Canadian investors are overweight in domestic stocks, resulting in increased exposure to certain risks.
A report by portfolio consultant Ashish Dewan at Vanguard Canada reveals that Canadian investors have a high “home bias,” favoring domestic equities over global ones. The report states that Canadian securities make up 2.6% of the global market, but account for about half of Canadian portfolios. This bias results in security and sector concentration, inefficient portfolio allocation, and exposure to idiosyncratic risk.
Vanguard Canada recommends a 30% Canadian equities and 70% international equities asset allocation for Canadian investors due to a trend of falling domestic preferences among individual and pension investors. The recommendation is based on historical evidence, diversification benefits, and the unique circumstances of individual investors.
Canadians should consider their exposure to Canada and increase global diversification. D’Angelo encourages clients to think globally and invest globally, avoiding over-concentration in Canada to avoid biases and overexposures, which can increase portfolio risk.
Canadian Investors’ Home Bias Reduction
- Investors in Canada and other developed countries are gradually reducing home bias in their portfolios.
- Many are moving towards global equity allocations.
- Canada leads in decreasing home bias from 67% to 50% since 2012.
- Australia and Japan have reduced home bias by 4% and 6% respectively.
- U.S. investors have only marginally reduced home bias from 83% to 81% since 2012.
Home Bias Risks for Canadian Investors
- Canada’s concentration in domestic securities is higher than global market.
- Top 10 holdings in Canada constitute over 38% of the index, compared to approximately 12% in global market.
- This concentration could lead to “idiosyncratic risk,” unpaid risks for investors.