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If registered retirement savings plan (RRSP) season is a market bellwether, investors are betting on more volatility ahead and believe interest rates will remain high for a while.
For the first two months of this year – the time when many contribute to their RRSPs – investors poured money into fixed-income products including guaranteed investment certificates (GICs), high-interest savings accounts (HISAs) and short-term bonds. All are paying interest of roughly 5 per cent, well above rates offered on those products during last year’s RRSP season.
In fact, the top three exchange-traded funds (ETFs) to receive inflows in January and February were CI High Interest Savings ETF CSAV-T, Horizons High Interest Savings ETF CASH-T and TD Canadian Aggregate Bond Index ETF TDB-T, according to National Bank Financial Markets data.
That’s a notable shift from the same two months last year when the top three funds receiving inflows were equity-focused, including iShares S&P/TSX 60 Index ETF XIU-T, BMO MSCI USA ESG Leaders Index ETF ESGY-T and BMO S&P 500 Index ETF ZSP-T.
While the data don’t break down the types of accounts the money was deposited into, RRSP season is one of the busiest for investment inflows along with year-end tax planning investment strategies, says Daniel Straus, director of ETFs and financial products research at National Bank Financial Inc. in Toronto.
“Both are well understood by traders on the Street, portfolio managers and advisors for serving clients,” he says.
The Investment Funds Institute of Canada (IFIC) reported net sales of mutual funds were $3.3-billion in February amid the last-minute rush to meet the March 1 RRSP contribution deadline for the 2022 tax year. ETFs recorded net sales of $4.1-billion. That compares to net sales of $9.9-billion for mutual funds and $4-billion for ETFs in February last year, according to IFIC data.
Need to do more client outreach
Charles Provost, wealth advisor and discretionary portfolio manager with Vo-Dignard Provost Family Wealth Management at National Bank Financial Wealth Management in Montreal, says some of his more conservative clients were asking about GICs, which is a huge change from last year’s RRSP season.
“As soon as the interest rates were around 5 per cent, people were interested,” he says.
Clients willing to take on a little more risk turned to bonds because the rates have increased, while aggressive clients were prepared to invest in stocks seen as a bargain amid the market downturn.
“They understand that there’s an opportunity after what happened last year,” when market valuations dropped, he says.
Mr. Provost says his team had to do more client outreach this year than in previous RRSP seasons.
“Some people were more reluctant to add more this year because 2022 was a tough year in the market,” he says.
Ida Khajadourian, discretionary portfolio manager and investment advisor with Khajadourian Wealth Management at Richardson Wealth Ltd. in Toronto, says her team also had to be more proactive during this year’s season.
“People were not in as much of a rush to contribute to their RRSPs this year if they were looking more at options to pay down debt and preserve cash,” she says.
Taking different approaches for investors
Her clients also had a lot of questions about how their RRSP contributions would be deployed immediately, including to GICs, bonds or other investments.
“We’ve been somewhat cautious and very selective about where to invest the contributions,” Ms. Khajadourian says, depending on the client’s risk tolerance and objectives.
For clients with lower risk tolerance, she says the money was put in HISAs for the short term or used to top up investments in high-quality Canadian dividend-paying stocks.
“We’ve taken a conservative approach for clients who are medium to long-term investors,” she says.
Ms. Khajadourian has also been adding exposure to bonds for the first time in many years, given higher yields and the overall outlook for the asset class.
“In a lower interest rate environment, we have typically invested that allocation into higher-yielding alternative investments, but we think there is an opportunity here, at least in the short-to-medium term,” she says.
For clients with greater risk tolerance, she’s been adding exposure “selectively” to beaten-down sectors such as technology, precious metals and Europe, “where we believe stocks are more attractively valued and primarily in renewable energy.” She’s also been adding to merger arbitrage strategies where she anticipates heightened activity in the coming months.
‘Appetite to sidestep’ volatility
Bonnie Guillou, senior investment advisor with Guillou Wealth Advisory Group at BMO Nesbitt Burns Inc. in Saskatoon, noticed many of her clients maxed out their RRSPs this year including using up contribution room left over from prior years. She says the additional contributions likely came from the cash saved up since the start of the pandemic.
Ms. Guillou also saw more investor interest in shorter-term fixed-income products including GICs and HISAs, and less volatile investments like infrastructure and private assets.
“[Investors] are becoming more cautious in the short term,” she says. “There’s an appetite to sidestep some of the volatility we’ve experienced in the past year and the unpredictability of what’s coming.”
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