“It just stands to reason that if you’re looking all over the world, you will find better bargains than if you’re looking only in one nation.”



That’s one of my favour-ite quotes from Sir John Tem-pleton, founder of Templeton funds — and my mentor.

Global diversification is important for Canadian investors at this point in the market cycle. The problem is that many Canadians have an overwhelming home bias in their investment portfolios. As of Aug. 31, Canadians had about $129 billion invested in Canadian equity mutual funds, compared with about $65 billion invested in global and international equity mutual funds.

That 2:1 margin is astonishing when you consider the fact that Canada’s equities market makes up less than 5% of the world’s public equities markets.

When I speak with investment advisors, I hear the same arguments about why it makes sense to stay in Canada and, in some cases, Canada alone. Unfortunately, these perceptions are a recipe for weak returns over the long term:

> Perception 1: Canada Is A Major Supplier To The Engine Of Global Growth. Canada’s economic growth in recent years has soared as a result of demand for our natural resources. We are indeed open for business, yet continue to lose one major company after another to foreign corporate interests.

Today, Canada controls about 10% of the global energy, materials and mining sectors. Suncor Energy Inc., our largest energy company, has a stock market value of about one-sixth that of U.S.-based Exxon Mobil Corp.

Don’t get me wrong — Suncor is a well-managed company with great growth prospects. The point I’m trying to make is that many more companies beyond our borders may benefit from global growth.

> Perception 2: The Canadian Dollar Has Nowhere To Go But Up. The C$ crossed the parity threshold with the U.S. dollar in the spring of this year. Demand for commodities and a weak US$ may keep the two currencies neck and neck through the balance of 2010.

But the average valuation of the C$ for the past 30 years is about US83¢ — far below today’s US95¢ range, but significantly higher than the January 2002 all-time low of US61.8¢. Future weakness cannot be ruled out. A downturn in commodities markets or a strengthening US$ could quickly deflate the loonie.

> Perception 3: It’s Not The Right Time To Invest In Global Equities. Foreign economies have a staggering amount of capital to finance growth. China alone has some US$2.4 trillion in foreign-exchange reserves. Japan has US$1 trillion in FX reserves at its disposal. Canada? About US$57 billion.

Meanwhile, there’s a vast discrepancy between the size of Canada’s domestic equities market and our global economic footprint. Domestic stocks represent about 57% of the stocks held by Canadians in their portfolios. Yet, on the world stage, Canada’s gross domestic product represents a tiny 2.3% of the global economy.

Consider your own buying patterns: you drive your Honda home from the office and fill up at Esso on the way; dinner is cooked on your GE stove and washed down with a Coke as you settle in to watch the big game on a Sony HDTV. Before bed, you check your email on an Apple computer, do a Google search and print the results on your HP printer.

All of these companies have a substantial presence in Canada.Yet, for investors, gaining equity exposure in them is easier said than done; none is publicly traded in this country. In theory, small investors could make an investment in each stock via foreign stock exchanges and some complex and costly currency transactions.

My Canadian passport is one of my most valued possessions. But when it comes to my investing portfolio, global exposure through an international stock fund is
essential. IE



Don Reed is president and CEO of Toronto-based Franklin Templeton Investments Corp.