Wealthy Management, by Kim Inglis
Even the CPP doesn’t keep its investments at home
Kim Inglis is an investment advisor and portfolio manager with Canaccord Genuity Wealth management.
Good investors understand the concept of diversification and its benefits in managing risk. However, although many do diversify with individual holdings, the majority falls short when diversifying from a global standpoint.
That's understandable as it's natural to invest in what one knows, which most often means domestic companies with familiar products and services. But there’s a lot of opportunity for investors who look farther afield.
Institutional investors and pension funds have long recognized this. The Canada Pension Fund (CPP), ranked as one of the 10 largest retirement funds in the world, has allocated only 16.7 per cent of its equity holdings to Canadian investments, compared to 69.8 per cent for foreign developed markets and 13.5 per cent to emerging markets. For fiscal 2013, the CPP had a 10.1 per cent rate of return.
The world’s largest pension fund, Japan’s Government Pension Investment Fund, has 43.5 per cent of its equity investment allocated to international stocks and posted 10.2 per cent for fiscal 2012.
Investors who stick to investing at home introduce a lot of risk to their portfolios. There are more than 30 major equity markets globally and Canada represents less than four per cent of world stock market capitalization. The likelihood of at least a few other countries outperforming Canadian markets in the coming years is strong and, just as it’s rare for a specific asset class or individual equity to consistently outperform year over year, the same applies to stock markets. Diversifying globally helps spread the risk that Canadian markets may not provide the necessary performance to boost portfolio returns.
Adding a global lens to the portfolio guards against sector concentration. Nearly 80 per cent of the S&P/TSX 60 is comprised of three sectors — financials, energy and materials. By looking elsewhere investors gain access to sectors — such as healthcare — that are under-represented in Canada.
Accessing markets worldwide allows investors to take advantage of global wealth trends. Credit Suisse reports that global wealth has reached an all-time high of USD 241 trillion and the average wealth per adult is USD 51,600. Analysts believe these numbers will increase 40 per cent over the next five years, with emerging markets accounting for 29 per cent of that growth. More wealth brings more funds available to invest, which bodes well for global markets.
For income investors, global investing provides an opportunity to boost overall portfolio yield. According to Guardian Capital, 58 per cent of world market returns are derived from dividends. In some countries the numbers are even higher. In Australia 73 per cent come from dividends and in the United Kingdom it’s 63 per cent. Although global dividends aren’t subject to the Canadian dividend tax credit, investors can hold most global equities in registered plans for tax efficiency purposes.
Investing globally can introduce some risks, such as foreign exchange and liquidity, and transaction costs can be higher in some international markets. Investors can mitigate these risks by accessing global equities via managed products such as exchange-traded funds or mutual funds. These will provide diversified exposure to the global markets, thereby reducing liquidity concerns, and many can be bought with currency hedging. Transaction costs are often reduced by the sheer size of managed products and the resulting economies of scale.
Kim Inglis, BCom, CIM, PFP, FCSI, AIFP is an Investment Advisor and Portfolio Manager with Canaccord Genuity Wealth Management, a division of Canaccord Genuity Corp., and member of Canadian Investor Protection Fund. Visit www.reynoldsinglis.ca. The views in this column are solely those of the author.