Clients are feeling uneasy this RRSP season, given that equities markets got off to a jolting start in 2016, but are not in panic mode. Most clients are sticking to the comfort and discipline of diversified financial plans.
“There’s a general sense of nervousness and caution out there, but it’s not 2008 all over again,” says Bev Moir, associate director and senior wealth advisor with Scotia Wealth Management, a division of ScotiaMcLeod Inc. in Toronto. “By early February, the volatility we saw in January had diminished somewhat and investors were breathing a sigh of relief. They saw values go down, but then go back up again, so they were reassured that staying put is best.”
Financial advisors are doing a fair amount of reassuring and hand-holding with their clients, but the power of sticking to a financial plan has been shown in markets that have been unstable for several months. Few people have all their eggs in one basket – whether it’s cash, stocks, bonds or alternatives – if they’ve been listening to their advisors.
Clients who follow their advisor’s advice to diversify geographically have seen their foreign assets gain strength, as the Canadian dollar dipped to 12-year lows in early January, thus providing an extra vitamin shot to counteract weakness in Canadian stocks.
“Every one of our clients has a game plan designed to weather turbulent markets. Without that, you’re building a house without blueprints,” says Adrian Mastracci, a financial planner and president of Vancouver-based KCM Wealth Management Inc. “The plan of action doesn’t change; you just have to hold your nose or hold your breath.”
He says clients particularly worried about turbulence may make a cash contribution to their RRSPs, then meet the targeted equities allocations in their plan by gradually phasing in equities purchases over two or three entry points during the coming year to avoid worry about timing.
“Nobody knows where the bottom is,” Mastracci adds.
Bank of Montreal recently released a survey that found 61% of Canadians planned to make an RRSP contribution before the Feb. 29 deadline this year, down from 64% last year. For consumers who contributed in January, the average amount rose to $3,984 this year from $3,738 in January 2015.
Dave Richardson, vice president and head of enterprise distribution strategy, at RBC Global Asset Management Inc. in Toronto, says this past January was a slower month for RRSP contributions than in January 2015 for Royal Bank of Canada (RBC) overall, and clients who are entering equities markets are doing so cautiously. Although this February is looking stronger, he says, January saw an uptick in sales of RBC’s safer guaranteed investment certificates and deposit products, while overall mutual fund sales slowed. Managed portfolio solutions were strong on the fund side, attracting clients with those products’ built-in asset allocation and rebalancing features.
“The portfolio solutions have performed well, whether they’re conservative or aggressive,” Richardson says. “They highlight the value of diversification across different asset classes and regions.”
Even on the fixed-income side, clients are seeking greater diversification by going beyond traditional Canadian government bonds and into portfolios that contain global and corporate bonds as well as dividend-paying and low-volatility equities.
“Compared with last year, this [RRSP] season is pretty much flat,” says Steve Donald, president of Assante Wealth Management (Canada) Ltd. in Toronto. “The mood is generally constructive, and our focus is helping clients stay on track with longer-term financial objectives.”
Again, diversified managed portfolios are among the best aids in managing the client emotions triggered by short-term market fluctuations, Donald says. Assante’s portfolios offer a mix of domestic and international fixed-income and equities, as well as non-correlated assets such as real estate funds.
“Our portfolios fared reasonably well last year, which gives clients more confidence in these rocky markets,” he says. “They’ve seen it before and have come out OK on the other side.”
Donald notes a small uptick in demand for segregated funds that offer guarantees on portfolio values for those who hold for long periods, but stresses that seg funds remain a small part of Assante’s business: “Diversification is the best protection against risk for long-term investors.”
Retirees with income needs typically have an “income wedge” – funds invested in short-term cash to meet withdrawals – as part of their portfolios, Donald says. This strategy avoids having to sell securities in distressed markets, but provides no growth.
Clients in the deaccumulation phase also tend to hold income funds that invest in an array of securities designed to produce a regular monthly income.
Jaime Harper, executive vice president and head of advisor distribution at Fidelity Canada Investments ULC in Toronto, says popular funds move beyond “pure vanilla” to include a variety of securities. Fidelity Strategic Income Fund, for example, holds a mix of U.S. government, high-yield and floating-rate bonds, global bonds and emerging-market debt. Other funds include an equities component in the mix, such as Fidelity Conservative Income Fund, which holds 20% in stocks.
“Investors want yield without taking risk,” Harper says. “The first couple of weeks of January unnerved a lot of people, and we’re seeing some caution.”
Nevertheless, Fidelity has had its best RRSP season ever. Its products are striking the right chord with Canadian clients seeking relative stability and diversification into U.S. and global markets, Harper says.
The firm’s three top sellers are Fidelity NorthStar Global Equity, a “go anywhere” global equity fund; Fidelity NorthStar Balanced, a mix of global equities and fixed-income; and Fidelity Global Monthly Income, which invests in a diversified portfolio of global asset classes and pays a monthly distribution equivalent to an annual yield of 1.7%.
On the exchange-traded fund (ETF) side, inflows are heading into more defensive strategies so far this year, says Daniel Straus, director of ETF research and strategy for National Bank Financial Ltd. in Toronto. Figures for January show Canadian equity net ETF flows were negative. Fixed-income ETFs had the strongest inflows, while U.S. and international equity ETFs also were positive.
For U.S.-based ETFs, in both the fixed-income and equities, investors showed an appetite for products offering currency hedging, providing insulation from any exchange-rate movements.
“With the 12-year lows for the Canadian dollar, investors who made the right call are taking profits and moving from unhedged ETFs into currency-hedged versions,” Straus says. “Many [clients] believe the worst is over for the Canadian dollar, but still want U.S. asset exposure.”
There also was interest in ETFs offering exposure to energy stocks, Straus says, such as iShares S&P/TSX Capped Energy ETF, sponsored by Toronto-based BlackRock Asset Management Canada Ltd. – a bet that oil prices have bottomed.
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