That combination of familiarity, distribution rates, and tax incentives are some of the core reasons that Canadians still have such a strong home bias — according to Dewan. That bias, however, has resulted in more significant sector concentration with Canada’s leading sectors taking up an outsized share in Canadian portfolios. Compared to global markets, Canada tends to be highly concentrated. Even as US stocks come under scrutiny for their growing concentration in a few names, Dewan says that US markets offer far more broad sector and subsector diversification than Canada does.
That concentration, Dewan says, could have contributed to lower risk-adjusted returns. It also leaves Canadians more exposed to risks associated with divergent central bank policy and geopolitical risk.
The downturn in Canadian home bias, however, represents a recognition by investors that they are overexposed to certain risks through their overweight to Canadian equities. Some of that shift away from Canada, however, can also be explained by the remarkable outperformance of US equity markets. Dewan speculates that most of Canadian investors’ allocation away from Canada has been an allocation to US equity markets.
There has also been a huge degree of innovation in investment tools and vehicles over the past 12 years. Canadians have more ETFs and other investment funds designed to access specific niche markets or specific investment strategies. DIY investing has also become more popular, with many younger Canadian investors allocating more globally and agnostically. However, Dewan cautions against DIY investors overestimating their skills. He says that the focus around home bias should largely be one based on best practices and principles. He believes a 30 per cent allocation to Canada and a 70 per cent global allocation can offer a principled, low-variation approach.
As advisors talk to their clients about any existing home bias they may have, Dewan thinks that global context and an understanding of the strategic value of Canadian assets are crucial considerations that need to be mentioned.
