Gordon Pape is a well known investing and personal finance guru and author, 2009Tory Zimmerman/The Globe and Mail
It's been a while since I tackled some of the money questions in my inbox, so let's get right to them.
Q – I have a considerable amount of U.S. dollars in my RRSP that I wish to invest in U.S. dollar fixed income holdings. Do you have any recommendations? – Bob R.
A – You might want to look at the iShares Core U.S. Aggregate Bond ETF. The fund tracks the performance of the total U.S. investment grade bond market and has about $23-billion in net assets (figures in U.S. dollars). Monthly distributions vary but lately have been about 18 cents per unit. The fund showed a total return of 5.79 per cent over the 12 months to March 31.
That said, the fund has been on a downward trend recently due to concerns about coming rate hikes in the States. Now that the Federal Reserve Board has indicated it will probably start raising rates some time this year, that pattern could continue. Don't be surprised, therefore, if the market price declines in the coming weeks. However, a further rise in the value of the U.S. dollar against the loonie could more than offset that.
If you want to reduce interest rate risk, look at the iShares Core Short-Term USD Bond ETF. It invests in a diversified portfolio of government, corporate, securitized, and emerging markets bonds with maturities of one to five years. Your returns will be much lower – just 1.77 per cent in the year to Feb. 28. But the risk is much less as well. – G.P.
Q – I recently met with an investment adviser from a big bank. After reviewing my portfolio, I was told I should upgrade my mutual funds to level II, i.e. institutional funds, as this will provide better returns with reduced risk through re-balancing process and so on. But these funds are not accessible by average retail investors so if I want to have this "better return and lower risk" financial product I would need to transfer my portfolio to him.
I would like to know what is the real difference between the regular mutual funds and the institutional ones. Even the MER is not lower than some of the retail mutual funds, such as Mawer. Do you see any advantage? How do I find out any more information about it myself before I decide what to do next? Thank you so much for your invaluable advice. – Mandi W.
A – Institutional funds are normally available only to high net worth investors and institutions such as pension funds. Their MERs are significantly lower than comparable retail mutual funds from the same family, but may not be lower than those from boutique houses like Mawer and Steadyhand.
Ask the adviser for proof that following his suggestion will likely result in a better bottom line return for you (nothing can be guaranteed, of course). This can be done by determining the actual return on your own portfolio over the past three years and comparing it with the pro forma result from the recommended portfolio. Also ask about costs. Will the adviser charge a fee for his services and, if so, how much? You might also want to compare the results of a portfolio invested in, say, Mawer funds before making up your mind.
Researching information on institutional funds on your own may be difficult because they are often not made available to the general public. Ask the adviser whether the units he is recommending can be found on Globefund, Morningstar, or Fund Library. – G.P.
Q - I set up an account for my nephew and buy him shares instead of presents. I have this account in trust in my name with his SIN number. Should I perhaps open an RRSP account for him instead and put these shares in the RRSP? He is only 12 and the account is small - $8,000. Thank you very much. – Elaine M.
A – Sorry but your idea won't work. For starters, no one is allowed to open or contribute to an RRSP for another person except a spouse. Second, your nephew must have earned income to qualify for an RRSP contribution, which seems unlikely at age 12. I suggest you continue with your current plan. – G.P.
Q – In a recent article you stated: "Once you turn 65 move just enough money into a RRIF to allow for a $2,000 annual withdrawal, which is eligible for the pension income credit."
Although I'm a few years away from 65, I am starting to more actively plan for that date and am going to semi-retire from my consulting practice in April. This is the first time I've heard of this strategy. What benefit does it provide? – Taras P.
A – The pension income amount allows you to claim a 15 per cent tax credit on your federal return for qualified income. This can be from a registered pension plan, annuity, or, if you are 65 or older, a RRIF. CPP and OAS payments are not eligible. The maximum amount that can be claimed is $2,000, which works out to a tax credit of $300 ($2,000 x 15 per cent). If you are in the lowest tax bracket, the credit eliminates all federal tax on the $2,000. If you are in a higher bracket, it reduces the effective rate. For more information, go here. - G.P.
Q - My representative from WFG World Financial wants me to designate a fairly large portion of my investment with them into a segregated fund. Is this a good idea? – Pamela B.
A - Sorry, but I really can't answer this. There are too many variables to consider such as age, cost (seg funds are more expensive than ordinary mutual funds), tax status, heirs, risk tolerance, etc. However, keep in mind that your rep has a vested interest in persuading you to do this – more commissions. If you want independent advice, talk to a fee-for-service financial planner who can look at your whole situation and make appropriate recommendations. – G.P.
Gordon Pape