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October 5th, 1999, the Federal Reserve decided to maintain the discount
rate at 5.25%. This absence of intervention is justified by the desire
to evaluate the impact of the last interest rate increase. However,
the Federal Reserve did adopt a « tightening bias » which translates
to the idea that they will increase rates at the first sign of inflationary
pressure. The market is indeed anticipating an increase in rates
in November or December due to certain economic numbers : an increase in
consumer spending, a robust manufacturing sector and a favorable employment
environment. The natural resource sector has attracted many investors
due to the increase in gold bullion prices. The European Central
Bank announced that they would be limiting the sale of bullion over the
next 5 years. Following this announcement, the price of the yellow
metal increased to 338.00$ an ounce. This translates to 28.1% increase
since its 52 week low.
Did you know ...
This year there is a new type of
mutual fund that will make the RRSP season very interesting. The
new products are foreign funds which are usually eligible as the 20 % foreign
content only, and have now become 100% canadian. In order to respect
financial security regulations, mutual fund companies can use two strategies
in order to accomplish this feat.
The first strategy consists of using
financial derivatives based on foreign indices. A financial derivative
is a contract where its value is determined by an underlying asset such
as a stock, bond, economic indicator or an index. Technically, by
purchasing numerous derivatives on foreign markets, a fund can match
its return with that of the foreign index.
The second strategy involves the
intervention of an intermediary such as a financial institution.
The intermediary constructs a porfolio duplicating the foreign fund of
the mutual fund company. This carbon copy fund belongs to the intermdiary.
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The
mutual fund company then buys a forward contract, which is a financial
derivative product mentioned earlier, on the portfolio belonging to the
intermediary. Without going into further detail, the forward contract
produces a return which is linked to the underlying asset, which in this
case is the actual mutual fund itself.
For both these strategies, the assets
of the mutual fund remain in money market instruments such as T-Bills,
and forward contracts. These products are 100% canadian. This
process completes the entire issue of how these foreign funds are considered
100% canadian by Revenue Canada.
Year-end distributions are being
anticipated for certain AIC funds. Their over-exposure to financial
services has hurt their returns over the last few months. This has
led many unitholders to redeem their investments with AIC. When a
fund is holding sufficient liquidity, managers do not need to sell the
stock in their portfolio. However, AIC Advantage & Advantage
II have traditionally kept very little or no cash at all in their funds.
Also , with their « Buy and Hold » strategy, AIC has probably
accumalated important capital gains on some stocks that they purchased
many years ago. These gains have never been realized. Investors
holding these funds within a registered plan have nothing to worry about
since they are tax sheltered. However, investors holding these funds
outside a registered plan should be aware of this.
News
There are two important news items
concerning Quebec based mutual fund company Cote 100 this month.
First of all, they have announced a merger with Aequilibrium of St-Hyacinthe.
This merger will result in assets totaling 440 million canadian dollars.
Also, Cote 100 has announced they
will be launching 4 new funds specializing in large cap stocks. They
will be investing in; Canadian Equities, American Equities, an asset allocation
fund as well as an income fund. A prospectus has been submitted with
the Quebec Securities Commission and the expected launch date should be
January 1st , 2000.
The two star funds with Fidelity,
Global Asset Allocation and International Portfolio are now available in
100% canadian content for your RRSP. This allows you to surpass the
20% foreign content. The new funds returns will follow the existing funds
with a slightly lower return of approximently 0.5%.
This is because the MER is a little
higher on the new funds.
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