Foreign
picks to consider
We’re into
the last seven days of the RRSP sales season. March 1, 2002 is the last day to
make a RRSP contribution and have it deducted from last year’s taxable income.
Investors’ natural tendency to procrastinate often leads them to making rushed
investment decisions. While last week’s article suggested some good Canadian
funds to consider for your RRSP, this week’s focus is on some of my favourite
foreign funds.
No
discussion of foreign fund picks is complete without first summarizing the
foreign content limits. Very simply, no more than 30 per cent of the book value
of any RRSP, RRIF, or any variation thereof can be held in foreign content
investments. An investment’s book value (BV) is synonymous with its adjusted
cost base (ACB) for tax purposes. Hence, they’re calculated in the same fashion
but on an individual account basis. Basically, BV includes not only original
purchases, but also distributions that are reinvested in additional units of a
fund. For a more detailed discussion of ACB calculations, revisit this previous
article (http://www.sterlingmutuals.com/Telus_TaxTips_16mar2001.htm).
How much
foreign content should you have? How do you exceed the limit if needed? Check
out this older article (http://www.sterlingmutuals.com/Telus_FgnContent_02feb2001.HTM),
which addresses these issues.
There are a
couple of ways to implement your desired foreign content.
The
simplest way to gain foreign stock exposure is to buy one fund with the
flexibility to buy any company, in any country, and in any industry. This type
of fund is a global stock fund. Here are some of my favourites in this
category.
AGF
International Value, Templeton Growth, and Trimark Fund SC are three of my
favourites in this category. Each of these is a good, broad-based global fund
that does not exhibit style extremes (i.e. not strict value, not pure growth –
but near the middle with a value tilt); emphasizes larger companies; is run by
a strong and deep management team; and trades relatively infrequently. Don’t
buy all three – just pick one and use it as the core of your global stock
exposure.
One other
fund to consider that shares all of the above characteristics (except that it
is a strict value fund) is Mackenzie Cundill Value C. I highlight is separately
because its extreme value style usually requires more patience than most people
have. However, investors should be handsomely rewarded over long periods of
time.
If you’re
more aggressive, you may prefer a global fund that has similar characteristics,
but invests in smaller companies offering potentially better growth
opportunities. In that case, Templeton Global Smaller Companies and Saxon World
Growth may be of interest to you. There isn’t much choice for global small cap
funds, but these two are quality offerings.
A more
customized approach to global stock exposure may appeal to some investors.
There are a few ways to do this depending on your needs, the contents of the
rest of your portfolio, and your comfort level with risk.
If you
already have lots of North American stock exposure through your Canadian
balanced and stock funds (many of which maximize foreign content) or other
industry specialty funds (which often focus on the U.S.), you may prefer an
overseas or international stock fund.
Alternately,
you may feel that the U.S. stock market is so large and liquid that simply
earning what “the market” earns will be better than most funds. In other words,
you may want to invest passively in the U.S. (via index funds) but retain the
expertise of a money management team for overseas stocks. In such a case, you
might opt to buy CIBC U.S. RRSP Index, TD U.S. RSP Index, an exchange-traded
fund or a regular foreign content index fund from one of these or other firms.
This type of efficient exposure to the U.S. market would fit nicely with a fund
that is mandated to invest strictly outside of North America.
Finally,
more aggressive investors might simply want to aim for higher returns and good
style diversification by focusing their U.S. stock exposure on the smaller cap
segments. Good U.S. small cap funds like AGF Aggressive Growth, CIBC U.S. Small
Companies, CI Signature American Small Companies, and Elliott & Page Mid
Cap would nicely compliment most Canadian and overseas stock funds while adding
return potential to a portfolio.
AGF
International Stock, Mawer World Investment, and Templeton International Stock
are superb choices for exposure to larger companies outside of North America.
My
definition of specialty funds includes everything from funds investing in
specific countries or geographic regions, to funds emphasizing specific
industries or segments. Bear in mind that these choices are only suitable for
those investors who are a bit adventurous, even if it is only with 5% or so of
the total portfolio’s value.
Good
regional funds include CI Emerging Markets and Spectrum European Growth. The
latter is a European stock fund providing exposure to medium sized companies.
Both of these funds are great compliments to most global and overseas funds.
Industry
funds worth a look include CI Global Consumer Products, Dynamic Global Real
Estate, Standard Life Natural Resource, and Talvest Global Health Care.
We’ve
always been told to diversify by geography because Canada makes up 2.5 per cent
of the world’s stock markets. As the global economy has become just that – more
global in nature – academic research has noted the increasing importance of
industry diversification relative to spreading portfolios around to different
countries/regions. What has been confirmed is that diversifying by industry is
now equally important as geographic diversification.
When
technology took started taking off in 1998, it wasn’t just in Canada or the
U.S. The industry boom grabbed other developed nations in Europe and the
Pacific Rim along for the ride. The tech bust also dragged down stocks in the
industry in all developed nations and, to a lesser extent, in emerging markets.
The body of
research, however, has concluded that emerging markets countries are the
exception to that general rule since political issues often trump the
importance of industry trends.
Does this
mean you should go out and buy a bunch of industry funds? No, because most
investors couldn’t handle the volatility present in each. Rather, a more
effective way is to diversify by geography, asset class, and investment style.
Since most
growth managers have a bias toward technology and health care; and value
managers have a bias toward financial services and (for now) energy; the
industry diversification will likely result quite naturally from choosing funds
with truly different management styles.
While I
have no magical answers, I hope these last two articles help in sifting through
the universe of investment options during the next seven days.
Dan Hallett, B.Comm., CFP, CFA is Senior
Investment Analyst with Sterling Mutuals Inc. He can be reached at dhallett@sterlingmutuals.com Sterling Mutuals Inc. is registered as a
mutual fund dealer in Ontario, British Columbia, and Manitoba.