Do clients need to add global assets?

Even though Canadian equities markets are highly concentrated in a few sectors – and small compared with other markets – many clients remain uneasy about investing outside of this country. But it’s a conversation advisors need to have

With the Canadian stock market accounting for only about 3% of global stock market capitalization, it’s important for your clients to consider investing opportunities outside Canada.

The issue hindering this strategy often is education. Although many Canadian investors near or in retirement show a strong preference for their own backyard and view foreign markets as being too risky, it can be helpful to remind your clients that their retirement is likely to be three or four decades long, and a higher level of risk in their portfolios may be justified.

There is another significant disadvantage to Canada’s markets: they are highly concentrated, with three sectors – financial services, energy and materials – comprising more than 70% of total market capitalization. Global markets, on the other hand, offer exposure to a range of sectors with potential for growth, such as health care, industrials, information technology and telecommunications, all of which are underrepresented in Canada, says Giles Marshall, portfolio manager with Fiduciary Trust Co. of Canada in Toronto.

Investing globally also provides greater balance for client portfolios, says Scott Newman, vice president, global investment strategies, with Invesco Canada Ltd. in Toronto. This balance can reduce portfolio volatility and offer inflation protection, he adds. Newman recommends that clients have a minimum of 50% exposure to global equities, including the U.S.

The underlying deterrent among clients is lack of knowledge about the benefits of global investing, says Heather Holjevac, a financial advisor with TriDelta Financial Partners Inc. in Oakville, Ont. Her view is borne out by the behaviour of many Canadian investors.

David Kunselman, senior portfolio manager with Excel Funds Management Inc. in Mississauga, Ont., agrees: “Given that [Canada’s economy] is only 2.5% of the world’s total GDP, [Canadian] investors are grossly overweighted in Canada in their portfolios.”

Despite relatively strong returns in global markets over the past five years, with prices to match, Marshall believes there are opportunities in particular asset classes and regions. For example, Marshall says, the U.S. and European markets offer broader, diversified exposure in sectors related to consumer demand, such as health care. He also sees opportunities in sectors related to consumer consumption in emerging markets, including “consumer staples, consumer discretionary and financials.”

Marshall is not optimistic about the materials sector; in his view, the commodities cycle has run its course for “the time being.” On the fixed-income front, his firm has what he terms a “systematic bias to investment-grade corporate bonds.”

Kunselman believes that emerging markets still hold potential for growth, despite a decade of outperformance, compared with the developed world. Emerging markets have, he says, “generally been steady, as recent elections in these countries have offered hope for policy change. We have seen large movements forward in Mexico, India, Brazil and Indonesia.”

Marshall agrees that it makes sense to have exposure to emerging markets, noting that they remain among the cheapest in the world. However, he cautions, “You have to be selective in picking opportunities.”

Both Newman and Kunselman note that the U.S. market, which has performed well over the past five years, has become expensive. They suggest alternatives such as Europe, where prices for world-class companies remain relatively low, and India, which is growing rapidly.

In terms of asset allocation, opinions vary. Newman suggests that it depends on the circumstances of the individual and that when income is required, risk should be reduced.

Holjevac typically starts with a 10%-20% allocation to global assets, adjusting the mix based on each client’s risk tolerance.

Marshall takes a more structured approach. For investors 55 to 65 years old, he recommends a balanced growth portfolio of 40% bonds, 22% international equities and 19% each in Canadian and U.S. equities. For investors 65 and older, he recommends a balanced income portfolio made up of 60% bonds, 15% Canadian equities, 14% international equities and 11% U.S. equities.

Dwarka Lakhan

Dwarka Lakhan is a pioneer in emerging markets journalism in Canada. His first emerging markets article, “Africa Joins Ranks of the Emerging,” appeared in Investment Executive, Canada’s leading newspaper for financial advisors, in September 1994. Since then he has written hundreds of articles on the full spectrum of emerging markets and has conducted more than two thousand interviews with emerging and frontier markets investment professionals.

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