Author: David Rosenberg

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I was chief economist and strategist for Merrill Lynch Canada in the early 2000s and then in the same role at Gluskin Sheff from 2009 to 2019, and I found that many Canadian investors suffered from a condition otherwise known as “home bias.”

So many seemed so uncomfortable investing in other markets around the world, even though Canada represents a tiny, tiny, tiny three per cent of the total value of global equities. I realize it feels cozy to be investing in banks and retailers you are familiar with, but there is a whole world out there that frequently offers better opportunities.

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Never mind that these folks who are so circumspect about investing in other countries often go on vacations there, and when they go shopping at the local malls, the establishments they frequently visit have their headquarters abroad or in the United States. They don’t mind travelling to other countries; they only mind investing in the companies in those countries. Go figure.

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In any event, Canadian-based investors who only focus their portfolio on the “home country” deserve to be taken out of the woodshed and whipped. They are doing themselves, their families and their clients a huge disservice. That is because if you are investing in the Toronto Stock Exchange, you are investing in a highly concentrated index where 61 per cent of the market cap is centred on just three sectors: resources (which includes energy and materials) and financials. That’s it.

So, not only do these myopic investors have concentration risk on a regional basis, they have doubled up on that concentration risk on a sector exposure basis. The S&P/TSX composite index is not nearly as diversified as most other country benchmarks, nor is it replete with true global brands and champions.

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Want exposure to the consumer? Try just an eight per cent chunk of the composite. Want technology? The globally red-hot space has less than a 10 per cent representation in the composite, which is one-third of the exposure you get, for example, within the confines of the S&P 500. Want exposure to health care? The sector commands the grand total of a 0.3 per cent share of the composite. Health care is 12 per cent of the S&P 500 and almost nothing in Canada.

The S&P/TSX composite is pure value and, as I said, extremely concentrated. Little more than a barbell portfolio with basic materials at one end and the banks on the other. If you want exposure to growth, particularly in technology and health care, you have to go to the S&P 500.

It should be mentioned that Asia is also chock-full of world-class industrial and tech names (Japan in particular). If you want a footprint in global brand names in the consumer luxury space, you must have exposure in Europe, where this space accounts for 20 per cent of the market cap — they simply do not exist in the S&P/TSX composite.

And the proof of the pudding is in the eating. Over the past year, the S&P/TSX composite has done just fine, with a 23 per cent gain in Canadian dollar terms. But the S&P 500 has advanced 33 per cent and the world market is also up a superior 27 per cent. And it’s not just the past year; it’s the past 10: the S&P/TSX composite has risen at an eight per cent average annual rate, about half the 15 per cent performance of the S&P 500 and considerably below the 12 per cent advance in the global MSCI index.

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Since my assumption is that people who invest in equities are risk-takers to begin with, why play it so safe by having all your eggs in one basket? Especially since the name of the game, after all, is to make money, and both the near-term and long-term historical record shows Canadian stocks, in aggregate, to be a laggard.

The bottom line: Move out of your comfort zone and expand your horizons. You’ll feel a lot better about making that decision when you start to receive your monthly financial statements.

David Rosenberg is founder and president of independent research firm Rosenberg Research & Associates Inc. To receive more of David Rosenberg’s insights and analysis, you can sign up for a complimentary, one-month trial on the Rosenberg Research website.

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