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Foreign markets beckon after Canada's 'amazing run'

Managers recommend locking in gains from hottest domestic investments

MUTUAL FUNDS REPORTER

Sell Canada is a major theme emerging this registered retirement savings plan season.

The mutual fund industry is urging investors to lock in gains from their top-performing Canadian investments and look to undervalued foreign markets for the best growth.

"Canada has had an amazing run. But at the same time . . . it's gotten rather pricey," said Jim O'Shaughnessy, a U.S. money manager that oversees $3.4-billion in funds for RBC Assert Management. "If you are looking just at valuations and opportunities, right now they really exist outside North America like I have not seen quantitatively for many, many years."

A handful of new funds focused on foreign markets have been launched by some of the industry's largest players in recent weeks. CI Financial Inc., Franklin Templeton Investments Corp., Investors Group and RBC Asset Management are all marketing new U.S. and global funds promising yield via a blue-chip global portfolio.

There's two key drivers behind the push to foreign markets. First, the end of the 30-per-cent cap on foreign content held in retirement savings and pension plans last year opened the door to international markets. Publicly traded Canadian companies represent about 3 per cent of the globe's vast equity market yet the average Canadian held a slender 14-per-cent foreign content in their 2005 RRSP, Royal Bank of Canada reports.

More importantly, Canada is an expensive proposition and there is increasing sentiment a correction may be coming soon. This country's equity markets are dominated by the financial and commodity sectors and diversification is essential, said Brenda Vince, president of RBC Asset Management.

"It's not that many days away from some very tough equity markets which obviously has been, I think, the reason why we're seeing some different products in the marketplace," Ms. Vince said.

European markets, for example, trade at a discount to Canada, reports Franklin Templeton Investments Corp. The overall price-to-earnings ratio for European equities is 15.3 times compared with the global average of 17.6 times, yielding a 2.7-per-cent dividend compared with the global average of 2.1 per cent. In contrast, the S&P/TSX composite index has a dividend yield of 1.84 per cent.

Dividend growth will fuel global investment returns, as low interest rates have allowed companies to pay down huge amounts of debt, said Lisa Myers, co-lead manager of the new Templeton Global Income Fund.

"Global companies have the balance-sheet flexibility to grow," she told a Tuesday conference call of financial advisers. "High free cash flow and strong balance sheets give us confidence about future global growth and stock returns."

Nevertheless, global funds can be a hard sell, especially when Canadian-focused investors have enjoyed three years of double-digit gains. A rising Canadian dollar has meant single-digit returns during the same period from all but one of 10 largest non-Canadian mutual funds. The sole exception is the Mackenzie Cundill Value 'C' Fund, a $3.9-billion fund that posted strong returns thanks in part to a heavy weighting in the soaring Japanese market.

Marketing the merits of foreign funds to Canadians is "definitely not an easy sell," said Iain Clark, chief investment officer of Henderson Global Investors. The British firm manages seven funds for Mackenzie Financial Corp.

"The time to do a little bit of diversification is after you've had a good domestic run," Mr. Clark said. "It's no good just chasing historic returns because you know that at some point that becomes overextended, overdone and it's going to turn."

Road trip

This RRSP season, a big push is on by financial advisers and fund managers for Canadians to diversify their portfolios with overseas holdings. Here are the returns on the 10 biggest non-Canadian equity funds, ranked by size. The funds are global equity unless otherwise indicated.

Fund Name 1-year return 3-year return 5-year return Net assets ('000)
Trimark Select Growth2.61%4.96%3.50%5,664,542
Templeton Growth Fund Ltd.4.82%8.86%0.46%5,123,445
Mackenzie Cundill Value 'C'12.14%19.11%10.33%3,894,386
AGF International Value-1.34%4.66%-2.48%3,860,309
MD Growth5.37%8.48%-0.10%3,667,421
Mackenzie Ivy Foreign Equity3.15%1.07%1.12%2,634,874
Trimark Fund - SC4.17%5.54%4.09%2,578,580
Brandes Global Equity-0.66%7.86%2,509,554
Investors U.S. Large Cap Value-A*1.11%2,391,509
TD Mgd Bal Growth RSP Port-I**9.09%9.59%2.64%2,306,353

*U.S. Equity

**Global Balanced and Asset Allocation

© 2007 The Globe and Mail. All rights reserved.

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