An early reading of the tea leaves indicates a buoyant RRSP season, with investors’ increasingly urgent retirement concerns outweighing the wealth-eroding effects of higher energy costs.

Overall, Canadians are in good financial shape. The Canadian stock market has been on a roll and is heading for its third consecutive year of double-digit gains. For the year ended Nov. 28, the S&P/TSX composite index showed a gain of about 20%, and it recently broke through five-year highs. The run has been fuelled largely by strength in commodity prices, a trend that has also supported the Canadian dollar’s 32% gain during the past three years. People are feeling the wealth effects of a roaring real estate market, employment is strong, and interest rates are still relatively low.

“The economy has been healthy, and we expect it will be another good year for investments,” says Paul Butler, vice president of product support for RBC Asset Management Inc. in Toronto. “There’s also a growing awareness of the need to save for retirement, and longevity is becoming more of an issue. Baby boomers are watching their parents live to 85 or 90 years old, and are realizing their own retirement could be a long one.”

It has already been a good year for mutual fund sales, with the Investment Funds Institute of Canada reporting that net new sales for the year ended Oct. 31 were up 44% from a year earlier to $19.4 billion, excluding reinvested dividends. The Canadian, U.S. and foreign common share categories are seeing net redemptions for the year-to-date as investor gravitate toward conservative choices.

The most popular category has been balanced funds, with net new sales of $10.1 billion; followed by dividend and income funds, with $8.9 billion in combined sales; and bond and income funds, with $6.7 billion combined.

The recent decrease in the tax on dividends and removal of the “dark cloud” of uncertainty hanging over income trusts mean strong demand will probably continue in these popular categories, says Allan Smith, president of Toronto-based Saxon Funds Management Ltd. He expects balanced funds will continue to meet the needs of people looking for built-in asset allocation.

“We’ve experienced strong sales in our Saxon Balanced Fund, and I think we’re pretty typical,” Smith says. “Balanced funds turn the difficult decisions over to the portfolio manager, in terms of asset allocation and individual security selection, and that’s why they’re so popular.”

Financial services consultant Colin Deane, managing director at Toronto-based Analytica Management Consultants Ltd., is predicting RRSP sales will probably be up slightly from last year’s $28.8 billion, although not likely at record-setting levels. He points to the tendency each year of some people to take a holiday from making a contribution.

“The number of people taking an occasional break from contributing to an RRSP has grown during the past six or seven years,” Deane says. “The trend has been compounded by the growing number of new homebuyers, who are finding that owning a home or a condo is more expensive than they thought. Still, the economy is doing well, incomes are increasing and there’s no reason a lot of contributors won’t at least match last year’s contribution, and may increase it some.”

Lower-income people may cut back on their RRSP contributions this year because of escalating energy costs, according to a poll on RRSP intentions conducted for Winnipeg-based Investors Group Inc. The poll of 1,000 Canadians by Decima Research Inc. in late October, found that 47% of Canadians with annual incomes of less than $40,000 will reduce their RRSP contributions this year as a result of higher gasoline and home-heating costs. Another 25% of Canadians with incomes of more than $100,000 said energy prices were a consideration.

Despite some negative sentiment, of those who do plan to invest in an RRSP this year, more than two-thirds (68%) of survey respondents expect to contribute the same or more than last year. Only 11% said they would contribute less.

Debbie Ammeter, vice president of advanced financial planning support at Investors Group, says it’s important that investors not allow challenges such as energy costs to compromise important long-term goals. She also points to the need for advisors to make investors aware of the opportunities to achieve growth and inflation protection by putting some of their retirement assets in equity assets.

@page_break@The Investors Group poll showed only 39% of respondents were aware that the Canadian stock market had risen this year. But people are excited about real estate, after a five-year record-breaking run in house prices; 65% of respondents expect their real estate assets will outperform other assets during the next 10 years.

Ammeter cautions that, in the long term, housing prices have not outperformed the stock market. During the 10-year period from 1994 to 2004, the average residential real estate sale price increased by 4.3% a year, based on research by the Canadian Real Estate Association, while the S&P/TSX composite index gained an average 10% a year.

“People are high on real estate, and expect it to outperform everything else during the next 10 years,” Ammeter says. “Historically, this hasn’t happened. But people get excited about hot asset classes. A balanced portfolio is something that financial advisors need to encourage — to help their clients get away from the influence of fads.”

Fund-of-funds portfolios, offered by both banks and fund companies, are becoming increasingly popular, as they offer investors a mixed bag of funds with different investment objectives and managers. Some include only the products of the offering company, while others contain a selection of in-house and outside managers. Typically, the client can choose among different types of portfolios, such as global, balanced, income, growth, conservative or aggressive.

portfolio products

Ammeter says the fund-of-funds portfolios allow even investors with small amounts to achieve healthy diversification.

“A growing number of our bank clients are in portfolio products,” says RBC’s Butler. “Every one is busy with work and family, and the fund-of-funds portfolios are a one-stop decision. The rebalancing is done automatically, so people simply need to pick a portfolio that suits them.”

Although the 30% limit on foreign content has been removed in time for this year’s RRSP season, most financial institutions are not expecting a huge rush to global investing. The strength of the Canadian dollar in recent years has eroded global returns. Despite wider choice in the global arena and exciting opportunities in emerging markets, many investors are wary.

“Should there be more foreign content in portfolios — yes, there should,” says Dan Richards, president of Toronto-based consulting firm Strategic Imperatives Inc. “Will there be? Probably not. During the past couple of years, people have been rewarded for having their assets in Canada. The resources cycle will end at some point, and it’s a good time to diversify globally. But emotions tend to be investors’ worst enemy.”

Richards says the big banks are formidable competitors and will probably continue to pick up market share this RRSP season. The banks are “proactive sellers” and have been increasing the number of financial advisors in their branches. They are also hitting the product niches in which demand is strong, including income and balanced funds, and fund-of-fund portfolios.

“The banks have become serious about competing, and have picked up their socks in terms of performance and the range of product choice,” Richards says.

Patricia Lovett-Reid, senior vice president at TD Waterhouse Canada Inc., expects a stronger emphasis on quality this season, with interest rates higher than they were a year ago and the possibility of a slowing in economic growth.

Small-cap companies could lose some momentum in favour of high-quality blue-chips, she says. Income trusts will continue to be popular, but there will be a “bifurcation” in the market, with investors differentiating between quality issues and lower-calibre trusts in which the distributions could be at risk. IE