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Home-based stocks make up over half of equities allocated to portfolios when it should be more like 30%
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Canadian investors have a bad case of “home bias” and should significantly reduce the share of local equities in their portfolios, investing giant Vanguard Investments Canada Inc. suggests in a new report.
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The report, released on July 11, found that home-based stocks represented 52.2 per cent of the average Canadian equities share of a portfolio. The optimal portfolio breakdown is 30 per cent Canadian stocks and 70 per cent international based on a risk formula created by Vanguard, meaning the average Canadian investor who wants to shake up their holdings has some work to do to achieve that mix.
“Despite the benefits of diversifying a portfolio globally, home bias has been strong among Canadian investors,” said Bilal Hasanjee, author of the report and a senior investment strategist at Vanguard Investments Canada.
Hasanjee acknowledged there are good reasons to be overweight the home team, among them tax considerations, currency hedging and “preference for the familiar.”
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Canadians aren’t the only ones guilty of home bias, either. In fact, they aren’t even the worst culprits. The report noted that investors in the United States, Australia, Japan, the United Kingdom and the euro area were also significantly overweight local stocks.
However, Vanguard said the average Canadian portfolio tended to be over-concentrated by security and sector. “Canadian investors are exposed to a considerable amount of risk that could have been diversified away,” Hasanjee said.
The top 10 holdings of Canadian investors showed their weight on the local index far outstrips their weight in equity markets.
For example, the Royal Bank of Canada, the top holding, had a local index weight of 6.45 per cent but a global equity weight of only 0.19 per cent.
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Further, the top 10 list, which also includes Toronto-Dominion Bank, Enbridge Inc., Shopify Inc., Canadian Pacific Kansas Railway Ltd., Canadian National Railway Co., Bank of Nova Scotia, Bank of Montreal and Brookfield Corp., showed that investors mostly have exposure to two sectors: financials and energy with some in materials and utilities.
“This results in information technology, health care, consumer discretionary and consumer staples being underweight relative to the global market,” the Vanguard analyst wrote.
So how did Hasanjee arrive at the 30/70 split for equities?
He took a 100 per cent equity portfolio and 60/40 portfolio gradually dropping the exposure in Canada versus world equities to find a volatility sweet spot.
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Among the factors considered in the calculation were home-country preferences, potential volatility of returns and volatility reduction from diversification, the degree of market-sector concentration, costs such as taxes and trading, currency impacts and regulatory restrictions.
Despite the findings, there are signs Canadians are starting to rely less on home equities for returns. Data on domestic investment trends from the International Monetary Fund showed equity home bias declining from approximately 66 per cent in 2012 to the current 52.2 per cent in 2022.
Pensions are also getting the message about diversification, the Vanguard report said.
The average home bias weight of pensions in Canada, Australia, Japan, Netherlands, Switzerland, U.S. and U.K. dropped to 37.7 per cent in 2022 from 67.1 per cent in 2002.
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The Bank of Canada raised the key overnight interest rate by another 25 basis points to five per cent — its highest level since 2001 — as governor Tiff Macklem suggested residual pandemic savings have delayed the impact of efforts to rein in inflation.
The July 12 rate hike, the latest in a series of aggressive hikes that started in early 2022, came despite some easing in inflation including lower energy prices.
Read the full story from the Financial Post’s Barbara Shecter.
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Rules for negative amortization mortgages to change
What economists are saying about the Bank of Canada rate decision
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Canada’s population continues to age, and the number of retirees grows annually, so it may finally be time for the government to consider some simple tax system reforms as they relate to encouraging, and prolonging, Canadians’ retirement savings. Tax expert Jamie Golombek explains here.
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Today’s Posthaste was written by Gigi Suhanic, (@gsuhanic), with additional reporting from The Canadian Press and Bloomberg.
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