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The pandemic may have kept Canadians close to home, but it didn’t keep their money from taking flight.
Canadians ramped up investments in foreign securities in the first 11 months of 2021, hitting a record $144.4-billion as of Nov. 30, up from $16.2-billion in the same period a year ago, according to Statistics Canada data.
Although it appears Canadians – notorious for keeping their investment dollars at home – are finally setting their sights further, experts say the failure of many advisors to implement global investment strategies is hurting long-term portfolio returns.
“The problem is that Canada is 3 to 4 per cent of the world’s capital markets and for most people, it’s anywhere from 40 to 100 per cent of their portfolio,” says Norman Levine, managing director at Portfolio Management Corp. in Toronto.
Mr. Levine, who is retiring after almost 50 years in the industry, says too many investors and advisors continue to cling to a small pool of domestic stocks. Roughly two-thirds of S&P/TSX Composite Index listed stocks are either financial or resources-related.
Having a permanent stake in foreign equities diversifies risk and ultimately boosts returns by exposing investment portfolios to a wide array of opportunities, he says. But that often has the opposite effect when investors rush into foreign markets.
He uses the pandemic foreign buying spree as an example. From January to November last year, $82-billion was invested in U.S. equity markets, according to StatsCan. Investors focused on big technology companies and funds that track broad market indexes such as the benchmark S&P 500.
As Canadian investors flooded in, big tech stocks had already rallied for several months. The S&P 500 advanced by 27 per cent in 2021 after a 16 per cent gain in 2020. In comparison, Canada’s benchmark S&P/TSX Composite gained 22 per cent in 2021 following a dismal 2 per cent return in 2020 after the energy sector cratered.
“They’re chasing performance. They’re going with what moved last year and the year before just as their market is starting to do well,” Mr. Levine says, adding those investors have missed out on a recovery in the resources sector.
“Resources and commodities type stocks trade in almost 10-year cycles … boom and bust. We’re in one of the up cycles.”
Instead of trying to time foreign investments, those with too many Canadian stocks in their portfolios should shift assets over time – even if that means U.S. stocks, which account for half of global equities, Mr. Levine says.
In the past 20 years, the S&P 500 has gained in value by 516 per cent, compared with 372 per cent for the S&P/TSX Composite Index. That translates into an average annual compounded rate of return of 9.5 per cent versus 8 per cent, respectively.
“Home bias has hurt [investors] very badly for returns over the past 20 to 30 years,” Mr. Levine says. “If you’re an advisor at a Canadian brokerage firm and every morning you’re getting inundated with your firm’s research, for the most part, it’s domestic companies.”
David LePoidevin, senior investment advisor and senior portfolio manager with LePoidevin Group at Canaccord Genuity Wealth Management in Vancouver says that, unfortunately, investors look in the rearview mirror all too often.
“They always have and they always will,” he says.
His typical portfolio has a 70 per cent foreign investment target. He says Canadians should invest at least 10 per cent of their portfolios beyond North America for better value.
“The problem is the U.S. has outperformed the rest of the world by a large margin,” he says. “While there are still excellent opportunities in the U.S., [investors] need to be going outside to the rest of the world.”
How to get global exposure
Investing in U.S. stocks is simple for most Canadians, but buying overseas stocks can be complicated.
Mr. LePoidevin points to getting exposure to European large-cap stocks through two exchange-traded funds (ETFs) – Vanguard FTSE Europe ETF VGK-A and WisdomTree Europe Hedged Equity Fund HEDJ-A, the latter of which is hedged to the U.S. dollar to protect against currency fluctuations.
“The European economy is roughly the same size as the U.S. economy and yet people have zero exposure,” he says.
Mr. LePoidevin also stresses the importance of foreign investment as a currency hedge for the Canadian dollar.
“In the long run, I worry about the Canadian dollar,” he says. “I think Canadians need to have diversification because they’re ill protected if the Canadian dollar should break down.”
Christine Poole, chief executive officer and managing director at GlobeInvest Capital Management Inc. in Toronto, invests about 53 per cent of her equity portfolio outside of Canada as a balance to sectors she can’t find at home.
“We tend to invest outside Canada in areas like technology or consumer staples to get global exposure. You can’t find a lot of that in Canada,” she says.
Her advice to investors who want exposure to markets like China or other developing regions, without going beyond U.S. markets, is to find companies listed in the U.S. that do a large portion of business around the globe.
“Even when we buy a U.S.-based company, it tends to be a multinational that has more than half its revenue outside of North America,” she says.
For Canadians having trouble shaking off their home bias, she says there are Canadian companies that rely on Canada for less than 20 per cent of their revenue, such as information technology service provider CGI Inc. GIB-A-T, and infrastructure consultant WSP Global Inc. WSP-T.
“You can get fine companies within Canada that have foreign exposure,” she says, adding that even the abundance of Canadian-listed resources companies provides a level of global diversification because they sell their products in U.S. dollars.
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