Is it time for investors to reduce their exposure to Canadian equities? At the risk of sounding like a disapproving parent, for some investors the answer may be yes.
If you’re a regular reader of this newspaper, chances are you’ve read some columnist (either me or someone else) preach the virtues of diversification. The reason is simple: diversification is the easiest, most effective strategy for protecting your portfolio.
However, a survey conducted in February by Toronto-based Environics Research demonstrates that many Canadians don’t like to venture beyond this country’s borders when it comes to their investments. Among 1,000 “affluent individuals” (those with more than $250,000 in investable assets), the average respondent replied that 64% of their family’s equity portfolio was allocated to Canada. The typical respondent planned to lower the number by a measly 2% over the next year.
No only do these actions conflict with the usual advice about diversification, they also run contrary to what high-net-worth individuals (those with $1 million or more in investable assets) have been doing over the past several months.
Based on discussions with high-net-worth individuals and with adviser colleagues, I would say “home country bias” is disappearing rapidly. I estimate the portfolio of the average high-net-worth individual I know is now allocated perhaps 40% to 50% to Canadian equities, with plans to reduce the number even further in the months to come.
Is there a lesson here? I believe there is. There’s a big difference between affluent and high-net-worth individuals, and it has a lot more to do with attitude than net worth.
The high-net-worth crowd has already hit its financial home runs; while growth is still important to it, preservation of wealth is its primary concern. Wealthy investors have a deeper understanding of the cyclical nature of business and stock markets. As a rule, they know good times don’t last forever; they realize there are times in the cycle to lock in profits. All this leads to a keener awareness of the importance of diversification.
Before anybody accuses me of Canada-bashing, let me say I understand the rationale for overweighting Canadian equities. Our stock market has had an extraordinary run over the past several years. Our economy is in better shape than that of many other countries. Our financial sector came through the recession relatively unscathed, and other sectors (energy and agriculture) have long-term tailwinds behind them.
But allocating 64% of an equity portfolio to a single market is an astonishing level of concentration. This is particularly true when one considers how highly concentrated Canada’s equity market already is: energy, materials and financials make up the bulk of the market cap. These people are piling concentration upon concentration, and accepting a tremendous amount of risk.
Is there more upside in Canada? Yes, absolutely. But the wealthy are learning where there are opportunities to diversify, find value and reduce risk.
If you’ve had 64% of your portfolio in Canadian equities over the past two to three years, you’ve probably done very well. But it’s time for an asset-allocation decision. The wealthy are beginning to take some “Canada” off the table. Perhaps it’s time for you to consider doing the same. •
