Over the past few months, clone funds have been steadily "wound down" due to the elimination of the RSP foreign content rules. Investors, that wished to maximize their foreign content within their RRSP, used clone funds, to bypass the foreign content rule. The cost of the forward contracts, associated with clone funds, made them slightly more expensive than the underlying funds. However, with the elimination of the foreign content constraints, investors can have 100% of their money outside of Canada at no additional cost.
The traditional perspective has always been that Canada represents approximately 3% of world Gross Domestic Product (GDP) and therefore you shouldn't have more than 3% of your investments in Canada, as there are better opportunities elsewhere in the world. Over the last few years, however, this would not have been the case. As the Canadian dollar has appreciated, it has done severe damage to rates of return in U.S. investments, as the returns were converted from U.S. to Canadian Dollars. Also, as China's economic expansion has exploded, the demand for Canadian resources has elevated the Canadian economy and created impressive rates of return for Canadian stocks in the energy, financial, and materials sectors.
The temptation for investors is to eliminate their "global focus" and flock back to Canadian investments to eliminate potential currency risks and to enjoy the benefits of the global expansion through the natural appreciation of Canadian resource and materials companies.
I would suggest that many of the companies in these sectors have already reached or at least approached "fair value" and the future potential gains that may be enjoyed pale in comparison to other global stocks that have lagged in performance in recent years.
The timing of the elimination of the Foreign Content Rule makes for some very interesting investment allocation decisions going forward. Logically, investors understand the need for global diversification but they may find it hard to ignore the recent surge in the Canadian stock market.
Stay tuned...
