The federal government dropped foreign-content restrictions on registered portfolios in 2005, but that doesn’t mean Canadians are flocking to diversify their investments internationally. The robust health of domestic stock markets and the Canadian dollar in the past few years means that most Canadians have probably not been thinking too hard about overseas markets.

However, many investment experts say that with the tail of a bull market likely approaching, there’s no better time to consider taking your registered or non-registered portfolio on a foreign excursion.

“It’s a good time to look at diversifying internationally,” says Hilliard MacBeth, portfolio manager at the Edmonton branch of Richardson Partners Financial Ltd. The strength of the C$ provides investors with some muscle when moving into other markets, he says. “There’s some urgency, because people are behind on this.”

To cushion against a hard landing following a decline in domestic markets, an investor’s portfolio should contain assets in areas unrelated to those domestic markets. MacBeth favours a weighting of more than 50% in foreign content, given current market conditions. “That’s where I’m finding the better choices and it’s a safety measure” against a market correction.

Canadian investors shouldn’t be too comfortable in relying solely on U.S. stocks either, he adds, because the U.S. and Canadian markets are too closely related to ensure true diversification. “When we go into international diversification, we’re looking for uncorrelated assets, and that can be difficult.”

So if your clients want to venture offshore, how can they do it?

> Global Mutual Funds Or Professionally Managed Accounts. Keeping the day-to-day security selection at arm’s length through a fund or money manager is the simplest way to go about adding international investments to a portfolio. The funds can be geographically specific or carry a global mandate.

> Foreign Market Exchange-Traded Funds. These are essentially index funds for a number of stock exchanges around the world and trade just like stocks.

“You don’t get any out-performance that way, but you do get diversification,” MacBeth says, adding that mixing a few ETFs from different regions — Asia, Britain and Australia, for example — is a good way to ensure global diversification. The funds have to be purchased through a broker, so a commission is paid on each trade, but annual fees are lower than those on traditional mutual funds.

> American Depositary Receipts. For those who prefer to be more hands-on, he recommends investors and their advisors take a look at ADRs. Issued by a depositary bank, ADRs are traded in the same manner as shares in U.S. companies. ADRs have a few advantages over dabbling directly in foreign exchanges.

There are more than 200 ADRs trading on the New York Stock Exchange, and others are on Nasdaq, which represents a good variety, says MacBeth. ADRs trade like any stock on the NYSE; the commission depends on the broker.

These investments provide a screening process of sorts, in that the companies have gone through the listing requirements of the NYSE, says MacBeth. “They tend to be the larger, better-established companies in those countries because those are the ones that go through the trouble of getting listed as an ADR.”

EXTRA WORK REQUIRED

He stresses that ADRs require some extra work and due diligence in terms of research. “You want to make sure that there’s backup to what you’re doing,” he says.

The comforting thing about ADRs, however, is that company information is relatively easy to find. Most of the companies that trade as ADRs have research analysts covering them, he says. “And almost all of them have a Web site so you can listen in on the most recent quarterly conference call and get a sense of how the company is doing.”

> Buying Individual Securities. Handpicking foreign securities is not for the weak of heart — or bank account, according to Marty Sims, executive vice president and sales director for private client services, HSBC Securities (Canada) Inc. in Toronto.

“When you get into buying foreign securities on an individual basis, there are fees that you don’t necessarily see,” he says.

Canadian brokerages have to pay jitney fees on foreign exchanges to their affiliates in order for them to execute the trades. These are passed along to the clients, along with a commission on each trade. In addition, some exchanges charge an exchange stamp tax for traders in foreign countries. “Some of those fees can be reasonably significant,” he says. On the jitney fee side, an investor would pay about 10 basis points to the clearing agency. “So that would be one-tenth of 1% of the value of the trade,” he says. Another fee — the exchange stamp tax — varies from exchange to exchange. The NYSE doesn’t charge a stamp tax, for example, while some exchanges, such as the London Stock Exchange, charge a stamp tax on a buy only. Others (such as those in Tokyo and Hong Kong) charge stamp taxes on both buys and sells, Sims says. There are also broker fees and/or commissions on trades.

@page_break@For those who prefer to choose stocks from foreign exchanges without the help of a broker, there is a self-serve option available in Canada. For example, HSBC InvestDirect allows investors to buy individual securities in 16 different currencies around the world. Sims cautions that the service does not offer the research and advisory benefits of the bank’s private client division.

“We provide tools and research on the site but [this service] would really be for people who are comfortable choosing securities on their own without any help,” he says. A flat-fee (between $25 and $29) is charged per trade and the jitney and exchange stamp duties would be the same as for a broker-assisted buy.

No matter which method investors choose when buying stocks globally, they need to pay heed to foreign currencies, says Sims. “You’re bringing foreign exchange risk into the scenario.” It’s not just the price of the stock that can go up and down, but how the C$ holds against the currency in which the stock is held also needs to be taken into account, he says. That’s why he thinks most Canadians, unless they’re fairly sophisticated investors, should stick with a professional manager who can structure a portfolio to neutralize the impact of currency risk.

Richardson Partners’ MacBeth says that advisors can’t afford to ignore the importance of international securities. “If there’s more diversification and more uncorrelated assets, you’re going to have less volatility and then your clients will weather the storm, whatever that storm turns out to be.” This diversification will ultimately protect client retention and even draw more clients into one’s practice.

“I find that clients are impressed when they hear an advisor or portfolio manager discussing international investing with them because it shows a level of sophistication,” MacBeth says. IE