Home-country bias is a conversation that ebbs and flows, with U.S. investment returns since the 2008/09 financial crisis reigniting the conversation, said Jon Knowles, institutional portfolio manager in global asset allocation at Fidelity Investments.

However, it’s important to ask how to appropriately deal with home-country bias against a backdrop where one market and limited diversification has been the best thing to do, he noted. “Even if we talk with our colleagues in the U.S., they have a 60- to 70-per-cent allocation to the U.S. already. They’re thinking is that enough or should we have even more? So that’s the backdrop we’re operating in.”

Looking specifically at how Canadian institutional investors have been allocating their capital to Canada over the past decades, Knowles noted 80 per cent of quarterly periods have seen outflows from Canadian equities and 60 per cent for Canadian fixed income. In the mid-2000s, when the foreign property rules were changed, there was a trickle down of diversification, he said, but the macro-environment of lower interest rates in the past few years has also led investors to seek out additional diversification.

Read: Expert panel: Weighing the benefits, pitfalls of investing in Canadian equity

The Canadian dollar also adds diversification, said Knowles. “The interesting part when talking about currencies, instead of bonds or individual stocks, is the fact that it’s generally a relative game. It’s growth in one market relative to another market, so you get a lot more idiosyncratic variables that come into the equation.”

Since the financial crisis, every time there was a decline in global equities, the Canadian dollar depreciated relative to other currencies, he said, acknowledging this is an argument for allocating abroad. “But the coin has two sides to it, where it works in our favour in market drawdowns, but also works to our disadvantage when we allocate abroad when markets are appreciating.”

Sharing a growth chart of 25 different developed markets since the 1900s, Knowles showed Canada has been a top-five developed market in terms of investment returns. “Certainly, we have underperformed the U.S. a little bit, but . . . the best performing market over time has been Australia, which has a lot of the same sort of attributes that we have in Canada. People typically say Canada is over-concentrated, it has exposure to a couple of specific sectors — and big companies within those sectors — and those are all challenges that face Australia as well.”

Looking at the same 120 years of market history, he highlighted the four key market environments that have occurred: falling rate environments, rising rate environments, deflationary stress and inflationary stress.

Read: Survey finds 77% of U.S. institutional investors worried about inflation and interest rates in 2024

Canadian equities have distinct payoffs and risk and return attributes in the different market environments, said Knowles. “In periods of inflationary stress, they have a much more potent diversification benefit, largely driven by some of those sector composition and company-specific details.”

In terms of takeaways, he said the Canadian dollar is one of the most important things to consider because it’s unique to Canadians. “If you’re in the U.S., Europe, Britain or Japan, you have safe haven currencies that don’t benefit from the same dynamics, so we really need to think about it in a differentiated way for Canadian investors.”

And while he acknowledged that Canadian equities get a bad rap globally, they’re tied to the Canadian economy and offer some unique diversification properties that help multi-asset investment portfolios.

Read more coverage of the 2025 DC Plan Summit.