Oh Canada

"True Patriot Love" can add risk when it comes to "home country bias" in a portfolio.

 A 2012 study by the International Monetary Fund (IMF)

more here: http://www.imf.org/external/pubs/ft/wp/2014/wp14187.pdf

 showed that on average between 2001-2012, approx. 70% of equity assets owned by Canadians were Canadian equity assets.

Interestingly, the rules that limited foreign content in RRSP's were changed in 2005, so that there was no longer any limit on foreign content.

In July, 2014 Vanguard published a study titled : 

Balancing Home Bias and Diversification:

more here: https://www.vanguardcanada.ca/documents/global-equities-tlor.pdf

• The premise of this study is that a diversified global equity index would allocate approx 4% to Canadian equities.
• Canadians only have approx 40% foreign equity in their portfolios.
• In other words, Canadians are, on average, significantly over-weight Canadian Equities.
• This is, in turn, adding a great degree of risk to portfolios because they lack the global diversity that would help to lower risk levels in a portfolio.
• Historically, Canadian equities have had a greater degree of volatility relative to the global equity market, without a commensurately higher level of return.
• Canada has over exposure to the Financial and Energy sectors

According to modern portfolio theory, individual securities, sectors and countries can be combined into portfolios that can have a lower level of risk per level of return than the individual assets held in isolation. This phenomenon is called the diversification benefit and occurs because the correlations among the assets in the portfolio are less than perfect and the universe of securities has expanded. For each level of risk, we can create an efficient portfolio out of the global set of securities that maximizes expected return for each level of expected risk. 

Why don't Canadians look beyond their own borders?

• Familiarity with company names, loyalty to Canadian institutions.
• Dividend tax credit for Canadian companies.
• Concern over currency risk.
• Higher costs for exposure to some global markets.

However, with Exchange Traded Funds (ETF's) costs are being reduced, currency risks can be hedged and you can still own "Canadian" but with significantly less risk.

Makes sense to think about broadening your global exposure and perhaps being a little lighter with Canadian exposure.

The views expressed are those of the author, Scott Tomenson, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.