From our Canadian Bureau: The Retirement Fund Shell Game   Page 2

And because futures are involved, it's possible to hedge currency. So you can buy an index fund that tracks the S&P 500 and which is also impervious to changes in the U.S. dollar. "I don't think that's a good thing," says Mr. Selhi, "but some people are really concerned when the Canadian dollar rises. If it goes up 10 percent and the S&P goes up 20, then they're really upset because their fund really only went up 10 percent and it's supposed to track the S&P." In fact, they may be sacrificing some of the diversification benefit of owning equities exposed to another currency while paying a heavy price to hedge.

Altamira has a number of funds that track U.S. indexes with the combination of underlying treasuries and futures contracts. Its latest funds aimed at RRSP investors looking to skirt the 25 percent cap are the RSP e-business Fund, RSP Science and Technology Fund, and RSP Japanese Opportunity Fund.

Clone funds are the copy cats of the industry. They aim to mimic an underlying foreign fund. This can be done in a number of different ways. Templeton Management Ltd. was one of the first to offer these funds, and they generally work like this: If you invest $1,000 into the clone fund, 25 percent at most (the amount of the current cap) will go into the underlying fund. The rest is deposited with a counterparty, typically a chartered bank. The bank then writes a forward contract to the clone fund in which it agrees to pay the same return as the underlying fund. In a nice dramatic twist, the bank then actually puts the $750 into the underlying fund to ensure it will be able to fulfill its contract with the clone fund.

Many Canadian investors are wary of using index and clone funds for their RRSPs, not because of the derivatives behind them (options, futures and forward contracts), but the fees tacked on because of the contracts involved. The fees can be up to 60 basis points higher than what an investor would pay for a plain vanilla foreign-content or index fund.

Many investment advisers believe that at least 30 percent of your portfolio should be in foreign holdings. As the Canadian government keeps raising the amount of foreign holdings it allows in its RRSPs, perhaps someday the cap will be dropped entirely. The fact that people have found ingenious ways of getting around it is one argument for dropping the cap. Another is recent research which found that the cap doesn't matter, as when foreign-content limits were dropped in the U.S., U.K. and Japan, investors still remained primarily in their home markets.

08/08/2000
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