Time for investors to buy local
Investors tend to be very shortsighted, which is why they have been dazzled by the strong performance of the U.S. equity market of late.
Therefore, it isn’t surprising to hear that the hottest investment products being sold by Canadian stockbrokers these days are U.S. stock funds and exchange-traded funds.
Indeed, the top-performing investment managers over the past five years have been those who had the foresight to underweight Canada and/or the materials and energy sectors.
In some cases, global hedge funds have gone as far as shorting the Canadian dollar and its resource and financial services sectors — a trade that has proven very costly over the past two weeks.
That said, it’s important to get some perspective by stepping back and expanding one’s time horizon. In this case, let’s take a look at the performance of the S&P 500 versus the TSX Composite.
From June 1999 through June 2013, we calculate the TSX has gained nearly 73% or 4% per year while the S&P 500 is up nearly 17% overall, representing a paltry 1.1% per year during the same 14-year period.
Most of Canada’s outperformance came during the normalized global economic growth environment from 2002 through 2007 when interest rates were much higher.
Our point is to highlight the importance of holding a well-diversified global portfolio through all market cycles. Unfortunately, investors at times chase previous year’s returns and many overweighted Canada at the top of the cycle in 2008. Now, many are significantly overweighting the U.S., thereby eliminating some of the benefits of diversification.
Who would have thought that having Canada and its energy sector as core holdings in one’s portfolio today would be considered contrarian?
In our opinion, Canada, and especially energy, belong in most globally diversified portfolios, albeit at a reasonable level.
Interest rates will eventually normalize and when that happens, it’s important to have some inflation protection in your portfolio. Canadian oil stocks, for example, offer such protection.
Rather than trying to time the market, we believe in sticking to the long-term fundamentals and gaining the benefits of having at least a minimum weighting (15% to 20% of a balanced portfolio) of Canadian stocks while employing strategies to mitigate downside risk in as cost-effective a way as possible.
Finally, it’s important to periodically rebalance your portfolio to prevent too much concentration in any one sector or country.
The good news is that the recent underperformance by Canadian stocks means there are some excellent value opportunities at the moment, while the strong performance in U.S. equity markets is providing a chance to monetize some gains near all-time highs. Martin Pelletier, CFA, is a portfolio manager at Calgary-based TriVest Wealth Counsel Ltd.