Monday, 23 April 2007

Investing in Canadian vs International Equities

Just came across a fascinating article on the CTV website titled "The identity crisis that will change the TSX" that was published in Saturday's Globe and Mail. Midway through it is a key phrase - "the Toronto Stock Exchange is becoming a market of smaller companies clustered in a narrow range of industries". The narrow range works out to financial, energy and mining.

The article is another good reminder about the need for Canadian investors, me included, to reduce equity holdings in the TSX to a minor portion - 10% or less - of the equity portfolio.

One of the benefits of moving to Scotland is that the distance adds perspective. It is easier to see how foreigners view Canada and to see Canada in its true place in the world. With respect to investment, Canada is a minor player, valuable primarily as an additional diversification element through resources.

The article also mentions the small cap nature of most of the TSX, so it can also play a small cap role in a portfolio (as we all know, small caps over long holding periods like twenty years, have been shown to give higher returns and to have weak correlation with the overall market, which in turn offers diversification benefit). Martin Gale over at Efficient Market Canada has an excellent article showing how the actual world equity market proportions work out - Canada is just over 3% of the total - and he uses this to show how a truly global portfolio would be structured, even to the names of the funds to buy. The reassurance of investing in what one knows about - domestic companies - is a great hazard as a result of the extra risk through inadequate diversification. (It's the same here in the UK. I'm in the midst of helping a friend do a portfolio makeover and that portfolio was 100% in UK equities yikes! ... through a raft of different mutual funds yikes! ... more on that in a future post).

Since I was due to do my semi-annual portfolio re-balancing in May, I will be doing some fairly drastic re-allocations along these lines, about which I will be posting down the road.

In my poking around review of UK online brokerages, I came across TD Waterhouse, the UK version. It offers what seems to be a wonderful account for those interested in international investing and diversification. Through one account, it is possible to trade directly on 15 different exchanges around the world, including Canada, the USA, the UK, various other European exchanges, Australia, Hong Kong and Singapore. In addition, the holdings can be in four different currencies - Canadian and US dollars, sterling and euros. The trade costs are not the lowest at £12.50 for online trades (around CDN$ 30) but that's a lot better than the $100-200 BMO Investorline had told me a few years ago that it would cost to buy UK securities. Unfortunately the account is only available to UK residents and it doesn't look like TD Waterhouse Canada offers a similar one but it sure looks to me like it would be a smart thing to offer.

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