Investors ditching home country bias – and how!

Investors ditching home country bias – and how!

Investors ditching home country bias – and how! Over the last year, investors have taken more than $12 billion out of Canadian equity mutual funds and ETFs. During the same period, $21 billion was pumped into the foreign equity versions of the same product types.

“The performance disparity between Canadian and foreign stock markets is no doubt the key driver at play here,” says James Gauthier, Head of Investment Fund Research, HollisWealth, “as the Canadian market underperformed several key foreign equity benchmarks over periods of one, three and five years, as well as on a YTD basis.”

Year-to-date and one-year equity market returns to July 31 were just the cherry on top of a period of extended outperformance on the part of foreign benchmarks. This has not been lost on investors, as flows into Canadian-domiciled equity mutual funds and ETFs have heavily favoured non-domestic products, while offerings focused on the Canadian stock market have been dropped like hot potatoes.

“As you often hear in investment ads, past performance is not indicative of future performance,” says Gauthier. “But it is often indicative where the money flows.”

Over the past 12 months, investors have taken more than $12 billion out of Canadian equity mutual funds and ETFs. During the same period, $21 billion was pumped into the foreign equity versions of the same product types.

“The performance challenges domestically were only made to look worse as the weak loonie juiced the Canadian dollar returns of U.S. and global stocks,” he says. “Any Canadian who elected to invest abroad five years ago looks like a hero today, and no doubt the performance of the past is being chased as hopeful investors bet on further foreign equity gains.”

Advisors have likely noticed that U.S. and global equity product launches have been a regular occurrence, whereas there has been very little in the way of new ETFs or mutual funds with a Canadian equity focus.

“Product manufacturers are always happy to take advantage of industry sales trends,” he says.

So when will this trend end or reverse?

“That will totally be a function of the performance of the markets moving forward,” says Gauthier. “The efficacy of using fund flows as a predictive indicator can be debated, but what’s for certain is that fund flows rarely ramp before an extended period of strong performance.”

 
Returns to 7/31/15, all in C$
Name YTD 1 Yr 3 Yr 5 Yr
MSCI EAFE GR CAD 21.4 19.7 23.0 13.7
MSCI World GR CAD 17.8 26.1 25.5 17.7
S&P 500 TR CAD 16.2 33.2 28.4 21.9
S&P/TSX Composite TR 0.6 -2.9 10.7 7.4
Source: Morningstar
 
  
 
Fund Flows By Product Type, To 7/31/15 (Billions)
Canadian Domiciled ETF Flows  
  YTD 1 Yr
Canadian Equity  $       (1.4)  $       (0.9)
Global & International Equity  $         2.0  $         2.3
U.S. Equity  $         2.2  $         3.4
Canadian Domiciled Mutual Fund Flows  
  YTD 1 Yr
Canadian Equity  $       (0.7)  $    (11.1)
Global & International Equity  $         3.4  $       10.7
U.S. Equity  $         1.8  $         4.4
Source: Morningstar, IFIC