What if you were told that you could only shop in the middle aisle of the grocery store? Would that bother you? By limiting your selection you limit your choices and eating a balanced diet becomes more challenging.
Most people wouldn’t limit themselves to one aisle in the grocery store, yet quite often, we end up limiting our investment choices. This is often what investors do when it comes to their financial portfolio. By restricting their investments to Canadian companies, the investor essentially stays stuck in the middle grocery aisle.
Limiting regional investment choices impacts the diversification of a portfolio, which in turn hinders an investor’s ability to maximize returns and manage risk over time. With the Canadian market predominantly comprised of the financials, energy, and materials sectors, one must expand outside of Canada to take advantage of high-performing industries.
‘Shopping the global market’ could be key to building a sustainable portfolio that will help you reach your long-term financial goals.
The world is your oyster
The tendency to invest predominantly in domestic securities is typically referred to as ‘home bias’. “People think they know their own stock market and feel more comfortable investing in it, and they overestimate the risks of investing abroad,” says Luis Viceira, George E. Bates Professor and Senior Associate Dean for International Development at Harvard Business School.
But this is a short-sighted perspective, he argues. A focus on domestic holdings is “unwise in the long run.” By diversifying globally, investors are able to profit from increases in value wherever they occur. Overall, this leads to greater risk-adjusted returns in the long-term, says Viceira. “I think it is safer than betting on any one specific economy.”
Navigating global opportunities
While investing globally offers more choice, the multitude of opportunities available can be challenging to navigate. Legitimately active managers, however, are adept at separating the wheat from the chaff.
With more than 25 years of business, operational and investment experience, David Fingold, Vice President and Portfolio Manager at Dynamic Funds, has gained the knowledge to manage a concentrated portfolio of global stocks. “I’m not concerned about what’s in the benchmark,” says Mr. Fingold. “I think other portfolio managers may be aware of Switzerland being a good place to invest, but they may say, ‘It’s 4 or 5 per cent of the index; if we put in more than 7 or 8 per cent, we’re extremely overweight. We can’t go any further.’ Since I’m not concerned about what’s in the benchmark, that gives me a huge opportunity, because Switzerland is a country that we believe is low risk and a lot of our competitors simply can’t take advantage of it because they’re wedded to the benchmark.” Israel is another example Mr. Fingold cites. “This country accounts for less than half a percent of the MSCI World Index, so it means we can find a lot of great companies that ‘index-huggers’ cannot respond to.”
Mr. Fingold also invests outside of the Canadian market in order to tap into some of the historically better performing industries. “The best performing industries of all time are the Information Technology, Consumer Discretionary, and Healthcare sectors. Those are very difficult industries to invest in within Canada,”
Going against the grain
Mr. Fingold looks for stocks that he believes are undervalued and have strong and growing free cash flows. “People are not excited by them, either because they are boring or they have some kind of temporary cloud hanging over them.” He adds that the companies he selects for his Funds have strong balance sheets, healthy margins and historical returns that are well above average. This enables him to create an optimal portfolio that spans the globe and has the potential to stand up over the long-term.
Currently, Mr. Fingold sees a lot to choose from in the global market. “As bottom-up stock pickers, we don’t make market calls,” Mr. Fingold explains. “We have no targets for market averages and don’t manage money relative to the index. We invest in a concentrated portfolio of high quality companies that we think will do well over the next three to five years.”
His approach is akin to a grocery-shopper with a list. While that shopper may shop the market, they also know exactly what products to get and at what price — and that translates into a healthy, actively-managed investment portfolio.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Views expressed regarding a particular company, security, industry or market sector are the views of the writer and should not be considered an indication of trading intent of any investment funds managed by 1832 Asset Management L.P. These views should not be considered investment advice nor should they be considered a recommendation to buy or sell. Dynamic Funds® is a registered trademark of its owner, used under license and a division of 1832 Asset Management L.P. ™Trademark of its owner, used under license.
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