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By Jonathan Chevreau
Excerpt from National Post
FP Investing Section
Thursday, September 9, 2004 |
Can 3.5 million savers be wrong? Canada Savings Bonds have been a bedrock savings vehicle since 1946 but the looming annual fall campaign suffered a setback last week.
Adrian Mastracci, investment counsel at
Vancouver’s ‘fee-only’ KCM Wealth Management, says, "I don't find them on client balance sheets any more. They may have run their course.”
Consultants Cap Gemini Ernst & Young Canada Inc. recommended the government's CSB program gradually be allowed to "run down."
The department of Finance quickly distanced itself from the suggestion, reaffirming its commitment to the bonds. The fall campaign is still a go, Finance Minister Ralph Goodale says. His department is reviewing its retail debt programs but "the option of eliminating the Canada Savings Bonds Program is not on the table."
But the report raises several valid questions about CSBs, apart from why government agencies waste taxpayers' money commissioning reports they have no intention of listening to.
The government's retail debt agency, Canada Investment and Savings, referred all queries back to the Finance department. Spokesperson Andree Houde says the retail debt review is the first since 1994 and public opinion research shows "a clear majority of Canadians" value the "safety and security" of CSBs.
But CI&S has been slow to move with the times. Many conservative investors who might have considered CSBs have instead embraced higher-yielding innovations like income trusts, Real Return Bonds, bond exchange-traded funds and high-interest daily interest savings accounts, as well as strip bonds and treasury bills.
The only substantive product innovation by CI&S in the last decade was the Canada Premium Bond (CPB), a less liquid CSB which pays slightly more than the regular variety.
But don't take my word for it. Here's what Cap Gemini said: "New products were introduced, but remained uncompetitive because they lacked differentiation relative to existing market offerings."
As a result, sales stagnated. In 1987, Canadians held 8.3% of total investable assets in savings bonds, Cap Gemini reported, a figure which plunged to just 1% currently.
Investment advisors agree CSBs are less visible in client portfolios. "I don't find them on client balance sheets any more. They may have run their course," says Adrian Mastracci, of Vancouver-based KCM Wealth Management.
Last spring's Series 89 CSBs offered the paltry yield of 1.25% -- fully taxable if unregistered. For short-term liquid investments of comparable risk, 1-year treasury bills paying 2.38% are a better choice, Mastracci says. Short-term savings accounts at the ING Directs of the world also pay almost twice as much as CSBs.
For longer-term savings addressed by CPBs, Mastracci prefers five-year strip bonds from Canada, British Columbia or Ontario. They pay 4.42%, compared to a blended 5-year yield of 2.79% from the current crop of CPBs.
With yesterday's rate hike, it's likely the October series (they go on sale Oct. 4) will pay slightly more but the CI&S declines to speculate by how much.
To be fair, forced savings from CSB payroll plans offer a discipline young people need to cultivate if they are later to graduate to real investing. If such an initial grubstake becomes one's first RRSP contribution, that's an important role for CSBs to play.
And there are others, such as the time-honoured ritual of giving CSB gifts to children or grandchildren.
CSBs are "still a necessary product," says Warren Baldwin, regional vice president. Some of his clients like CSBs for the liquid part of their portfolios, although he prefers premium money market mutual funds.
Because CSBs are used by so many savers in such small amounts, Baldwin agrees it's an expensive product to administer. "Even though interest rates have always been somewhat lower on CSBs than they are on other term deposits, there would be some economy for the Bank of Canada in getting out of the CSB business."
If the government is sincere about remaining in the business, it needs to listen to the public and help savers evolve into investors.
The CSB sales pitch relies on the its rock-solid safety of capital. That's true in the short term but the CI&S could do a better job of educating Average Joe Saver about taxes, inflation and fees. Fees are negligible on CSBs but the other two enemies are fully present.
As this column has preached before, the Canadian public is ready for something like America's iBonds: inflation-linked savings vehicles with some tax deferment features outside registered plans. For three years, the case for iBonds has been made by a grassroots petition which can be found at http://canadianinvestor.tripod.com/.
Every year at this time, I've asked CI&S president Jackie Orange why the agency can't come up with a CSB with the attributes of iBonds. She replies their market research shows little demand for such a product.
It may be true the mass market for CSBs doesn't realize it needs inflation indexing and better tax treatment of interest income. But that just means CI&S needs to do a better job educating its clientele.
The agency needs to enter the 21st century and help investors fight taxes and inflation. If it can't do so, the government may as well listen to its high-priced consultants and phase out the program altogether.
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