge Bureau. “You need to revisit your master plan to bring it into line with the new reality. But timing is everything when it comes to implementation.”

Pape says studies have repeatedly shown that the “efficient frontier” for investors is 40% to 60% foreign content in a portfolio.

“Over time, I suggest people aim for a 50-50 split between Canadian and foreign content in their RRSPs,” he says. “But before you take any action, create a new master plan. Then gradually implement it over the next year or two.”

Investor advocate Ken Kivenko sounds a note of caution, warning that the end of the foreign content limit could lead to increased promotion of international funds. “These tend to be more expensive and were exactly the type of fund exploited by the market timers,” he notes in his monthly report on the fund industry. “International funds are subject to a greater number of risks including particularly currency risk,” he says. “Right now the Canadian economy and market actually look very good which is probably why the government timed the change the way it did.”

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

(03/01/05)

Doug Watt