by Adam Butler, Resolve Asset Management, via S&P Dow Jones Indices
Summary
Many studies have documented the fact that market participants in many regions, including Canada, invest more in the companies from their home country than would be warranted by their countryās share of global markets. Ā Three of Canadaās largest and most sophisticated pension funds have cut Canadian exposure in their equity allocations. Ā Yet private Canadian market participants have so far failed to follow suit. Ā Private market participantsā Canadian equity holdings represent almost 18 times Canadaās share of world markets.
Large, Sophisticated Managers Are Reducing Canadian Equity Exposure.
Canada has several world-class pension plan managers. Ā The Canada Pension Plan Investment Board, the Ontario Teachersā Pension Plan, and the Caisse de depot et de placements du Quebec collectively manage CAD 700 billion. Ā Each has over 1,000 employees with offices in financial centers around the globe.
Itās worth exploring the holdings of these large, sophisticated fund managers to compare and contrast with your other portfolios. Ā Of particular note, all three pension managers have materially cut their portfolio allocations to publicly traded Canadian equities in the past three years. Ā The Ontario Teachersā Pension Plan has lead the way, reducing its Canadian equity exposure to 1.6% in fiscal 2015 from 9.0% in 2012. Ā The Canada Pension Plan cut its Canadian equity holdings to 5.4% from 8.4%, and the Caisse de Depotās allocation fell from 12.6% to 9.0%.
Private Canadian Investors Heavily Overweight Canada
In contrast to Canadian institutions, Canadian private market participants tend to heavily overweight the local market. Ā A 2016 Vanguard study calculated that Canadians held 59% of their equity investments in Canada.
These figures are about 18 times more than Canadaās share of the world equity markets. Ā For example, according to the S&P Global 1200, as of June 30, 2016, Canadian stocks accounted for 3.3% of global equity market capitalization.
āHome countryā bias is a common theme in behavioral economics literature about investing, but a multiple of 18 seems excessive. Ā It means that most market participants are making an active ābetā that the commodity-driven Canadian market will outperform all other global markets and asset classes by a substantial margin. Ā This view appears to stand in contrast to the views expressed by some of Canadaās most respected institutions.
Conclusion: Time to Think Globally
Canadaās most sophisticated institutions have moved to take advantage of global opportunities in their equity allocations. Ā Individual Canadian market participants might benefit from a similar line of thinking.
[1] Canada Pension Plan annual reports for March 2016 and 2013. [2] Ontario Teachersā Pension Plan annual reports for December 2015 and 2012. Ā Calculation of percentages by ReSolve Asset Management. [3] Caisse de depot et placement du Quebec 2015 annual reports for December 2015 and 2012.This article is a publication of S&P Dow Jones Indices LLC. Ā© S&P Dow Jones Indices LLC 2016. S&PĀ® is a registered trademark of S&P Financial Services LLC. Dow JonesĀ® is a registered trademark of Dow Jones Trademark Holdings LLC. S&P Dow Jones Indices LLC is not an investment advisor. This publication is not a recommendation by S&P Dow Jones Indices to buy, sell, or hold a security, nor is it considered to be investment advice.
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