Iran deal may have scuttled oil price recovery in the medium and short-term and offers advisors the most compelling case for why home country bias could ruin returns given our oil dominated securities markets.
The big story out of Washington Tuesday was the deal between the world’s superpowers and Iran that will see the country dramatically reduce its nuclear capabilities over the next 15 years. While not a sure thing to pass in Congress, advisors here in Canada are facing down the barrel of an increasingly problematic home country bias that could see some clients experience significant losses if overly Canada centric.
In late June New York RIA Barry Ritholtz wrote a column for Bloomberg View discussing this very subject. He pointed out that while U.S. investors were guilty of home country bias, Canadians, along with the Brits, take first prize for overdoing it when it comes to investing at home.
“Now consider the typical domestic portfolio in Canada, which accounts for 4 percent of global equity capitalization. According to a recent survey from the International Monetary Fund, Canadian investors allocate a mere 40 percent of their total equity investments outside Canada,” wrote Ritholz. “Their local allocation to Canada is about 10 times what it should be. The numbers are similar for the U.K. The considerably smaller size of these markets means that these home country biases create a significant overexposure to home country companies. Radically reduced diversification is the net result.”
There is the argument to be made that Canadians just don’t like to play the currency game which is the case whenever they wander outside the country. The loonie rises and falls in reaction to events beyond our borders that we have very little control over; it’s only human nature to avoid these currency swings. In addition, it’s only natural to invest in companies you’re more familiar.
However, advisors should know better.
“I think its critical that advisors educate their clients on the short comings of the Canadian equity market in particular. That they help them understand that it is a highly concentrated market dominated by 3 sectors – materials, energy and financials which total about 70% of the TSX,” Bellwether Investment Management CEO Bob Sewell told WP. “They need to at least look at their investing through a North American lens if not a global lens to gain broad exposure to all sectors of the global economy.”
So, WP asked Sewell if advisors were getting the message.
“Unfortunately, when we review existing portfolios of prospective clients we see a heavy bias to Canada and often a further allocation to energy companies,” said Sewell. “Our sense is that at least some advisors aren’t revisiting their client’s asset mix and making tactical adjustments to reflect the current risk/reward potential of the global markets.”
In late June New York RIA Barry Ritholtz wrote a column for Bloomberg View discussing this very subject. He pointed out that while U.S. investors were guilty of home country bias, Canadians, along with the Brits, take first prize for overdoing it when it comes to investing at home.
“Now consider the typical domestic portfolio in Canada, which accounts for 4 percent of global equity capitalization. According to a recent survey from the International Monetary Fund, Canadian investors allocate a mere 40 percent of their total equity investments outside Canada,” wrote Ritholz. “Their local allocation to Canada is about 10 times what it should be. The numbers are similar for the U.K. The considerably smaller size of these markets means that these home country biases create a significant overexposure to home country companies. Radically reduced diversification is the net result.”
There is the argument to be made that Canadians just don’t like to play the currency game which is the case whenever they wander outside the country. The loonie rises and falls in reaction to events beyond our borders that we have very little control over; it’s only human nature to avoid these currency swings. In addition, it’s only natural to invest in companies you’re more familiar.
However, advisors should know better.
“I think its critical that advisors educate their clients on the short comings of the Canadian equity market in particular. That they help them understand that it is a highly concentrated market dominated by 3 sectors – materials, energy and financials which total about 70% of the TSX,” Bellwether Investment Management CEO Bob Sewell told WP. “They need to at least look at their investing through a North American lens if not a global lens to gain broad exposure to all sectors of the global economy.”
So, WP asked Sewell if advisors were getting the message.
“Unfortunately, when we review existing portfolios of prospective clients we see a heavy bias to Canada and often a further allocation to energy companies,” said Sewell. “Our sense is that at least some advisors aren’t revisiting their client’s asset mix and making tactical adjustments to reflect the current risk/reward potential of the global markets.”
