Commentaries

The federal budget tabled in February and passed in March contained a significant item for investors. After decades of dealing with foreign content restrictions on registered pension assets, Canadians will no longer have to concern themselves with Canadian content. The budget eliminated the 30% maximum foreign content restriction. I have yet to find anyone in the financial services industry who saw this coming. Due to the surprise nature of the announcement, it has taken some time for the industry to respond. It is likely that no real change will come until May and will continue through the early part of the summer.

On the surface, this legislative change would first appear to have little to no effect to the portfolios we manage for clients. Eliminating foreign content requirements is a long overdue change. For at least the last half dozen years, we have been able to circumvent the foreign content limitations through various means including the use of clone funds (typically any fund that has ‘RSP’ in its name). Clone funds qualify as Canadian content but emulate the performance of a foreign fund. Another way we have been able to add to our foreign holdings is through the foreign content held by Canadian funds. For a fund to qualify as Canadian content it simply needed to live within the same rules as investors – i.e. not more than 30% of its holdings could be foreign. This meant that investors could have 70% of their assets in Canadian content, but that this potentially gave us 21% portfolio exposure to foreign markets (30% of the 70% is 21% of a portfolio).

On deeper analysis however, the change to the foreign content rules will have very substantial effects on our holdings. In fact, if we were to do nothing at all in response to the budget, our portfolio weightings would change substantially. This is because mutual fund companies will now change how they invest. They will change the mandate (the rules and governing philosophy) of each fund. Most fund companies will merge the clone funds with the underlying foreign fund they meant to emulate. Some will change the mandate of their clone funds and have them emerge essentially as altogether new funds. Perhaps a bigger change will be that most Canadian funds will now drop any foreign content; we no longer need them to use foreign content room as a means of helping us circumvent foreign content restrictions. Some Canadian funds will take a different tact. They will free themselves to hold any amount of foreign content they deem appropriate.

The unique response of each fund will determine the actions we need to take with portfolios. If a client’s Canadian holdings were all to drop their foreign content we would likely need to shift some assets to foreign holdings to simply maintain our pre-budget weightings.

Perhaps the most significant changes we will face this spring will be the need to reassess the value of self directed RRSPs. With the exception of clients who hold individual shares or securities in their RRSPs (they will still need self directed plans) many people will no longer have any need of these plans, nor the fees and slower transaction speed they imply. The most compelling reason for self directed plans in the past decade has been to allow us to maximize our foreign content while allowing the greatest flexibility in selecting the funds within our portfolios. Self directed plans had allowed us to use all foreign funds from companies with strong foreign offerings while using the Canadian content from other companies to satisfy the Canadian content requirement in the self directed plan as a whole. I estimate that as many as 70% of my existing self directed RRSP accounts are no longer needed with the change to foreign content rules.

The elimination of foreign content restrictions will mean a pile of paperwork needs to be completed, but will result in fee savings and higher investment returns for Canadian investors. What it will not mean is any substantial change to our weightings in Canada or the foreign markets – we have been able to strike the desired weightings for many years without concern for the foreign content restriction. It is only due the changes that will take place within mutual funds in response to the budget that we will need to adapt our portfolios in order to maintain our desired weightings.

We will be in touch with all clients in this regard in the next few months.



Alan Cameron

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