Get clients to invest outside Canada, advisers urged

TORONTO — Going global was the theme of the fifth annual Morningstar Canada Investment Conference held here this…

TORONTO — Going global was the theme of the fifth annual Morningstar Canada Investment Conference held here this month.
Speakers at the conference, noting that most Canadians’ retirement portfolios have less international diversity than they recommend, urged financial advisers to rectify the situation.
But that could be a tough sell to Canadian advisers and their clients.
Most investors globally tend to have a “home bias” and hold a very large proportion of stocks from their own country, said Michele Gambera, senior research consultant and chief economist at Ibbotson Associates Inc., a wholly owned subsidiary of Chicago-based Morningstar Inc. Morningstar Canada is the latter’s Canadian subsidiary.
Nonetheless, Mr. Gambera touted international diversification. “As markets are not perfectly correlated, it reduces volatility. Any North American investor should have a foreign-equity exposure that is, at a minimum, 25% and at a maximum, around 50%,” Mr. Gambera said.
“If prices are efficient, then each country’s capitalization should be represented by the MSCI [All Country World Index],” he said.
Still, home bias is understandable, Mr. Gambera conceded, “because retirees have to buy goods in their local market. Therefore, they will need more equity to purchase the goods, some of which cannot be imported; they need to have a home bias.”
It could be that home bias is especially acute in Canada.
After all, the Canadian stock market has had a “fabulous run,” said another speaker, Patricia Croft, chief economist at Vancouver, British Columbia-based Phillips Hager & North Investment Management Ltd. “But I think now is the time to invest in other areas in the world that represent value,” she said.
Investors are “not being paid for risk in Canada,” Ms. Croft told delegates, saying she takes a “contrarian” stance of adding large-cap U.S. stocks.
Some skepticism
The federal government’s 30% limit on foreign content in tax-
sheltered Registered Retirement Savings Plans — basically the Canadian equivalent of 401(k)s — was eliminated two years ago (InvestmentNews, March 14, 2005). But according to statistics from the Toronto-based Investment Funds Institute of Canada, foreign holdings made up just 25% of total assets held by Canadians in mutual funds at the end of last year.
Is that due to skepticism on the part of advisers or clients — or both?
The Canadian dollar has gained about 7.7% against the U.S. dollar this year and is hitting highs not seen in almost three decades.
“I put much of my clients’ money abroad,” one adviser, who asked not to be identified because of company policy, said in an interview. “On paper, I did very well, but I didn’t hedge, and the rising currency ate up all the profits,” the adviser said.
“My clients don’t care about the economic theory of international diversification. My job is to make them money,” the adviser added.
There has a been an “unprecedented” 50% run-up in the Canadian dollar over the past five years, and that has “severely blunted international returns for investors who went global early,” said Douglas Porter, deputy chief economist and managing director at Toronto-based BMO Capital Markets Corp. But Canadians don’t need to hedge their U.S. holdings if they have a long-term horizon, he said.
“Currency may be your friend in 10 years,” Mr. Porter told the attendees. “The other big topic, and I think this overwhelms the [rise in the Canadian dollar] as a story for financial markets, is this backup in long-term interest rates that we’re seeing right across the board right now,” he said.
“I do believe that after more than 20 years of a bull market in bonds, I think we’re now in a bear market. So we are still recommending an overweight position in equities at this stage,” Mr. Porter said.
“Certainly with strong equity mar- kets, strong global growth, an appreciating currency and rising interest rates, it’s been a real challenge,” said Scott Colbourne, managing director and partner at Cornerstone Capital Partners LP, a Mississauga, Ontario-based hedge fund that focuses on global fixed-income management.
“Some of the most-favored markets in my opinion are Brazil, Mexico and Colombia,” he said. “I think they offer attractive opportunities to investors, both on a real and long-term basis.”
The switch to a more global focus means changes for the Canadian asset management industry, according to Eric Bushell, chief investment officer of the Signature Advisors team at Toronto-based CI Investments Inc.
“The organizations that do not adapt to this changing environment will ultimately perish,” he told conference attendees. “The single-strategy mandate is going to turn into a thing of the past … managers should be given the liberty to seek out the best risk-adjusted returns, wherever they may come.”