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How to scout world for RRSP foreign content

Only 5% of plan holders make use of their entire 30% allowance, writes KEITH DAMSELL

MUTUAL FUNDS REPORTER

Canadian equities represent a slender 3 per cent of the global equity market. That leaves investors struggling to fit 97 per cent of foreign markets into a slim 30-per-cent allowance within their registered retirement savings plans.

"The Canadian market is a very small market," said Edgar Legzdins, president and chief executive officer of BMO Investments Inc. "We have some excellent companies, but 97 per cent of the opportunities are elsewhere." Few of us are making the most of that opportunity; a recent survey conducted for Royal Bank of Canada found only 5 per cent of RRSP holders maximize their foreign content allowance.

So where to invest? We asked a number of international equity fund managers and investment strategists for their advice.

United States

It's a lonely time to be a U.S. bull. Wall Street makes up about 50 per cent of the global stock market but many fund managers are pessimistic, and are underweighting U.S. stocks in their portfolios.

It's widely believed the Federal Reserve Board will keep raising U.S. interest rates this year. Higher borrowing costs will mean slower profit growth for corporate America and a lacklustre equity market.

Meanwhile, U.S. equities remain pricey on the global stage. The Dow Jones industrial average has had a strong 5-per-cent run since the U.S. presidential election last November. "U.S. stocks just aren't that cheap right now," said David Winters, chairman and chief executive office of Mutual Series Fund Inc. of Short Hills, N.J.

And continued weakness in U.S. currency against the Canadian dollar could wipe out returns, fears Gavin Graham, vice-president, director of investments at Toronto-based Guardian Group of Funds Ltd. He recommends that investors consider buying U.S. funds that hold export-driven companies able to hedge against the U.S. dollar.

There are about 500 U.S. equity funds, but few strong long-term performers. Two above-average options: North Growth U.S. Equity Fund and RBC O'Shaughnessy U.S. Value Fund.

Europe

There's some agreement that European markets may achieve the best gains this year. Trade barriers are vanishing, the labour market is liberalized and a strong shared currency means years of restructuring may finally pay off. "The [European] economy is not going to go through the roof . . . but the market is much better positioned than the U.S.," said Pascal Duquette, Montreal-based manager of Altamira Global Value Fund.

It's estimated that European blue-chip stocks trade at a 30-per-cent discount to their U.S. rivals.

Many European markets offer very compelling evaluations, said fund manager James O'Shaughnessy at Bear Stearns Asset Management Inc. of New York. Top picks: Sweden, the Netherlands and Italy. Investors have about 100 European equity funds with a wide range in performance to choose from. One standout: Trimark Europlus Fund, up 24 per cent last year and an average of 8 per cent over five years.

Asia

Managers agree that Asia and the Pacific Rim is the most complex region to evaluate.

When it comes to export-driven Japan, "flip the coin," Mr. Duquette said. On one side, a weak U.S. dollar is hurting trade. On the other, China is still gobbling up Japanese goods and supply cheap labour.

China's economic growth will slow but still hum along at an impressive 7 to 8 per cent annually, Mr. Legzdins said. That said, few are keen on direct Chinese investment and prefer exposure via Hong Kong and Taiwan. Markets in Australia and New Zealand, meanwhile, are considered costly because of currency gains.

There's a vast range of short-term performance among the 80 or so Asia and Pacific Rim funds. All have shown weak average returns over five years. For lack of a compelling pick, consider Clarington Asia Pacific Fund, winner at December's Canadian Investment Awards.

Invesco name still lives

Invesco Funds Group Inc. agreed in October to pay $325-million (U.S.) to settle allegations of improper trading. U.S. regulators say the fund manager allowed market timing in their funds -- a rapid-trading strategy in which investors profit from inefficiencies in how mutual funds are valued.

The company's Denver head office presence has all but vanished and its U.S. retail assets have been rolled into sister fund company AIM Investments. Nevertheless, AIM and British parent Amvescap PLC have no plans to pull an Enron, and change the name of the football field in Denver that bears the company's name. (In 2002, Enron Field, home of the Houston Astros baseball team, was rechristened Minute Maid Park.)

"The name still is Invesco Field at Mile High, and I don't have any other news at this time," said AIM spokesman Ivy McLemore, referring to the Denver Broncos' home field. Al Lewis, a columnist at the Denver Post, has his own suggestion: Spitzer Field. Eliot Spitzer, the crusading New York Attorney-General, began his shakeup of the U.S. fund industry in September, 2003.

Rockwater on a roll

A deft series of deals makes Rockwater Capital Corp. a fund manager to keep an eye on.

In November, the Toronto-based company gobbled up wounded money manager KBSH Capital Management Inc. for $102-million (Canadian). The marriage catapulted Rockwater's assets under management to $6.7-billion, up from $500-million.

Then on Jan. 11, Rockwater concluded a $35-million debenture deal, with Caisse de dépôt et placement du Québec of Montreal snapping up a hefty $30-million of the issue. Two days later, Rockwater went back to the market, looking to raise $40-million in equity.

The issue is being led by TD Securities Inc. and Rockwater's investment arm First Associates Investments Inc.

The brain behind Rockwater is president and chief executive officer William Packham, former head of Merrill Lynch Canada Inc. and Midland Walwyn Inc.

kdamsell@globeandmail.ca

© 2007 The Globe and Mail. All rights reserved.

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