Why foreign content and how much should you have?

Over the last 30 years, international markets have generally outperformed Canadian markets. It makes sense to invest globally not only based on historical returns, but also because many economic sectors (e.g. Healthcare) are not significantly represented in Canadian markets. In addition, despite several good years recently, Canada only represents 3% of world stock markets.

However, investing globally is higher risk, partially due to currency fluctuations. What is the best mix? Well, it depends on what time period you look at and whether or not you do monthly rebalancing. The ideal can be anywhere from 60% Canadian/40% Global to 25% Canadian/75% Global. This last example is shown at the right. In this case, monthly rebalancing was used, allowing a greater return overall than either of the constituent indices. Given this wide range of historical outcomes, a 50%/50% split is, in theory, your best bet for future risk/return trade-off.

Minimizing risk in theory is fine, but what about in practice? What are professional money managers doing? Canadian pension plans, in fact, had 54% of their equity investments outside of Canada in Q1 2012 (StatsCan - CANSIM Table 280-0003). That is a sizeable chunk! And Q1 2012 was not unusual. Canadian pension plans have tended to hover close to the 50% foreign/50% domestic mark for the equities portion of their portfolios since foreign investment restrictions were lifted completely in 2005. Adding those equities to the rest of the asset mix (including bonds, short term instruments, real estate, etc.), about 32% of the value of Canadian pensions is made up of foreign investments (StatsCan Daily Review, 2012-09-12).

What is your portfolio's foreign exposure? We would be pleased to review your foreign content (including the foreign holdings in your Canadian funds). Please contact us for a comprehensive Asset Allocation review of your investments.

More on foreign investing

 



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