New Morningstar study peels back the layers on most preferred investment structures, appetite for risk-taking, and more
While most assets among individual investors in Canada are placed in balanced strategies, that doesn’t mean they’re averse to allocating part of their portfolios into riskier assets either, according to a new study from Morningstar.
The study, which covers 14 countries, was conducted based on all accessible investment instruments to retail and mass-affluent investors who have the capacity to invest in their local market.
“This study is conceptually in line with Morningstar’s Global Investor Experience Report,” says Danielle LeClair, director of Manager Research at Morningstar Canada. “It’s an expansion of our ability to take a deep dive on different topics and compare different markets, and I’m excited that this piece is out there.”
Based on its snapshot survey conducted in early spring and throughout the summer, Morningstar found more than 50% of investor assets in Canada were weighted towards balanced mutual funds, an outcome that LeClair says can be expected given the investment platforms available and the appetite for diversification among individual investors in the country.
“We also found 5% of all non-fund-of-fund product and ETF assets among Canadian investors were in dividend-focused categories, which are characterized by a yield greater than that of the S&P/TSX composite dividend index,” she says. “Even within categories, we see Canadians have strong tilt toward dividend-paying strategies, and it’s a theme we’ve been seeing for a few years.”
The study also found a continued prevalence of home bias across all markets including Canada, with investors’ tilting their portfolios more heavily towards equities in their local market compared to the equivalent portion allocated in most broad global equity indices.
In line with that, locally domiciled mutual funds came through as the most popular investing structure among Canadian investors, which LeClair attributes to the fact that most assets in Canada are linked to advisor networks that are plugged into a broad distribution base of mutual funds.
“I think that provides advisors with a platform of opportunities for investors, but also professional managed assets that they can recommend to investors,” she says. “After locally domiciled funds, direct equities and direct fixed-income securities were the next most popular investing structures.”
From a global perspective, Canadians tended to fall on the medium-risk range of the investor spectrum, preferring to allocate small portions of their financial assets in cash-like investments rather than cash. That modest appetite for risk-taking, according to the report, isn’t surprising given the drift from defined-benefit to defined-contribution plans that’s occurred within Canada’s pension system.
The survey also found that relative to other markets, Canada exhibited a stronger interest in crypto investment. Polls seem to indicate that compared to Americans, Australians, and British households, Canadians were more likely to invest in digital assets. The report also notes that Canada was among the first jurisdictions to allow cryptocurrencies to be held and traded within discount brokerage platforms.
“Canada really has a favourable regulatory environment for digital assets,” LeClair notes. “The government of Canada came out with commentary around digital assets as early as 2014, which legitimized the space to a certain extent. Since then, the country’s securities regulators have been relatively accommodative of digital assets compared to their global counterparts, and the first digital asset ETF was launched here.”
Another point towards Canadians’ moderate risk-taking, she says, is the emergence of liquid alternatives as an option for investors. That came off the back of regulatory changes opening the door to alternative mutual funds in 2019.
The survey also found distribution networks in Canada were dominated by a handful of vertically integrated financial institutions where financial advice is also made available to investors. Within these channels, the majority of assets sit in commission-based share classes, with ongoing advice and distribution fees bundled into the commission paid to advisors.
But that could be changing. Citing a recent supplementary study to the Morningstar Global Investor Experience that focuses only on Canada, LeClair says data from March this year showed a notable shift among investors into fee-based products. It also revealed that between 2020 and 2022, most new fund launches were in fee-based share classes.
“We at Morningstar encourage more transparency around what’s included in these bundled fee packages, and I believe the CFRs have also prompted changes in that direction,” she says. “The shift of investors navigating towards fee-based is really an improvement that we've been seeing in the market.”
Another positive trend in Canada, according to LeClair, is the ongoing shift toward ESG investing. While Europe continues to lead the way in terms of ESG adoption, the Canadian market for sustainable funds has also been evolving in a positive direction.
“There has been some guidance issued by various Canadian governing bodies, about ESG standards,” LeClair says. “I think those standards are going to help give investors more clarity on what it actually means when they're buying ESG funds.”