TOO MUCH CAUTION CAN BE BAD FOR YOUR FINANCIAL HEALTH

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  Happy New Year. I hope it will be one of health, happiness, and prosperity for you and your loved ones.

We’re off to a good start for 2003 as far as the stock markets are concerned, but it’s still too early to know if we really hit the bottom of the bear market in October or if this is just another tantalizing sucker’s rally. That’s always the problem in timing markets, you can never be sure you’re right until after the fact.

What we do know with certainty as we embark upon the New Year is that people are nervous about investing. As a result, a degree of paralysis seems to have taken hold when it comes to financial decision-making.

For evidence, just look at the results of a survey on RRSP intentions for this year, which was conducted for Toronto-Dominion Bank. It showed a whopping 20% drop in the amount of money people intend to contribute to their retirement plan in 2003. Moreover, those who do contribute are clearly opting for safety over growth potential. The survey showed that only 26% intend to invest in equity mutual funds this year, down from 48% last year. Conversely, the number who plan to put their money into GICs rose sharply, despite the fact that five-year certificates are only yielding around 4%.

This penchant for caution is understandable, given the lousy markets of recent years. But there is danger in going to extremes. A return of 4% is not going to build an RRSP very quickly. Right now, it isn’t even going to keep pace with inflation, which at last report was running at 4.3% annualized. The CPI rate should fall this year, but even if we get back to the 2% range that doesn’t leave room for much real growth in a GIC-based RRSP.

Your RRSP is a long-term commitment. So you need to think long-term in making your decisions. If you want to put a portion of your contribution into a low-yielding GIC because of the safety it offers, fine. But I wouldn’t exceed 25%.

Put the rest of the money into a mix of low-risk mutual funds. If you want to be ultra- conservative, here are three suggestions from Gordon Pape’s 2003 Buyer’s Guide to RRSPs. You can buy a copy through our on-line bookstore at 25% off the suggested retail price. Go to: http://www.gordonpape.com/bookstore/productdetail.cfm?product_id=340

RECOMMENDED FUNDS FOR YOUR RRSP

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  These balanced funds invest in a combination of stocks and bonds and are particularly well-suited for smaller RRSPs with limited assets. They are all conservatively-managed funds with a sound historical record.

Trimark Income Growth Fund. Rating $$$$. The revival of value investing also revived the fortunes of this fund after it spent several years wandering in the wilderness. The portfolio is broadly diversified, with an almost even split between stocks and bonds at the end of November 2002. Stock selection tends more toward value than growth, with emphasis placed on issues that are attractively priced in relation to historical earnings and valuations. Results have been steadily improving, and the one-year gain to Nov. 30 was a very respectable 4.7% (SC units), one of the best in the category. That result pulled up the three-year average annual compound rate of return to 11% which has to make investors extremely happy in the light of the volatile market conditions that prevailed during that time. This fund comes with two purchase options and we strongly recommend the SC units, which have a much lower MER. That makes a big difference to your net return; the one-year gain for the DSC units to Nov. 30 was almost a percentage point less than that of the SC units, at 3.8%. Ask your financial advisor to acquire the SC units for you with a zero front-end load. Many will now do this for good clients.

Harbour Growth & Income Fund. Rating: $$$. This fund’s name should be taken literally. Its first aim is growth, with income secondary. This is an asset allocation-driven fund, which means that the manager, Gerald Coleman, decides first on what proportion of stocks, bonds, and cash to hold and then makes his securities selections on that basis. As of the end of November, the fund was 46% invested in stocks and less than 6% in bonds, with the balance in cash. In other words, a very conservative mix. The average annual return for the three years ending Nov. 30 was a well above-average 9.7%. The fund has had only one losing calendar year, in 1998 when it dropped. 1.2%. It’s part of the CI group.

Mackenzie Ivy Growth & Income Fund. Rating: $$$. This entry has evolved into a true balanced fund since Jerry Javasky assumed portfolio responsibility in 1997. Returns are well above average for the Canadian balanced category, with better-than average risk. The fund made a slight profit in 2002, and shows an average annual compound rate of return of 7.3% over the three years to Nov. 30. That’s a lot better than a GIC. Nervous investors will be especially interested to learn that this fund has only lost money once over a calendar year and that was back in 1994 when it dropped a fractional 0.7%.

BRANDES FUNDS OFF TO GOOD START

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  It’s very early days but initial performance results from the new Brandes family of mutual funds are encouraging.

These funds were born in a storm of controversy. First came the decision of the San Diego-based Brandes organization to suddenly pull the plug on a long-standing relationship with AGF in order to launch their own brand here in Canada. Then came a legal challenge from AIM Funds, alleging that employees hired away by Brandes had provided the company with AIM’s detailed lists of financial advisors. That’s critical information for a start-up operation. The suit was settled out of court in the fall, but not before several news stories appeared that must have been embarrassing to Brandes.

But all these backroom machinations aren’t what interest investors. They want to know what’s happening on the bottom line, especially in times like these. If a company can deliver the goods, they’ll get business. It’s as simple as that.

So far, most of the Brandes funds are doing the job. The company offers nine core funds, all with a start date of July. For the three-month period to Nov. 30, five of the funds are beating their category average, one is dead even with it, and three are underperforming. The laggards include the Brandes Canadian Money Market Fund, which will never produce stellar results as long as the company insists on imposing an absurdly high management fee of 1.5%. Investor who have socked away $6.5 million into this fund should rethink their decision.

The equity and balanced funds are a different matter. Most have been impressive out of the gate. Top performer so far is the Brandes Canadian Equity Fund, which shows a three-month gain of 7.6% against an average loss of 1.3% for the category. Also looking good is the Brandes Canadian Balanced Fund, which is ahead 6.4% for the period versus a slight loss for Canadian balanced funds as a group.

Brandes Global Equity Fund, which most closely resembles the AGF International Value Fund that the firm used to manage, is up 2.2% for the three months, compared to break-even for the category. That’s a much better result than the 0.7% loss posted by the AGF fund over the same period. It’s now run by Harris Associates L.P. of Chicago.

The two underperforming stock funds in the Brandes line-up are U.S. Equity, which is trailing the category average despite a three-month gain of 0.8%, and Emerging Markets Equity, which dropped 4.2% for the period.

It’s too soon to form any meaningful judgments based on these initial results. But they look promising. I’ll continue to keep a close watch on the family.

This article originally appeared in the January issue of Mutual Funds Update, a monthly newsletter that provides practical advice on building a winning fund portfolio and choosing the right funds for your needs. For January only, we’re offering a 3 for 2 mutual funds special that includes a three-month trial subscription to MFU, a copy of the 2003 Buyer’s Guide to Mutual Funds, and unlimited access for one year to our on-line Mutual Funds Database. Check out the details at http://www.gordonpape.com/bookstore/productdetail.cfm?product_id=335

SHOULD YOU INVEST IN INCOME TRUSTS?

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   Income trusts have been one of the fastest-growing sectors of the Toronto Stock Exchange in recent years. There are several reasons for this: high yields, significant tax breaks in some cases, and the overall strength of the sector during the bear market.

With interest rates so low, many people have been putting their money into REITs, energy trusts, and other types of income vehicles to obtain cash-on-cash yields of anywhere from 5% to 15%.

But some observers have branded this as a “bubble”, similar to the high-tech phenomenon, and warn that the day of reckoning is coming. Certainly these trusts are interest rate sensitive, and if rates rise their market value may take a hit.

However, my view is that the risk is more than offset by the benefits these trust funds offer. And I expect that 2003 will be another positive year for the sector. To read why, go to: http://www.buildingwealth.ca/News/Featuredetails.cfm?NewsletterID=1363

RRSP vs. RESP

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   Many people are wondering whether it’s smarter to contribute to an RRSP or to put the money into an RESP (registered education savings plan) for their children’s college schooling and collect the federal government’s Canada Education Savings Grant. We’re found the ideal solution. Check it out in our Question and Answer section at http://www.buildingwealth.ca/qa.cfm

Other topics this week cover RRSP overcontributions, alternatives to money market funds, the Home Buyers’ Plan, and bond funds.

You’re invited to submit your own question, using the special e-mail form you will find on the page.

DAVID TAFLER DIES

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   David Tafler, co-author of The Complete Guide to RRIFs and LIFs and Gordon Pape’s 2003 Buyer’s Guide to RRSPs, passed away suddenly on Dec. 18. His death was a great loss to the publishing world and to his family and legions of friends. To read a memorial to David, go to: http://www.buildingwealth.ca/News/Newsdetails.cfm?NewsletterID=1362

SECRETS PUBLISHED IN TRADE PAPERBACK

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   Secrets of Successful Investing, which I co-authored with Eric Kirzner, sold thousands of copies in the original hard cover edition. Now a completely updated trade paperback version has been released by Viking Canada and we’re offering it at a special price of $20.03 to mark the arrival of the New Year. That’s 20% off the suggested retail price. To order: http://www.buildingwealth.ca/bookstore/productdetail.cfm?product_id=339

That wraps up Investing Today for this month. As always, you’re invited to pass along a copy of this newsletter to anyone you think might be interested in it. To enter your own free subscription, go to: http://www.buildingwealth.ca/InvestingToday/Newsletter.cfm