Clients investing during this RRSP season are worried about the economy and financial markets, but are more open to diversifying their portfolios than ever before, says David Richardson, vice president, enterprise sales and group financial services, with Toronto-based RBC Global Asset Management Inc. (RBCGAM).
“We’re getting the biggest crowds at our events since the financial crisis of 2008,” says Richardson, who spent much of January speaking at branch seminars across the country.
“Investors are deeply concerned about everything from global geopolitical events to the spread of Ebola,” he adds. “Falling oil prices have triggered worries about the Canadian economy, and [investors are] trying to understand how all these things impact their lives and their portfolios.”
Clients no longer are hiding out in the safety of cash. After witnessing interest rates falling to rock-bottom lows and several years of juicy stock market returns, particularly in the U.S., clients are realizing that their best path this RRSP season is to diversify their risk across a variety of asset classes.
And with Canada suffering the effects of its declining dollar and reduced energy prices, clients are becoming more willing to venture into international territory. They’re uneasy about Canada’s heavy exposure to oil and metals stocks, which are suffering from a slump in commodities prices. Even the Canadian banks, which have been investment darlings, have significant exposure to the energy sector. Resources and financials together make up almost 70% of the market capitalization of the S&P/TSX composite index – and that makes sticking to home turf a limited strategy for clients.
The most popular solutions for RRSPs investment this season are balanced funds and fund-of-fund portfolios. These are one-decision products that put together a mix of investments and sometimes a mix of portfolio managers, leaving the asset-allocation decisions and rebalancing to professionals.
And within the balanced fund category, clients are warming up to a bigger share of equities and more international exposure. At RBCGAM, for example, the top-selling portfolio product is RBC Select Balanced Portfolio, which has a roughly 60/40 mix of stocks and fixed-income.
In contrast, in the immediate aftermath of the 2008 financial crisis, clients were gravitating toward RBC Select Very Conservative Portfolio, which holds only 20% in stocks and 80% in fixed-income.
“The low-interest rate environment is challenging for retirees looking to generate income from their investments,” Richardson says. “[Those clients] are looking at a life expectancy of a good 30 years after retirement. They know they need a mix of securities, including some stocks that offer the potential to grow at a rate better than inflation.”
With interest rates at extremely low levels, achieving safety and income in fixed-income is more challenging this RRSP season, says Andrew Dedousis, senior wealth advisor with Meridian Credit Union in Guelph, Ont. Those clients who previously invested in guaranteed deposits are finding rates discouragingly meagre. On the bond side, if market interest rates start to rise, previously issued bonds could be susceptible to losses in returns.
However, he adds, fixed-income remains an important asset class for clients, as bonds behave differently than stocks in various economic scenarios and provide valuable diversification.
Within the fixed-income asset class, Dedousis is encouraging his clients to diversify with products that offer exposure to a variety of securities, including Canadian government bonds, floating-rate debt, preferred shares, global bonds, convertible bonds, corporate and high-yield bonds, and bonds of various durations.
“With interest rates coming down for many years, bond prices have rallied and investors have made money, but we take pains to tell our clients that’s not likely to continue,” says Andrew Pyle, financial advisor and associate director with Pyle Wealth Management in Peterborough, Ont, which operates under the ScotiaMcLeod Inc. banner.
“Interest rates could start to rise,” Pyle says, “and that could erode capital. We are seeking ways to enhance yield.”
The two best-selling products in January from Franklin Templeton Investments Corp. of Toronto confirm clients’ appetite for diversification: Franklin Quotential Diversified Income Portfolio, a globally oriented fund-of-funds that has an 80% fixed-income and 20% equities mix; and Templeton Global Bond Fund, which incorporates a mix of bond strategies and has reduced its average duration to less than two years, keeping the portfolio’s terms short in case of future interest rate increases.
Although many clients’ initial inclination is to diversify into the U.S. market, strong returns for the past several years have pushed U.S. valuations to high level, and there are better-priced opportunities in Europe and even in some emerging markets this RRSP season.
“Europe has a lot of world-class, multinational companies,” says Philip Bensen, senior vice president and head of national sales with Franklin Templeton.
Jaime Harper, executive vice president and head of advisor distribution with Toronto-based Fidelity Investments Canada ULC, says the firm experienced its strongest monthly fund inflows in its history in January, hitting the asset milestone of $100 billion.
“The U.S. has been offering opportunities with the recovery in the housing market, a renaissance in manufacturing and growing energy self-sufficiency,” he says.
The firm’s two most popular equity funds in January were Fidelity American Equity Fund and Fidelity Small Cap America Fund, followed closely by the globally oriented Fidelity NorthStar Fund.
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