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By Joanna Pachner
National Post
FP Weekend Section
RRSP Guide 2007
Saturday, February 24, 2007
It's been two years since Ottawa lifted the 30% cap on foreign investments you could hold inside your RRSP, to loud cheers from the mutual fund industry. After all, Canada represents less than 3% of the global economy, and while our markets have been on a roll recently, there's a world of opportunity out there.
Adrian Mastracci, fee-only portfolio manager at KCM Wealth Management in Vancouver, says, "You should make foreign investment an integral part of your portfolio's mix."
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Once a deadbeat debtor, Brazil is enjoying a commodity-driven economic boom. |
Last year, Canadians boldly ventured abroad, spending $6.6- billion on foreign equity funds, according to the Investment Funds Institute of Canada. In December alone, foreign equities accounted for 25% of net fund sales.
Still, most of us were never in danger of bumping our heads on the foreign-content ceiling, and that still holds true today. The average Canadian investor's foreign exposure stands at 15%, up from 10% in 2003. "The dial is moving up, though not at a very fast pace," says Michael Higgins, senior manager for investor communications at RBC Asset Management Inc.
This year, conditions at home may finally accelerate the pace. For five years, Canada has led the pack in market performance among developed countries, keeping investors close to home, says Mr. Higgins. After such a run, however, there aren't many bargains left among large Canadian companies. As well, the commodities surge that drove most of those gains seems to be petering out.
Meanwhile, hot foreign markets such as the BRIC foursome -- Brazil, Russian Indian and China --are starting to look less volatile. As more Western capital flows in, targeted financial products are becoming available to retail investors, and world-leading companies such as Brazilian aircraft maker Embraer or India's outsourcing giant Wipro, are showing promising growth. The BRIC nations recorded a staggering 53% gain last year, helping to lift the Morgan Stanley Capital International Emerging Markets index by 30%. The outlook continues to look rosy: economists and analysts expect global markets to slow but remain healthy.
Still, just because you no longer have limits doesn't mean you ought to overindulge. "You should make foreign investment an integral part of your portfolio's mix," says Adrian Mastracci, a fee-only portfolio manager at KCM Wealth Management Inc. in Vancouver. Take the 60/40 growth/fixed-income split that many investors employ: Of the 60% growth portion, he suggests putting 25% in Canadian equities, 20% in U.S. stocks and 15% around the globe. "Look for diversified baskets of ETFs [exchange-traded funds] or mutual funds so nothing is going to hit you too hard if it goes sour," he says. "And it would be better to stay with quality companies, so check what the fund's invested in."
Martin Gale, who runs Efficient Market Canada, a Web site offering RRSP advice, is more aggressive in his mix. His suggests a portfolio comprising 35% American equities; 25% European, East Asia and Far East stocks; and another 10% in emerging markets. "Such a portfolio would ensure that you are globally diversified roughly in proportion to the size of the economies around the globe," he writes on the site.
In recent years, many investors have turned to funds of funds as a way to get instant global diversification, points out Mr. Higgins of RBC. These baskets of funds now account for about 13% of Canadian fund assets.
So, where in the world should you put your loonies? A survey of economic and investment forecasts points to the following hot spots for 2007:
Asia - The two giants, China and India, have grown up a lot in the past few years and that's meant a shift in the investment opportunities. Rather than raw materials, the focus now is on providing goods and services to the emerging middle class. But it's Japan that's been drawing the most attention this year. The country's stocks didn't do well in 2006 despite solid corporate earnings, but that's all the more reason why many expect a turnaround. Japanese companies now look cheap compared to North American ones and the country has invested heavily in neighbouring China to tap its growth.
Latin America - The commodity boom has done wonders for Brazil. Once a deadbeat debtor with soaring inflation, it's now one of the fastest-developing countries whose citizens' lust for consumer goods is growing in step with their rising incomes. As with China and India, that's where the smart money is heading -- serving the middle class with homes, electronics and entertainment services.
United States - The big question is, will the giant crash this year, tripped up by the real estate bubble and massive debt, or will it gently decelerate? Signs so far point to a soft landing. More importantly, American stocks look cheap compared to Canadian ones and offer vastly more choice and liquidity. RBC, for one, finds U.S. equities attractive enough to recommend a higher-than-normal weighting. But Gavin Graham, chief investment officer at Guardian Group of Funds, suggests playing it safe by buying established companies with a major focus on overseas markets.
Mr. Mastracci, for one, isn't a betting man.
"I'm not smart enough to pick the winning sector or country. I want a piece of the rock everywhere around the world," he says. But if you have a hunch, he recommends turning 5% to 15% of your portfolio into your "mad money" fund and ploughing it into whatever global spot you think will boom.
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