Canada can be a great place to invest, especially when our resources are in demand and the Canadian dollar is flying high. However, many Canadian investors are missing out on international opportunities by overweighting their portfolio with companies that are closer to home. A “home-country investing bias” may lead to concentration risk and potentially lower returns over the long run.
There are a number of reasons why Canadians favour investing at home, including loyalty and familiarity with Canadian companies, as well as the perception that investing abroad is too risky, however, Canada only represents 3.4% of the global economy opportunities.1 Investing globally can provide exposure to the world’s full spectrum of developed and emerging economies.
Canadian retail investors might want to examine the approach taken by the Canada Pension Plan Investment Board (CPPIB), one of the most highly regarded pension fund managers in the world. The CPPIB holds only 31% of its investments in Canada.2 It capitalizes on opportunities in other geographical markets and reduces risk by spreading exposure across countries which may be going through different stages of the business cycle.
A broadly diversified portfolio with exposure to various geographical regions and sectors has the potential to smooth out volatility, mitigate downside risk and enhance return potential over the long term. Canadians who only invest at home risk limiting their opportunities and face a greater concentration of risk in their portfolios. Investors should look abroad to achieve greater diversification.
Outperformance of the Canadian equity market is typically followed by an extended period of outperformance in global equity markets.
Source: Morningstar, as of December 31, 2014. Represents difference in rolling 5-year returns between the S&P/TSX Total Return Index and MSCI World Index (in CAD).
- Source: Based on MSCI World Index TR (July 31st, 2015)
- Source: Canada Pension Plan Investment Board (CPPIB)