Canada, to use the old (pejorative) adage, is the country known as “hewers of wood and drawers of water,” historically reflecting our economy’s reliance on natural resources. While we may chuckle at this antiquated notion, many investors continue to adhere to an analog of this concept where a strong reliance or preference exists for investments within Canada. As the global economy has blossomed over the past few decades, the investment opportunity set outside of Canada, and the ease with which it can be accessed, has increased. By embracing leading companies outside of Canada, in both developed and emerging markets, your portfolio benefits from greater sector and geographical diversification, which ultimately reduces portfolio risk.
The phenomenon where investors tend to favour their domestic market is known as “home country bias.” Within the S&P/TSX Composite Index, the main Canadian equity market benchmark, three sectors dominate: Financials (35.1% as of February 2017), Energy (21.3%), and Materials (12.1%) collectively represent 68.5% of the index. On a global scale, Canada only represents approximately 3.3% of global equity markets within the MSCI All Country World Index (MSCI ACWI), an index representing developed and emerging market stocks. By viewing markets through a narrow home country lens, investors miss the opportunity to invest in quality companies in other sectors and further diversify their portfolio.
While the proximity, liquidity, and size of the US market makes it a relatively quick and easy candidate for portfolio diversification, I’m advocating for a broader, global perspective, encompassing not only developed markets such as the US, UK, and Japan, but also emerging markets such as China, Indonesia, Hungary, and Brazil. This exposure can be accessed indirectly through global equity benchmarks such as the aforementioned MSCI ACWI or the FTSE Russell All World Index; as of February 2017, emerging markets represents 10.5% of the total index weight within the MSCI ACWI, and 10.6% of the FTSE Russell All World Index. The US, for comparison, represents 53.8% and 53.2% within each index respectively; a reflection of its importance to the global economy.
Implementing this concept of investing from a global perspective is relatively easy. Many mutual fund companies and exchange-traded fund (ETF) providers, both here in Canada and in the US, have investment vehicles with exposure to global companies that are benchmarked to a global equity index. For most, if not all of these vehicles, the foreign exchange risk can also be hedged out, if so desired, thereby separating investment risk from currency risk.
Investing from a global, rather than an individual, country-centric, perspective is important and beneficial for your portfolio as you may be missing out on 96.7% of the investment opportunity set that exists outside of Canada. Our team at MCA Cross Border Advisors Inc. can provide an independent review and analysis of your investment portfolio and how its risk profile can be reduced.
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MCA Cross Border Advisors, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.