Canadians looking to boost global market exposure in their RRSP used to have to turn to certain strategies to get around the foreign content limit – set initially at 10 per cent and raised twice until it reached 30 per cent in 2001.
That foreign content limit no longer exists today. Since 2005, Canadians have been free to invest as much as 100 per cent of their RRSP money beyond the country’s borders. But financial planning and investment experts say many Canadians these days are keeping their retirement savings close to home.
Is it time for these Canada-centric investors to start pushing the geographic boundaries of their RRSP?
“Generally speaking, over the last number of years, investors in Canada were de-emphasizing global markets,” observes Don Reed, president and CEO of Franklin Templeton Investments. “Probably about nine months or a year ago that tide started to turn, and now we’re seeing more funds go into global investments.”
It’s easy to see the appeal of keeping an RRSP portfolio invested mostly in Canada, says Graham Isenegger, portfolio manager and investment adviser at CIBC Wood Gundy’s Blue Heron Advisory Group in Victoria. The 2008 financial crisis had pummeled stock markets around the world and raised the spectre of a global economic collapse.
Compared with the rest of the world, Canada certainly looked more safe.
“After what happened in 2008, there’s a craving for what you understand,” Mr. Isenegger says. “When you own stocks in Tim Hortons or CIBC, there’s a real comfort in being able to drive by those businesses every day.”
But there’s a price to pay for that comfort. Canada accounts for only about five per cent of the total world market today, Mr. Reed says. Investors with a Canada-heavy RRSP are bypassing 95 per cent of portfolio growth opportunities available to them, he adds.
They’re also limiting the extent to which their portfolio can be diversified, says Paul Brodeur, a certified financial planner and vice- president, wealth management at Ottawa-based Alterna Savings and Credit Union Ltd.
“The Canadian economy is a highly concentrated market with few sectors,” he says. “The majority of the economy is made up of financial and energy companies, and is highly underweighted in sectors like health care and consumer staples.”
With the financial crisis now a thing of the past, global markets have once again become welcoming places for investors in search of growth opportunities. So where in the world should Canadians invest their RRSP dollars?
Mr. Brodeur points, for starters, to the market next door. With an economy that remains on the upswing, the United States is still “a very attractive opportunity, although there have been some selloffs recently and we’re not expecting the same kinds of returns in 2014 versus 2013.”
Beyond North America, Mr. Brodeur cites Europe and Asia as good hunting grounds for opportunities. Europe has attractive securities attached to multinational companies, he says, while China remains viable even as its economy is expected to slow down slightly in the year ahead.
Investors venturing out into the world should be able to take advantage of lower-priced stocks that yield healthy returns, Mr. Reed says. But there is a higher-risk trade-off for these lower valuations, especially in emerging markets such as China, Thailand, South Korea, Taiwan and India.
Europe also remains higher-risk than North America, Mr. Reed says.
“But that [risk] is already accounted for in the price of stocks,” he says. “The risks are declining in Europe, but it’s still higher risk than in North America.”
Mr. Reed’s advice for Canadians exposing more of their RRSP to foreign markets? Don’t go it alone.
“Find yourself a good adviser – one who understands the risk tolerance level of the investor and also understands what’s going on in the various investment vehicles,” he says.
While there’s no magic formula for allocating an RRSP portfolio – or any investment portfolio for that matter – a good rule of thumb for those investing for the long-term is foreign content of between 20 per cent to 50 per cent, says Silvio Stroescu, ING’s head of deposits and investments.
“But make sure that you rebalance your allocation regularly, taking into account currency fluctuations that are associated with having foreign exposure,” he says. “We recommend that you keep allocation very well diversified. For example, have 50 per cent allocated to Canada, 25 per cent to the S&P, and 25 per cent to EAFE – Europe, Australia, Far East.”
Before making changes to their portfolio, investors should check first to see what they already have in their RRSP, Mr. Isenegger says.
“People generally have more foreign content than they think,” he says. “In some cases they’ll have investments in Canadian companies with interests outside Canada or, if they own a mutual fund, often it will have a percentage of its assets outside Canada.”
Ken Huggins, a certified financial planner and senior wealth adviser at St. Catharines, Ont.-based Meridian Credit Union, says a global RRSP isn’t for everyone.
Conservative investors who can’t stomach the relatively higher-risk profiles of foreign investments may want to minimize their exposure to global markets. Those close to retirement and who have already built a decent nest egg should probably not be making significant changes now to their portfolio, Mr. Huggins says.
For everyone else, a world of opportunity awaits.
“When you go beyond where you live and open up to other places in the world, that also opens up opportunities,” Mr. Huggins adds. “Majority of Canadians don’t have a pension plan and their RRSP is, in essence, their pension plan, so the added return from global investments can really make a difference for them.”