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Why International Diversification Benefits Canadian Investors

Apr. 13, 2018 4:12 PM ET2 Comments
Kurt Reiman profile picture
Kurt Reiman

Our annual ETF Investor Pulse survey shows that Canadian investors invest three-quarters of their portfolios domestically, exhibiting a large "home bias" - the tendency to prefer domestic over global securities. Although this bias is not unique to Canada, the implications are greater for Canadian investors because the domestic equity market is smaller, narrower, and contains large sector tilts. In our view, geographic diversification is as important as asset class diversification for Canadian investors. To make the case, we provide three examples that demonstrate how international equity exposure can enhance portfolio performance.

Participating in the global growth story

It's easier for Canadian investors to achieve a portfolio with substantial home bias because unlike the U.S., Japan, and Europe, Canada's economy and financial markets are a relatively small share of the overall pie. Canada represents just 3% of the world equity markets based on MSCI data and an even smaller share of global GDP according to the IMF (it's just 1.4% in case you were wondering). It's a big world out there. Limiting a portfolio to Canadian stocks ignores over 95% of the investment universe.

Some argue that because the Canadian stock market includes multinational companies, it reduces the need to invest in foreign securities. Although true, the exposure is insufficient. For one, there is simply no substitute for gaining direct exposure to industry leading firms, many of which are found internationally (for example, European luxury goods, U.S. technology). Additionally, earnings outside of Canada tend to be more sensitive than Canadian earnings to global economic activity (see the chart below). A Canadian-centric investor may feel like they're missing out during economic expansions. Moreover, global stocks have delivered a slightly better return on equity this century than Canadian listed companies, despite wide variability across geographies and time.

The chart above paints an overwhelmingly

This article was written by

Kurt Reiman profile picture
Kurt Reiman, is BlackRock’s Chief Investment Strategist for Canada. Previously, Mr. Reiman’s held a role as a Global Investment Strategist for BlackRock where his responsibilities included relating the Investment Strategy Team's research and investment views to key institutional and financial advisor clients and offering perspective on all asset classes - including equities, fixed income, alternatives and multi-sector approaches to investing. Mr. Reiman joined the firm in 2013 with over 15 years of experience in investment research and strategy. Prior to joining BlackRock, he was the Head of Thematic Research at UBS Wealth Management in Zurich and New York. Mr. Reiman also held analyst positions at Reuters and the G7 Group. Mr. Reiman earned a BS degree in business and economics from the State University of New York College at Plattsburgh and his MS degree in international relations with a concentration in international economics from the Johns Hopkins University School of Advanced International Stud

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