Low-risk RRSP funds
There are lots of places that you can put your RRSP money. Trying to make sense out of all the hype is not easy. But here’s a little help: four mutual funds that I consider to be good choices for a retirement plan this year. I have selected them from each of the three basic asset classes: cash, income, and growth.
Altamira Short-Term Canadian Income Fund. This is a very unusual fund. Officially, it is classified as a short-term bond fund but in reality it is actually part money market fund as well. As of the start of this year, 40 per cent of the assets were in short-term provincial bonds, most of which mature in 2005. The largest single holding was a 28 per cent position in a Manitoba floating rate bond that comes due in April.
The portfolio also has a 28 per cent position in federal and provincial T-bills, a 15 per cent holding in federal government bonds, an 11 per cent stake in corporate bonds, and a 5 per cent position in mortgages. This detail is important because it shows how this fund differs from an ordinary money market fund, which invests exclusively in T-bills and short-term corporate notes.
The other major difference is a floating N (net asset value). The net asset value of money market funds is usually fixed at $10. In this case, the NAV will fluctuate, although not by a lot.
The end result is a portfolio that is only a little more risky than that of a money market fund but which generates better cash flow and a slightly higher return. For example, in the 12 months to Dec. 31, this fund produced a total return of 2.15 per cent and cash flow of 27.75c a unit. The companion Altamira T-Bill Fund, which I also like a lot, gained 2 per cent with a cash flow of 19.86c per unit. With interest rates so low, you need to squeeze every cent you can out of the cash section of your RRSP. This fund gives you that small edge.
I also like the fact that it is no-load, has a low MER (management expense ratio) of 0.57 per cent, and is easily accessible through Altamira. The minimum initial investment is $1,000.
The fund is appropriate for the cash portion of your RRSP.
CIBC Canadian Bond Index Fund or TD Canadian Bond Index Fund. There is very little to choose between these two big bank bond funds. Either would be a suitable addition to the income portion of your RRSP. If you do business with either of these banks, make sure that one of these funds is in your plan.
Both funds track the Scotia Capital Universe Bond Index. The total returns are very similar; both show a one-year gain of 6.1 per cent to Dec. 31 while the CIBC fund has a slight edge in the three-year average annual compound rate of return, 6.58 per cent to 6.43 per cent. Cash flow from each in 2004 was within a hundredth of a cent, at just under 48c a unit.
The main difference is that the TD fund makes monthly distributions while the CIBC fund pays quarterly, but that shouldn’t matter in an RRSP. The CIBC fund has a slightly higher MER at 0.96 per cent compared to 0.89 per cent for the TD fund. You’ll need a minimum of $1,000 to take a position in the TD fund while $500 will buy your way into the CIBC entry. Both funds are no-load.
RBC O’Shaughnessy Canadian Equity Fund. There are a number of good Canadian equity funds that I would readily recommend for the growth portion of your RRSP. The CI Canadian Investment Fund, run by Kim Shannon, immediately comes to mind as a low-risk, high-return choice. But when it comes down to a single choice, I have to go with this RBC entry.
This fund gained 22.6 per cent in 2004, almost double the 12.1 per cent average for the Canadian Equity category. Over the past five years, which covers the 2000-2002 bear market, the average annual compound rate of return was 13.5 per cent compared to a peer group average of 5.3 per cent. The MER is only 1.63 per cent, very low for a fund of this type. It’s pretty hard to argue with those numbers. About the only factor that might prompt someone to select CI Canadian Investment over this one is the fact that the Shannon fund has a better risk rating, according to Globefund. But it also carries a load charge and has a higher MER. Nothing is perfect!
Be sure to check with your financial advisor before making a final decision on any RRSP purchase.