RRSP investors shy about foreign content

(January 13, 2005) Canadian investors aren’t big on making use of their foreign content allowances. In fact, only 5% of RRSP holders have reached their 30% foreign content limits, and more than one-third have no registered foreign holdings at all.

These findings come from the most recent RBC Financial Group and Ipsos-Reid Marketing Research telephone survey.

Investment habits of Canadians were maybe further revealed in the fact that only half know about the 30% allowance, perhaps indicating that many Canadians never even come close to running up against the cap.

Proponents of maximizing foreign content exposure say global holdings are one of the best ways to increase growth in a portfolio, and the diversification can help dampen the impact of fluctuations in individual markets. The most compelling point, however, is the sheer size and number of investment opportunities outside of Canada. “Canada represents approximately 2% of the world’s capital markets,” says Dan Chornous, chief investment officer of RBC Capital Markets. “Foreign content investments are essential to building a diversified portfolio.”

It may be the battle lies in getting people to contribute to their RRSPs at all. An earlier RBC Ipsos-Reid survey of Canadian’s intentions showed many are not even interested in making maximum contributions to their RRSPs. Although survey respondents say they intend to nearly double their RRSP contributions, on average they intend to contribute $5,560 for the 2004 tax year, up from $2,866 for 2003 — these numbers do not come near the maximum $15,500.

Investment managers say foreign content is appropriate for most RRSP portfolios, regardless of their size. “We think foreign content makes sense for just about everybody, but the key driver is the level of risk clients are willing to accept,” says Todd Asman, director of financial services at Investors Group. A lot of times, he says, it’s up to the advisor to educate clients about the benefits of foreign investing. Paul Butler, vice-president of products at RBC Asset Management, says a big reason so few people invest abroad is the natural tendency to stick to things that are familiar. “There’s a natural tendency to invest in what you know. People tend to be over-concentrated in the sectors they work in. It’s the same with the country they live in. They know the TSX so they tend to invest in Canadian equities.”

Liz Lunney, portfolio manager at Franklin Templeton Investments, private client group, says the size of a client’s portfolio is not important, but the clients might not always see it that way. “It might seem overly complicated for what investors might think are relatively small sums of money,” she says. “It’s all about diversifying the portfolio and better managing the volatility and downside risk in particular. International investments have a strong role to play in a diversified portfolio.”

Ipsos-Reid representatives were not immediately available to comment on the survey sample. Although it is not known if those surveyed ever received professional financial advice, the results are considered to be a relatively accurate reflection of the Canadian adult population. Pollsters surveyed 1,201 Canadians by telephone at the end of 2004.

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com