Tuesday 15 May 2007

Internationally Diversified Portfolios from IFA - US vs Canada

Now that Index Fund Advisors has opened up shop in Canada, there is the chance to see how some real experts approach the issue of building an internationally diversified portfolio based on principles of modern finance in two different countries - Canada and the USA. The websites of IFA Canada and IFA USA each present a series of twenty model portfolios with varying amounts allocated to various fixed income and equity asset classes.

For comparison, I've chosen a portfolio allocation that interests me - 70% equities and 30% fixed income - but you could pick any range from 0 to 100% for either asset class. It is extremely interesting that the Canadian version includes a hefty 16% Canadian equity allocation while there is zero separate Canadian allocation in the US version. This is apparently in keeping with the home company bias every country has. It isn't justified by finance theory that says a country's weight should approximate its value portion of the whole world, which is 3-4% in Canada's case. However, this makes no effective difference to the risk/volatility profile or the diversification effect since Canada's long term correlation with the US market is in the mid 90% area. It's a good illustration of the principle that in order to be an asset class, a grouping of equities needs to move up and down differently than, aka be uncorrelated with the other.

Another big difference is that Emerging markets is completely absent from the Canadian portfolio while it takes up 8% of the US portfolio. This time the problem is apparently that it is impossible at the moment to create the Emerging markets component in Canada ... it is apparently to be resolved by next year. Similar difficulties must explain the lack of breakdown in the fixed income portion into Global and Government components seen in the US version. The total number of holdings in the Canadian list is 12,924, much less than the 16,540 in the US list but it is still an awesome number.

IFA has just barely launched in Canada so it is a player worth watching and considering, given the high quality of its products in the USA.

1 comment:

Jordan said...

I'm new to indexing and just researching IFA Canada as an option. As I look at the Indexfolio "70" there is now emerging markets at 4.25%

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