The Reminder is making its archives back to 2003 available on our website. Please note that, due to technical limitations, archive articles are presented without the usual formatting.
Ralph Goodale's federal budget, tabled on February 23 and passed in the House of Commons during the week of March 7th, was indeed designed to please all political parties, given that the Liberals have a minority government. The budget brings several improvements to retirement savings plans. Registered Pension Plans If you have a defined benefit RPP through your employer (years of service times a factor times your average earnings), beginning in 2010 the upper annual benefit limit per year of service as prescribed by the Income Tax Act will be indexed to average wage growth. For money purchase plans, or defined contribution plans as they are also known (your benefit is unknown and will be provided by whatever your segregated part of the plan grows to be at your retirement), the limits of contribution will increase by $1,000/yr. between 2005 and 2009, ending at $22,000/yr. upper limit. RRSP contribution limits Upper limit will increase to $21,000 between now and 2010, from $16,500 that was scheduled to be the limit for 2005. However, the percentage of earned income remains at 18%, meaning this will benefit people with over $92,000 of annual income. Removal of foreign content limit Pension plans and investment managers lobbied strongly prior to year 2001 for scrapping of the foreign content limits in registered plans. The reason: historic rates of return in foreign stocks were on average 3%/yr. better than Canadian stocks and the Canadian market, comparatively speaking, is a small one. (Some of the foreign historic outperformance can be attributed to our declining dollar over decades, prior to 2003.) Up to now, the government wanted to continue to encourage investment in Canada, in return for the RRSP tax break, so capitulated to the lobbyists in baby stepsÉover time increasing foreign limits from 10% in the seventies, to 20% in the nineties, and gradually to 30% in 2001. Then, there was silence by investment managers because foreign investments were underperforming Canada after Y2K. The new budget's removal of the foreign content limit completely at this time was a surprise to the investment industry, given that the lobbies had quietened down in recent years. The Morgan Stanley Capital Index (global) was down 46% in the three years ended Dec. 31/02, whereas the TSX (Canada) was only down 22%. The MSCI World 5-yr. avg. at end February/05 is now showing negative 4%/yr., whereas the TSX Composite 5-yr. avg. is positive 2.8%/yr. Most foreign mutual funds still have negative 5-yr. averages, although there were exceptions, such as Mackenzie Cundill Value Fund with an average 12.3%/yr. (hedges against currency fluctuations), and the Templeton Global Small Companies Fund with an average of 11.6%/yr. (both as of Feb. 28/05). See 'Foreign' P.# Con't from P.# There are reportedly several reasons why the Feds have decided to remove foreign content limits at this time: Canadian companies' ability to raise capital in the "global village" has improved. Canada's debt situation is improving (we're more competitive globally), while the U.S. debt situation is not improving (and U.S. currency is declining in value). With Canada's low market capitalization (3% of the world's), it is difficult for large pension funds to do large stock trades in the small Canadian market without affecting stock prices. Canadians have been selling foreign investments over the past year (given the negative effect of the rising Canadian dollar), and foreigners have been increasing their investment in Canada. Therefore it's unlikely that there will be a mass exodus of capital from Canada quickly. If foreign limits aren't removed now, the lobbies will be sure to be resumed again as soon as rates of return on foreign investments improve. In the late 90s, the mutual fund industry produced "efficient frontier" studies espousing that portfolio returns could be increased markedly through increasing foreign to 50-70% of a portfolio, as long as one had 10-25 years to go to retirement. At the same time, it was recognized that foreign was more volatile historically, which is the reason for the 10-25 year parameters. To assist investors in increasing their overall foreign component, mutual fund companies devised ways to enable Canadian content funds to hold up to 30% foreign, and further, to make pure foreign funds eligible as Canadian content. Suffice it to say the latter "clone" funds all had slightly higher annual management expense ratios than the pure underlying funds. The day after Mr. Goodale delivered the recent budget proposals, Brandes Mutual Funds announced they would immediately drop the management expenses on their clone funds. Other companies have not been so quick, but are feeling the pressure to act on behalf of investors. It is expected that over time the clone funds will likely be merged into the pure foreign funds, and the mandates for equity fund managers will change gradually. For example, why would Canadian equity funds any longer invest up to 30% in foreign investments? Trustees of registered plans are now modifying their software to remove the foreign content limit so that the systems do not calculate and accrue excess penalties. Given that foreign was "out of favour" in 2004, and P/E ratios are reportedly lower outside North America, and the Canadian dollar is high nowÉit should mean that foreign is poised to outperform other markets sometime soon. If you believe our dollar won't go up to 90 cents in relation to the US dollar, then now would be a good time to buy and hold foreign, especially given the new unrestricted foreign limit in registered plans which should buoy up the demand for foreign investments. You may buy foreign mutual funds at most financial institutions, and you may buy some individual foreign stocks at full service brokerage firms (exchange rates apply). Do not turn your back on this foreign equity asset class, since it's currently on sale! Julie Leefe is a Certified Financial Planner and Investment Advisor with Bieber Securities Inc. in Winnipeg (website www.biebersecurities.com, toll free 1-800-205-9070). Since she visits extended family when in Flin Flon, she meets with her Flin Flon clients in their homes, or when they're in Winnipeg.3/23/2005
