National Post (National Edition)
Canada’s oligopolies have been winners
The outperformance of the U.S. equity market since the financial crisis compared to the Canadian equity market has not only commanded a lot of attention but is also having an influence on where we currently invest. This isn’t surprising given the return gap is nearly double since then for those who decided to move their portfolio’s south of the border compared to those who stuck closer to home.
That said, a lot of this has to do with our resource-driven economy and its resulting large weighting in the S&P TSX. For example, if one expanded out the comparison of the S&P 500 to the S&P TSX back to January 2000, this return gap is quite narrow with the TSX actually outperforming with a 6.31 per cent compounded annual return versus the S&P 500’s 5.32 per cent. No doubt that the bull run in commodities captured from 2001 through to 2008 played a huge roll in this.
When moving beyond energy our nation has become a land of oligopolies. Sectors like our banks and telecommunications have become highly concentrated and protected from outside threats due to government legislation and our relatively small population that is geographically dispersed.
This lack of outside competition has allowed these companies to not only maintain their market share but also retain some very robust profit margins on their products and services. While this isn’t good for consumers who have little choice but to accept exceptionally high wireless, banking and investment fees these sectors have been a great place for investors especially when compared to their peers south of the border.
The telecommunications industry in Canada is dominated by four major players, BCE Inc., Rogers Communications Inc., Telus Corp. , and Shaw Communications. Compare this to the U.S. Telecommunications sector with over 19 public companies dominated by five major companies including AT&T, Verizon Communications, T-mobile US, Sprint Corporation and Centurylink.
It gets real interesting when looking at both sectors from a return perspective over the same period of broader S&P 500 outperformance.
Since January 2008, we calculate that a market cap weighted index of the four aforementioned Canadian telecommunications delivered an 8.59 per cent annual compounded growth rate with a relatively low standard deviation of 12.57 per cent.
This compares to a market cap weighted index of the aforementioned five U.S. telcos that delivered a 6.33 per cent annual return and 16.46 per cent standard deviation.
This gap gets even more pronounced when looking at the Canadian financial services sector.
The ishares S&P/TSX Capped Financials Index is dominated by the Big-5 Canadian banks en- compassing over 65 per cent of the index. Compare this to the five largest U.S. banks that make up only 22.5 per cent of the U.S. Financials sector.
As a result, we calculate that the ishares S&P/TSX Capped Financials Index ETF (XFN:TSX) has earned a compounded annual growth rate of 7.11 per cent with a standard deviation of 15.69 per cent since January 2008. This is vastly superior to the ishares U.S. Financials ETF (IYF:NYSE) that gained only 3.94 per cent with a much higher standard deviation of 21.93 per cent.
It doesn’t get much better when comparing a market cap weighted index of the Canadian banks to a cap weighted index of the five largest U.S. banks. The Canadian banks delivered a 10.7 per cent annual compounded growth rate with a 15.76 per cent standard deviation while the U.S. banks gained only 5.81 per cent but with a much larger standard deviation of 32.84 per cent.
In conclusion, for those giving into their inner fear-of-missing-out (FOMO) and looking to allocate even more funds to the U.S. equity market, perhaps it’s worth doing a bit of homework first especially if you have the ability to dictate how long and which sectors to invest in.