How to grow a RESP
The grandmother was very concerned. She wanted to open a registered education savings plan (RESP) for her six-month old grandson, but she couldn’t decide how to invest the money.
“My RRSPs are all down,” she said. “I don’t want that to happen to my grandson’s education savings.”
Clearly, the volatile stock markets of the past three years have spooked even investors with long time horizons. The boy won’t need to draw on his RESP for at least 18 years, and a lot can happen in that time. The chances are that well-chosen equity funds will outpace everything else during that period in terms of total return. But she didn’t want to take the risk of suffering short-term losses in the interim.
Of course, she could simply put the money into a GIC and let it go at that. But with the big banks offering less than 3% on a five-year term right now, the RESP won’t grow very quickly.
Weigh the risks
Weighing risk versus return potential is difficult but one way to approach the problem is to invest in a well-managed balanced fund. In cases where safety takes priority over returns, a nservatively-managed fund with a low-risk portfolio would be the best choice.
The best way to pinpoint funds that meet this criterion is to take a look at which ones fared best over the past three years. Any balanced fund that was able to withstand the rigors of the worst bear market since the Great Depression should be able to satisfy most people’s desire for safety. This doesn’t mean they will be the best performers going forward; in fact they will almost certainly lag behind the field when markets are strong. But if you’re looking for a fund that should outperform GICs over the next five years while keeping your risk to a minimum, these are all worthy candidates.
Next page: Four picks
Dynamic Focus Plus Balanced Fund. We don’t normally think of the Dynamic funds in terms of conservative portfolios, but this is a notable exception. Over the three years to May 31, it generated an average annual return of 9 per cent, with a better-than-average safety rating. The fund operates under the overall direction of veteran Ned Goodman, one of the best money managers in Canada. The mandate is to generate decent income while preserving capital, however if you need strong cash flow this is not the best place for your money. Distributions are paid quarterly and over the past 12 months the total paid out was only $0.12 per unit. But if your objective is to find a fund that offers an even blend of equities and bonds and provides growth potential over time, this is a great choice. Currently, the portfolio is almost equally split between stocks and bonds and the largest bond positions are in Government of Canada issues and senior corporates like Bell Canada. All in all, a very impressive balanced fund and one that would fit nicely into an RESP.
Mackenzie Income Fund. The last time this fund ever lost money over a calendar year was way back in 1994. It’s a rock-solid performer with one of the best safety ratings in the sector and a perfect choice for nervous moms. The portfolio is heavily weighted towards bonds (58 per cent of the assets as of May 31) but there is a large enough equity position to allow for growth potential. There are two types of units, but only the “B” units are now being sold. They show a three-year average annual return of 7.2 per cent, compared to an average loss of 0.7 per cent for the Canadian Balanced category. Quarterly distributions are $0.10 per unit, with an extra capital gains distribution at year-end.
Royal Monthly Income Fund. If you prefer no-load funds, this is a great choice. It was one of the top three performers in the Canadian Balanced category for the three years to the end of May, with an average annual gain of 10.6 per cent. It shows above-average returns for all time periods out to five years and, as with the other funds we’ve mentioned, risk is below average. This is the one to choose if you’re looking for steady income from your balanced fund. Distributions are paid monthly (current rate if $0.0425 per unit) and over the past year the total was $0.595 per unit. Based on a recent net asset value of $10.89, that works out to a projected cash yield of 5.5 per cent. Currently, the portfolio is 47 per cent in stocks, 41 per cent in bonds, and 12 per cent in cash. The equity holdings tend to be blue-chip stocks that pay good dividends, such as BCE, Bank of Nova Scotia, TD Bank, CIBC, and TransCanada Corporation (formerly TransCanada PipeLines). The fund is managed by John Varao, who has been in charge since it was launched in 1997.
TD Monthly Income Fund. In terms of safety, this one scores the best marks of this group, according to Globefund. The risk level is only about half that of the average balanced fund, so your chances of losing the grandkids’ education money by investing here are pretty slim. On the other side of the coin, the odds are good that you’ll earn a much better return for junior’s RESP than by putting the money into a GIC. The average annual gain over the past three years is 10.9 per cent and the one-year return is 12 per cent. Like the Royal fund, this one also offers decent cash flow, although it is not quite as good on that score. Monthly payments are $0.04 a unit, or $0.48 a year, for a projected cash-on-cash return of 4.1 per cent based on the recent NAV. Bonds make up just under 40 per cent of the portfolio, stocks account for 30 per cent, while about 25 per cent is invested in other types of securities like income trusts. The rest is in cash. Doug Warwick has called the shots here since the fund was started in June 1998.
All of these funds are suitable for low-risk portfolios. If income is especially important to you, Royal Monthly Income is the best choice. For maximum growth potential, with somewhat more risk than the others, choose Dynamic Focused Plus Balanced. Be sure to consult with your financial advisor before taking action.