* Historically low Canadian interest rates heat up sales
* Product protects principal, offers some market upside
* Some financial advisors are critical
By Andrea Hopkins
TORONTO, March 11 With interest rates low
and bitter memories of falling stocks fresh in their minds,
Canadian investors are increasingly looking to market-linked
GICs, a product that protects their principal while offering
Sales of Guaranteed Investment Certificates (GICs) linked to
equities performance rose to a record C$32 billion ($32.36
billion) in 2011, up 13.7 percent from 2010, according to a
study by research firm Investor Economics.
This is just a fraction of Canada's C$450 billion GIC
market. But fresh flows into traditional fixed-rate GICs, once a
staple investment for risk-averse retirees, have all but dried
up as investors take a hard look at their ultra-low returns.
"In a context where other GICs are not growing at all or are
declining, this growth is quite significant," said Carlos
Cardone, a consultant at Investor Economics, who predicts
further sales growth as asset managers come up with new
The 2011 growth is on the back of an 8.8 percent annual rise
in 2010, making market-linked GICs one of two go-to products -
along with premium savings accounts - for conservative investors
looking to guarantee principal and enhance returns.
"This is exclusively driven by the level of rates. Somebody
goes to the branch and finds out what the interest rate is, and
in many cases these GICs are not renewed," Cardone said.
As just one example, an investor looking to put C$10,000
into a non-cashable two-year GIC with compound annual interest
can expect a return of about 1.30 percent at most of Canada's
big banks. Lock the money in for four years, and the interest
rate rises to just 1.6 percent.
Those returns don't even match the 2 percent inflation
target of the Bank of Canada, which is expected to keep its main
policy rate at 1 percent until next year.
Domenic Gallippi, head of term investments at Bank of
Montreal, has seen the rise in popularity of market-linked GICs
"A lot of our clients know they need the additional juice
that comes out of the equity markets but they are still fearful
- especially with what happened in the last few years," Gallippi
Like its competitors, BMO, Canada's fourth-largest bank,
offers a growing list of market-linked GICs. While there is
no fee to purchase a GIC, banks can profit handsomely
in a rising market. Investors get to keep only a portion of the
market's gain, with the bank pocketing the rest.
Canadian banks also see the product as a key tool in
retaining low-cost deposits and clients.
While it is impossible to know whether a
market-linked GIC bought today will do better than the
traditional version, a survey of past performances shows how the
ups and downs of recent financial markets have played out.
BMO's two-year GIC linked to 10 blue chip stocks returned
2.02 percent per year upon maturity last month. Their four-year
"Growth" GIC linked to 15 blue chip stocks returned 10 percent a
year at maturity this month.
Returns during market downturns are not as pretty. BMO's
"Return Enhancing" two-year GIC linked to 10 blue chip stocks
returned the guaranteed minimum of 1.5 percent per year in early
2009. And its one-year GIC linked to 10 blue chip stocks
returned only its guaranteed minimum of 0.2 percent upon
maturity this month.
BEWARE INFLATION AND TAXES
With every major bank and many others offering a variety of
GICs tied to everything from broad equity markets to specific
stocks, investors have plenty of options to choose from.
But investment advisors caution the simple appeal and
guaranteed safety of principal may mask the downside of a
product that gives investors only a portion of market gains and
next to nothing at all when markets slide.
As a result, the investment may not even begin to keep pace
Brian Burlacoff, a financial advisor at Sun Life Financial,
said a properly balanced portfolio can mimic the safety of a GIC
by including a product such as a corporate bond mutual fund.
Another part of the portfolio with more aggressive equity market
exposure can then capture market gains.
The other downside is that gains in a market-linked GIC are
taxed as interest income - a higher rate than capital gains
realized in an investment like a mutual fund - unless they are
in a registered plan sheltered from tax until withdrawal.
Still, Burlacoff has sold market-linked GICs to investors
who want the simplicity and safety of a GIC, an age-old product
that anyone can understand.
"It is a very simple solution for somebody who may want
exposure to equities but are worried about preservation of their
capital," he said.
BMO's Gallippi said critics of market-linked GICs who argue
investors could get equal or better returns with more direct
investments don't understand the target audience.
"These products not geared to the type of client that has
the stomach to invest directly in the marketplace on their own,"