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M A R / A P R 2 0 0 5

InSite News and views for the online investor

In the last issue of InSite, you learnedthat creating a sound strategic plan isthe first step toward investing success.Once that plan is in place, it becomescritically important to select invest-ments that are right for you. Is it justluck or is there a more disciplinedapproach to investment selections?You’ll find that through a disciplined,ongoing process of evaluating and re-evaluating your investment selections,optimal performance can be achieved.

Begin by answering some of these important questions: Do yourinvestment choices still reflect yourlong-term plan? How have your current investments performed? Are there better choices inside the category, or should you make otherchoices given current market condi-tions? Examining the full range ofinvestment products available to

you can help in your selectionprocess. If you already have madeyour selection, then do you need to make adjustments?

It’s important to regularly fine-tuneyour investment choices to keep upwith current market conditions andany changes to your long-term goals.Disciplined investors know thatinvestment decisions that made sensein the past must be constantly revisit-ed in order to ensure that both theappropriateness and performance ofthose investments are in keeping withcurrent and future goals.

To help you select the investmentsthat are right for you, take advantageof a comprehensive array of onlinescreening and research tools avail-able. Basic to advanced screeningtools and third-party research,

such as Morningstar Canada, Zack’s Investment Research, andbriefing.com, can help you evaluatewhich investment products match

your unique investment plan. To build your mutual fund portfolio and make the selection process easier, try Analyst Select Funds or modelportfolios that match your investortype and asset mix.

The RRSP investing process is a goodexample of the benefits of carefulanalysis. Many investors make lastminute contributions in February inorder to meet the tax deadline. Ratherthan carefully assessing their invest-ment options, they simply ‘park’ theircash leaving strategic investmentdecisions for another place and time.If you are among those who areunder-invested, now is the perfecttime to look at your best investmentoptions. Instead of making last minutecontributions, you can leverage thepower of automatic purchase plans tomake regular contributions through-out the year.

Whether you are just starting a portfo-lio or fine-tuning your investments, ittakes more than just luck. A careful,disciplined selection and an ongoingreview of your plans go a long waytoward investing success.

Making the Right Selection: Is It Just Luck?

“A careful, disci-

plined selection

and an ongoing

review of your

plans go a long way

toward investing

success.”

2 Mar/Apr 2005

There is a wide range of screeningtools on bmoinvestorline.com to helpyou select investments that best fulfillyour plan. There are both basic andadvanced Screeners for stocks, mutualfunds and fixed income products,depending on the type of investor youare and the level of support you want.

If you are an investor who wants moresupport, use the Predefined StockScreener to choose from a list of pre-determined criteria. The result is a list of stocks that match your specificrequirements, with links to detailedcompany information. The Advanced

Screener lets you control the searchcategory with parameters that you canchoose, such as “per share data” or

“valuations”. You can also save the results for future use. Both thePredefined and Advanced StockScreeners are available for Canadianand U.S. companies.

To help select the fixed income products that are right for you, weoffer Quick Picks, which allows you to search our entire inventory for a list of fixed income products that meetsyour investment needs. Or, experi-enced investors can use the AdvancedScreeners to narrow down the searchto specific fixed income products.

The mutual fund screening tools let you choose Quick Picks or theAdvanced Fund Selector. You can alsochoose from the Analyst Select Fundsand the model portfolios, put together by leading Canadian economist Ranga Chand.

Screening tools can help you makedecisions and cut through the clutterby showing you investments that meetthe criteria you specify. You decide on the level of support you need,depending on your comfort level,experience and preference.

This issue of InSite focuses on giving you relevantinformation to support you in making confidentinvestment selections. As an online investor, youknow there is a wide range of financial optionsavailable to you when building your portfolio. Thetrue determinant of successful investing is beingable to evaluate each of these options and select thebest investments that meet your personal needs.

During February and March, you can test your investing knowledge byentering the Ultimate Golf Getaway. This year there are more options.For every correctly completed quiz, you earn a ballot for a chance to win your dream 18 – a trip for you and three guests to your choice ofScotland, Hawaii, or Spain, where championship golf courses, world-class resorts and diverse cultural experiences await.

I encourage you to take the time to enter the Ultimate Golf Getawaybefore it ends on March 31st. You’ll have some fun, learn a few things,and – if you’re lucky – get to make another selection that has the powerto affect your future: your choice of a vacation destination.

Best of luck!

Thomas A. FlanaganPresident & Chief Operating Officer

InSiteScreening Your Investments

Contributor’s Note

BMO InvestorLine

rated Best Online

Broker for the 7th

time in a row by

The Globe and Mail †

Growth & Income Model PortfolioThe Heavy Hitter®* Growth & IncomeModel Portfolio is designed to provideinvestors with moderate long-termgrowth of capital and reasonable current income. It is suitable for thoseinvestors who can withstand moder-ate to significant year-to-year fluctua-tions in the value of their portfolios in exchange for potentially higherlong-term returns. It is not suitable for investors with a short investmenttime horizon.

The target allocation of the portfolio is 65% stocks and 35% fixed incomeand consists of 6 underlying HeavyHitter funds (Table 1). These six funds,like their counterparts in the HeavyHitters Select Funds’ list, all have astrong performance history, superiorrisk/reward ratios, a minimum 5-yeartrack record and below-average man-agement fees within their respectivecategories.

The portfolio is well diversified withexposure to a wide range of sectors in both domestic and foreign equitymarkets. The fixed income componentof the portfolio consists of high qualityCanadian government and corporatebonds with an average term-to-maturity of about 8 years.

The investment returns for the Growth& Income Model Portfolio are shownin Table 2. The portfolio’s averageannual total return for the 5-year period ending December 31, 2004 was11.3% and on a yearly basis the portfo-lio has delivered positive returns 4 ofthe past 5 years, with returns rangingfrom a low of -0.4% in 2002 to a highof 20.9% in 2000.

The Growth & Income Model Portfoliohas a moderate/high risk profile.Although there is a 1 in 11 chance that returns will be negative over any1-year period, the portfolio has deliv-ered positive returns over all 3 and 5-year holding periods. Looking at all

5-year rolling periods from October1998 to December 2004 (Table 3) returnshave averaged 11.5%, ranging from ahigh of 13.2% to a low of 10.6%.

To learn more about the Heavy HitterModel Portfolios, check out theNovember/December 2004 issue of InSite. Or, visit the Mutual FundCentre in the Education Centre atbmoinvestorline.com.

Ranga Chand is widely recognized as one of

Canada’s leading economists and mutu-al fund analysts. He isalso the Founder and

President of the research and consult-ing firm Chand Carmichael &Company Limited.

3 Mar/Apr 2005

Heavy Hitter Model Portfolio Corner by Ranga Chand

4 Mar/Apr 2005

The exceptional performance ofCanadian equities has been goodnews for equity mutual funds.Every fund has different strate-

gies for making the most of goodmarkets. One strategy is to varythe amount invested in the differ-ent sectors of the economy, hop-ing that some will outperformothers. The Fidelity CanadianDisciplined Equity®† fund followsa “sector-neutral” approach. Thefund invests a set proportion ineach sector – proportions thatmirror the composition of theCanadian stock market.

This disciplined approach givesthe fund some key advantages:

• It has broad exposure to all areas of the Canadian market all the time.

• It is never overexposed orunderexposed to any particularsector, which means lessvolatility.

• The investment managementteam can focus on what they dobest - finding the best opportu-nities within each sector.

Although it’s sector neutral, theFidelity Canadian DisciplinedEquity fund is anything but passive. The fund has an unusualmanagement system that focuseson stock picking. Robert Haber,Chief Investment Officer forFidelity Investments Canada anda fund manager with more than17 years experience, providesoverall guidance. Working withhim are 11 analysts, with expert-ise in different industries, whoselect stocks, manage assets anddevelop investment strategiesfor the different sectors. They, in turn, are supported by two

research specialists. Togetherthey follow Fidelity’s traditionalbottom-up, wide-rangingresearch approach. The result? A fund with a unique approachthat delivers consistent results,providing a strong foundationfor an investment portfolio.

Profile of a Heavy Hitter:Fidelity Canadian DisciplinedEquity Fund by Fidelity Investments

Feature of the MonthWatch Ranga Chand’s

latest webcasts as

he talks about the

Heavy Hitter Select

Funds and Model

Portfolios, exclusively

available through

BMO InvestorLine.

To watch Ranga Chand

or other online invest-

ment webcasts, visit

the Education Centre

and choose “Expand

Your Knowledge” at

bmoinvestorline.com

today!

5 Mar/Apr 2005

Income trusts were set up to encour-age investments in such industries as oil, gas, resources and property.Income trusts can be an attractivechoice for investors looking forincome from their portfolios, as cashflow generated by the business is dis-tributed to the unit holders. In addi-tion, where businesses are allowedsignificant tax breaks, the savings are passed on to the unit holders.

Tax Considerations for Income TrustsIncome trusts do not pay tax at the corporate level, therefore the depreciation allowances, property tax reductions and amortization ofbuildings flow through to the ultimateinvestor. However, when unit holderssell their income trusts, they are liablefor capital gains tax on the differencebetween the adjusted book cost,which is what they originally paid lessall of the tax breaks that have flowedthrough to them, and what the trustprice is on the day they sell.

Investors should choose the time tosell their trust units carefully - specif-ically when it is most advantageous to them. When they do pay tax ontheir gains, it is taxed at the capitalgains rate, typically half their top marginal tax rate.

Earnings PayoutsAnother important point to rememberis that income trusts have to pay out at least 90% of their earnings to retaintheir trust status. Any business needs

to retain some cash in order to main-tain its equipment or premises and toinvest in new machinery. A good ruleof thumb is to see whether the incometrust is paying out more than 95% of its Free Cash Flow, or Funds FromOperations (FFO), as they are some-times described. Free Cash Flow

includes not just earnings but alsoitems such as depreciation and amor-tization. If the trust is paying out all,or almost all of its cash, it is likely thatmanagement is being too aggressiveand that the payout will have to bereduced or eliminated in the future.

What To Look For When investing in income trusts, it isvery important that investors look atthe underlying quality of the businessand the strength of the balance sheet,just as they would do with any invest-ment. If it’s a cyclical or low marginbusiness such as restaurants, truckingor agriculture, it is highly likely thatthe trust will end up cutting or sus-pending its payouts. Although oil and gas trusts can be volatile, you arereceiving a high yield to compensatefor the fluctuation in prices. Incometrusts are a suitable investment if theyare purchased for a relatively high level of tax effective income, and not expected to be growth vehicles over thelong term. Investors should carefullyreview their selection to make sure thatthis is a suitable investment for theirinvesting needs and risk profile.

Gavin Graham is Vice President,Director of Investments, at GuardianGroup of Funds Ltd.

Making the Most of Income Trusts by Gavin Graham

InSite

“Income trusts

are a suitable

investment

if they are

purchased for a

relatively high

level of tax

effective income...”Explore Our SiteTo learn how you can take full advantage of all the stock trading featuresavailable to you, check out the Interactive TradingTutorial on the “ExploreOnline Investing” page inthe Education Centre at bmoinvestorline.com today.

Is there a success story you’d like to share withInSite readers? Are there any topics you wouldlike to read about? We’d like to hear from you. Tell us your story at insite@bmoinvestorline.com.

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InSite is published six times a year by BMO InvestorLine Inc., and is distributed withBMO InvestorLine account statements. To requestadditional copies of this issue, please send anemail to insite@bmoinvestorline.com. To viewpast issues of the newsletter, visit the EducationCentre at bmoinvestorline.com.

The articles in this newsletter are prepared as a generalsource of information. They are not intended to providelegal, investment, accounting or tax advice, and shouldnot be relied upon in that regard. If legal or investmentadvice, or other professional assistance is needed, theservice of a competent professional should be obtained.The information contained in this newsletter is based on

sources believed to be reliable, but its accuracy cannot beguaranteed. The views expressed and information provid-ed in the articles are attributable solely to the authors.

Commissions, trailing commissions, management feesand expenses may be associated with mutual fundinvestments. Please read the prospectus of the mutualfunds before investing, including the mutual funds in the model portfolios. Mutual funds are not guaranteed,their values change frequently and past performancemay not be repeated. The indicated rates of return arethe historical annual compounded total returns, includingchanges in unit value and reinvestment of all distribu-tions, and do not take into account sales, redemption,distribution, or other charges or income taxes that mayhave reduced returns.

Please send comments and suggestions toinsite@bmoinvestorline.com or mail to: The Editor, BMO InvestorLine InSite, First Canadian Place,100 King St. W., 54th Floor, Toronto, ON M5X 1H3.

BMO InvestorLine is a member of BMO Financial Group.†As ranked by The Globe and Mail, 2002, 2003, 2004 &Feb. 5, 2005, by Gómez Canada Q1, Q3 2002 & Q2, Q42003 and by Watchfire GómezPro, Q2 2004. ®Registeredtrade-marks of Bank of Montreal, used under licence.®*“Heavy Hitter” is a registered trade-mark of ChandCarmichael and Company Limited, used under licence.®†Canadian Disciplined Equity is a trade-mark of FMR Corp.™Trade-mark of Bank of Montreal, used under licence.BMO InvestorLine Inc. is a wholly owned subsidiary ofBank of Montreal. Member CIPF. 5122168 (03/05)

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