Home truths

We are admonished almost chronically to cross the border for investing. That is one of those permanent suggestions, followed nowadays by the Canada Pension Plan and endowment funds throughout the land.

The reasons for such diversification are spelled out. The top holding of the leading mutual funds represent more than one-third of the Canadian TSE Index. Still, Canada embodies only 3.6 per cent of the world’s stock market capitalization. By concentrating on Canadian investments investors here are not fully diversified across the global markets.

Canadian investors’ concentration on the energy and financial sectors pretty well excludes health care, bio-tech, and much of the technology sector. Yet, it clearly ignores the developing countries and their start-up sectors.

Does the over-weighting of our domestic holdings at the expense of foreign securities make financial sense? That means automatically ignoring some phenomenal companies such as Apple or Microsoft.

The Canada Pension Plan’s operation expense of $490 million under-estimates by $782 million the cost of external management, $173 million on transaction cost, plus $586 million on collection premiums and distribution cheques bringing the total cost of these operations to about $2 billion. These numbers do not include the extra expense of monitoring foreign holdings.

Taxes on U.S. investments are higher than for Canadian ones, and that helps to justify Burger King’s takeover of Tim Hortons. Still, the CPP has been successful, but net the advantage is much less than is realized.

Furthermore, currency fluctuations may work against the purchase of non-Canadian Investments. If our dollar recovers to its usual relationship to the U.S. counterpart, this could prove to be very costly to Canadians.

One probably should question the dysfunctional U.S. government – compared to ours – as well as the rising cost of health care across the border.

In addition, at the beginning of the this year Canadian shares were trading at a substantial discount to  the U.S. market. That gap may return, and for Canadian investors taking advantage of that would have better performance. Logic also suggests that our smaller market should present more opportunities for expansion than the U.S. one.

Over the years we have been urged to invest in foreign securities. All but ignored is the inadequate security regulation in foreign markets where supervision is much more tax. Despite pleas to the contrary,  buying Canadian is not only more patriotic, but probably is more rewarding financially over the long term.

Finally, there is every reason that our financial resources remain in Canada, in both stock markets, but also in infrastructure projects that will pay for themselves.


Bruce Whitestone