Canada has the fourth largest equity market in the world but accounts for just 4% of world equity markets, as measured by market capitalization within the MSCI World Index. So for Canadian investors, it makes sense to look abroad, said Catherine Jackman, vice-president with Phillips, Hager & North Investment Management. Yet investors typically allocate more to their home country equities than to their country’s share of the world equity market.
“You may want to consider a higher allocation to non-Canadian equities,” Jackman added.
“Canada is a concentrated market, and concentration contributes to risk,” she said. “Canadian markets have lots of exposure to natural resources, which can be volatile. Global markets are generally less volatile and more diversified. During certain periods when Canadian markets are turning down, more diversified global equity markets tend to fare less poorly. If you have global investments, you help diversify your portfolio.”
For years, Canada’s foreign content rule limited how much pension plans could invest in foreign equities. But that regulation was lifted a decade ago. “We have [since] seen a shift among Canadian institutional investors away from Canadian equities toward foreign equities,” Jackman said.
Why do global equities matter? Because they are included in most DC plan lineups: you see them inside balanced funds and target-date funds.
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