Canada- Keeping the Dream Alive

As a Canadian investor, I certainly have a home bias, allocating 50% of my equity to the Canadian markets. But does this make sense given that Canada generates a minimal share of global economic output? Is it the comfort of knowing Canadian names or is there an opportunity to improve my portfolio by increasing U.S. exposure?

Should I expect.......

• increase- decrease portfolio volatility?

• better diversification to reduce capital risk?

• higher portfolio returns?

• improved income from the portfolio?

With the Canadian markets lagging badly behind their U.S. counterparts in 2023, one is tempted to shift to an increased U.S. focus. But what if I take no action and remain balanced equally between the U.S. and Canadian equity markets? Will patience win out?

In November 2022, I reflected on why owning a piece of Canada made sense. (see Rodney Dangerfield's Canada) Logic dictates that Canada has much of what the global economy needs, despite our small footprint.

The Canadian stock market is very different in composition than the U.S., causing annual results to frequently be divergent (creating a big assist or a large portfolio drawback). If we use 2021 as a recent starting point, we can see the small or large annual differential......

2021

Canada +25.09%

USA +26.89%

.......minor advantage USA

2022

Canada -5.84%

USA -19.44%

....larger advantage Canada

2023

Canada +4.37%

USA 14.85%

.....large advantage (year-to-date,) USA

(as of June 20,2023)

Expanding the time frame to include 2020, one can see the zigzag effect of the indexes underperforming/outperforming, relative to each other.

What causes the wide swings in performance on an annual basis? It does not appear to be a quality issue, political outlook or general opportunity set. It is the sector weighting of the respective indexes.

With Canada, you get a definite overweight in financials, materials and energy (very beneficial in 2022).

In return, Canada lacks the U.S. index exposure to information technology, with the S&P 500 closing in on a 28% weight(Canada's weighting in this sector is closer to 8%).

Year-To-Date 2023

Digging deeper within each sector, the performance so far in 2023 is relatively equal, so it does not seem to be a question of quality or opportunity.

XEG (S&P TSX Capped Energy) -9% YTD

SPN ( S&P 500 Energy) -8.3%

XIT (S&P TSX Capped Information Technology) +36%

IUIT (S&P 500 Information Technology Sector) +41.6%

SPF ( S&P 500 iShares, Financial Sector) -1.6%

XFN ( S&P TSX Capped Financials) + 2.3%

Performance data as of June 20, 2023

In my view, it makes sense to have exposure to all the major sectors. Some will lead and some will lag. The timing is unknown. Canadian banks, energy and base metals have a strong historical record, providing a solid portfolio foundation. I plan to keep my equal weight U.S. and Canadian for the next several years, watching for political or economic changes that might force me to reconsider.

Keeping the Canadian Dream Alive - Patience required!

regards, Tim

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Tim Morton, CFA is a retired portfolio manager with 45 years of experience working with private clients and is the editor of mortonir.com and a contributor to Barron's. My comments are not to be taken as investment recommendations. They are purely for discussion purposes. Please see your registered advisor for investment advice.