Clark Wealth Management Group - ScotiaMcLeod Fredericton

When we look at mutual fund flows in the past we see a clear correlation between a fund categories recent past performance and investors purchase and sell decisions. Generally investors will invest en masse in the most recent best performing asset class. This is known as buying high.

Similarly, we see funds flow out of investment categories classes that have had poor returns most recently as discouraged investors give up and move what’s left to something they hope will perform better. This is known as selling low.

These fund flows also reflect the emotional state of investors. If investors are fearful, as is now the case for many, they will buy what they see as safe and familiar. This helps explain why people would be buying GICs at near zero rates of return and why in February 2010 mutual fund investors were net sellers of equity (particularly global) funds. Mutual fund investors poured money into Canadian balanced funds (73% of net purchases) and bond funds (25% of net purchases). That means that only 2% of net new purchases went to equity funds.

Given the amounts involved it is not just unguided investors who are doing this. Fund flows suggest that some advisors have encouraged clients to sell global equity investments and buy Canadian balanced and bond funds. People feel comfortable with Canadian balanced funds because they recognize the names of the top companies in the fund (e.g. Canadian banks, insurance companies, etc). They also appreciate that there is a portion invested in bonds.

However, given the relative size of Canada’s market and economy on the world stage, is selling all global investment exposure and buying Canadian the right thing to do? While we have some good businesses to invest in here in Canada, it’s safe to assume that all the best investment opportunities are not Canadian. Indeed, some important economic sectors are scarcely represented here at all.

Investing Globally, with the Canadian and US dollar near parity, is attractive at this time. In terms of valuations, many global markets have not gone up like the Canadian market over the past few years so there may be “buy low” opportunities there.

Most people agree that economic activity, wealth creation, and investment opportunities are aligned with population to some extent. With that in mind, consider this; In Canada there are about four cities with populations larger than one million. In the USA there are about nine cities with populations larger than one million while in China there are around one hundred and seventy cities with populations of greater than one million people. With a population this large building affluence and chasing the middle class dream there are bound to be opportunities for investors.

A decade ago the notion that investors should consider investing a portion of their portfolio in so called emerging markets like China and India was almost unthinkable. Political corruption, market manipulation and fraudulent accounting practices made these regions too risky for consideration.
In the past ten years there have been significant reforms in many of these emerging markets that have led to increased political stability, improved corporate governance and better fiscal and monetary policies. Many of these Countries are in better fiscal shape than so called developed market economies.

Take a sensible approach. I’m not suggesting that investors should be either abandoning Canadian equity, balanced and bond investments, or loading up on emerging markets investments. As a core strategy investors should be sticking to a disciplined investment plan, based on diversifying risk through asset allocation. As you might expect this will likely involve continued investments in other parts of the world – including the faster growing emerging markets.

If you are inclined to or being encouraged to follow the crowd and move a large chunk your money into exclusively Canadian balanced or bond funds, you should reconsider the investment discipline that led you to that decision. Assuming there are no good opportunities outside Canada is a very large (and likely incorrect) assumption.

As with all investing, it should be done carefully. Remember, history doesn’t repeat itself exactly, but it certainly rhymes.

Keir Clark, is a senior wealth advisor, with Clark Wealth Management Group and branch manager at ScotiaMcLeod in Fredericton, NB. He can be reached online at www.keirclark.ca or by telephone at 506-450-6465.

Information and opinions contained herein have been compiled from sources believed reliable but no representation or warranty, expressed or implied, is made as to the accuracy or completeness.