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By Jonathan Chevreau
National Post
Excerpt from FP Money Section
Saturday, November 13, 2004 |
The surge in the Canadian dollar and renewed calls for Ottawa to relax foreign content restrictions for registered investments were top-of-mind concerns for investors this week.
Adrian Mastracci, investment counsel at Vancouver’s
‘fee-only’ KCM Wealth Management, says, "Rebalancing is an absolutely necessary discipline. That's because rebalancing means selling some securities while they are "high" while purchasing others when they are "low.”
Such cross currents can be confusing. Domestic versus foreign exposure and currency risks are two major considerations involved in the necessary investment discipline known as "rebalancing."
The subjects of last week's profile -- The Wealth Advisory Group's Bill Smith and Rob Bell -- believe now is a good time to "rebalance" back into the United States. They note that American growth stocks are the cheapest they've been in 30 years.
They admit this is never easy because it runs counter to what investors intuitively feel they should do. The all-too-human tendency is to let winners ride rather than redeploy profits to asset classes which have languished.
But rebalancing is an absolutely necessary discipline, says Adrian Mastracci, investment counsel for Vancouver-based KCM Wealth Management Inc. That's because rebalancing means selling some securities while they are "high" while purchasing others when they are "low."
Most North American market indices are showing positive returns since Jan. 1, 2004, Mastracci says, and all have posted healthy gains since Jan. 1, 2003.
Those with more than two thirds of their portfolio in stocks or equity funds might want to consider lightening up on them, Mastracci says. Many clients who recently moved to him had portfolios with 80% or more in equities.
Some may have started out with a more balanced asset mix of 50% equities, 40% fixed income and 10% in cash. If the last two years of market gains took the equities to 65%, investors could prune back to the original 50%, redeploying the proceeds in fixed income.
For those with new cash to invest, it's a matter of scrutinizing portfolios for holes which need to be plugged -- for example, your portfolio may be underweight corporate bonds or equities outside North America.
Rebalancing outside Canada involves additional complications, given the Canadian dollar's increasing strength and expectations of weakness of the U.S. dollar.
This has been positive for investors overweight Canadian securities. And most Canadians are way overweight the home market because RRSPs and pension funds must be 70% Canadian content, leaving just 30% for foreign exposure. Non-registered portfolios are also likely overweight because only Canadian dividends qualify for the dividend tax credit.
Such government-mandated enticements mean most investors have far more exposure to Canadian securities than the 3% position Canada represents in global securities markets.
Given the rise in the Canadian dollar and the Canadian stock market, rebalancing from Canada to the rest of the world would seem a prudent action. This is among the reasons the pension industry continues to badger Ottawa to raise the foreign-content limit.
The government should listen, but relax the restrictions gradually, since a wholesale exodus from the TSX could deflate values and ruin everyone's portfolios.
Looking outside Canada, the U.S. market seems the obvious first choice, since many of its multinationals are global titans. Indeed, many "snowbirds" maintain U.S. dollar portfolios to use for extended stays in Florida or Arizona.
However, with the post re-election rally taking the Dow Jones industrial average well past 10,400, a case could be made that American stocks are fully valued. Couple that with its dual deficit problems and the shaky U.S. dollar and one might conclude a better place to rebalance is outside North America -- in the EAFE (Europe, Australasia, Far East) markets and even the riskier emerging markets.
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