This column represents an anniversary of sorts. It's the 10th column of my burgeoning writing career with Report on Business. Of the previous nine, the best reaction I've had (other than encouragement from my mother or hate mail) came from the Feb. 16 column entitled "Feeling comfortable? Maybe it's time to shake up your portfolio."
The premise of the column was that Canadian investors no longer have properly diversified portfolios. Terrific returns from energy and income-oriented stocks have fuelled a heavy Canadian exposure in general, and in those two sectors in particular. I suggested that Canadians are feeling pretty comfortable with their holdings, but proper diversification is not about feeling comfortable. Indeed, if you like everything in your portfolio (i.e. it's doing well), that's generally a sign that you're not adequately diversified.
As a rookie columnist, it felt good to get some requests for reprints on the column. And with a steady increase in articles on the same theme, it appeared that the word was getting out. It also didn't hurt my spirits that in recent weeks the Dow Jones industrial average was flirting with a record high while the S&P/TSX composite index was being dragged down by the energy stocks. (Yes, my oil short is still in place).
Last week, however, I got two doses of reality. Both made me realize how long it would take for investors and advisers to change their mindset on where Canada fits into a diversified portfolio.
The first dose came while I was having lunch with a senior executive from one of the full-service brokerage firms. He told me that when they analyzed what their clients held, he was shocked at what a low percentage of assets were in foreign securities. He admitted to being embarrassed and wouldn't tell me the number, but clearly it is very low.
Later in the week a friend asked me to review some recommendations he received from his financial planner. He had a chunk of money to invest and the planner had put together a proposal outlining three investment options, each with a different risk level. Each option used four or five mutual funds to implement the strategy.
I knew a few of the funds and I researched the rest on Globefund.com. Two things really jumped out at me. First, while all the funds were perfectly respectable, their top 10 holdings, almost without exception, read like a who's who of stocks that have done well over the last couple of years. Looking backward, these portfolios were real winners. But were they looking forward? Second, the portfolios were overwhelmingly Canadian. Of the three recommendations, the highest foreign weighting was 13 per cent.
These two episodes increased my conviction that Canadians, along with their advisers and money managers, are setting themselves up for suboptimal returns in the coming years.
I don't exactly know what we can do to turn the ship more quickly. If a strategy has been working, it's hard to give it up. It's important, however, that we always put our investment strategy in a historical context and look at it from a broader perspective.
It's all about Canada right now, but it hasn't and won't always be that way. The S&P/TSX chronically underperformed foreign markets from the late eighties to the late nineties. From an economic point of view, Canada has been firing on all cylinders in recent years. But you don't have to look back very far to remember what it was like the last time the loonie was in the mid-80-cent (U.S.) range. We couldn't trade our way out of a wet paper bag.
Certainly if you talk to people in the manufacturing sector today, it's sounding like those days are back. Despite a strong overall economy (driven by the consumer and resource sectors), their profit margins have been in rapid decline.
Every investor's situation is different and I'm not recommending a wholesale shift out of domestic securities. But advisers and their clients have got to stop managing money through a rear-view mirror. It's the quickest way to disappointing returns. After the recent declines in the Canadian market, investors are indeed feeling less comfortable about their portfolios. Unfortunately, it's for the wrong reasons.
Tom Bradley is president of Steadyhand Investment Funds Inc.
Tom Bradley