Despite the red-hot performance of the Magnificent Seven, Canadian portfolios continue to hold a significantly disproportionate amount of domestic equities.
A report from Vanguard Investments Canada Inc. finds Canadians are 18 times overweight their domestic holdings, up from 15 times last year.
Canadian investors allocated 50% of their total equities allocation to Canadian stocks (according to International Monetary Fund data from a year ago), despite Canadian stocks accounting for about 2.6% of the global equities market as of April 30.
That’s lower than in last year’s report, when Canadians allocated 52% of their equities allocation domestically. However, the overweight was lower because Canadian stocks made up 3.4% of the global equities market.
Both years’ allocations are an improvement from 2012, when Canadians allocated 67% of their equities portfolios to domestic holdings, Vanguard stated in a release.
“Based on our research, we see a reasonable equity balance of around 30% home bias, in Canadian securities, and 70% invested in non-domestic markets,” said Sal D’Angelo, head of product with Vanguard, in the release.
Similarly, a 2022 study published by Franklin Templeton Investments Corp. concluded that putting 25%–35% of the equities allocation into Canadian stocks was reasonable, with the higher end of that range appropriate for more growth-oriented accounts.
Risks of home bias include “sector concentration, greater volatility and less efficiency with your investments, all of which can contribute to higher risk,” D’Angelo said.
The report found that as of April 30, the top 10 holdings in Canada made up more than 36.9% of the domestic index (and 0.99% of the global market), while the top 10 global securities were 14.6% of the global market. This concentration difference could contribute to idiosyncratic risk, which can be reduced with diversification.
Home bias, which can be attributed to a preference for the familiar as well as corporate governance standards, tax considerations, currency risk and other factors, has been a hot topic this year.
In March, 92 business leaders signed an open letter to Canadian finance ministers asking them to address the state of domestic investments by pension funds.
“Canadian pension funds have reduced their holdings of publicly traded Canadian companies from 28% of total assets at the end of 2000 to less than 4% at the end of 2023,” the letter stated.
In response, the 2024 federal budget proposed the creation of a working group, led by the finance minister and former Bank of Canada governor Stephen Poloz, to explore ways to drive more domestic investment from Canadian pension funds.
Also in the budget, a consultation on modernizing the definition of “qualified investments” asked stakeholders to consider whether updated rules should favour Canada-based investments.
Canada had a foreign content limit for RRSPs and RRIFs from 1971 to 2005, which ranged from 10% to 30%.