Insight February 2005 Monthly Update

“Risk management continues to be a key theme in the Canadian wealth market. And cash is piling up as investors continue to express concern about the stock market outlook and grouse about the low interest rates available on bonds and GICs. This issue of Insight takes a detailed look at this pool of money, since it is potentially available to investment fund manufacturers and other wealth market players. For the purpose of our analysis we define the liquid market as those vehicles that are immediately cashable without risk of capital loss. This includes: regular savings accounts, high-interest savings accounts, cashable GICs, T-bills, commercial paper, Canada Savings Bonds and provincial savings bonds, and money market funds. The above components constitute what we regard as ‘core liquidity.’ Not only are they immediately cashable without risk of loss, but their future deployment—into investments, other savings vehicles, debt reduction or spending—is at the discretion of the household. Our total liquid asset measure is broader since it includes the uninvested cash component of long-term investment funds (excluding foreign funds and RRSP-eligible clones). The deployment of these liquid assets is at the discretion of the portfolio managers responsible for these funds. Still, we think this total liquidity number is important because it provides a broad measure of the money now ‘on the sidelines.’ The key point here is that this cash mountain constitutes a significant potential source of new cash which could find its way into investment funds if overall investor psychology around equities turns bullish.”