By Graham Bodel, CFA
Special to the Financial Independence Hub
We have heard so many suggested new years resolutions over the last couple of weeks but believe it’s worth piling on two more for Canadian investors. We hope not but suspect we’ll be highlighting the same resolutions for years to come.
Chalten has been open for business for less than a year but already we have seen some very concerning consistencies in the portfolios that we have reviewed, the two biggest and most concerning being high fees and lack of diversification. For 2016 we recommend Canadian investors address both issues.
Slumping loonie boosted foreign equity funds
On Tuesday, Morningstar Canada released preliminary data for 2015 on the performance of its 42 Canada Fund Indices which measure aggregate returns of funds for various standard categories. The data, which shows significant underperformance of Canadian Equity funds in 2015, can be viewed on its website: Slumping loonie boosts foreign equity funds in 2015.
The article reveals two clear reasons for the underperformance – firstly, the Canadian dollar’s depreciation – 16.2% versus the US dollar, 6.6% against the Euro and 11.5% against the British Pound. Secondly, the Canadian stock market is overweight the energy and natural resources sectors relative to the global market and both fund groups were down more than 20% on the year.
The result is that in 2015 many Canadian investors holding exclusively Canadian stocks or a significant overweight position suffered from a massive opportunity cost. In Canadian dollar terms our local market underperformed many other developed markets by 20% or more. For example, while I’m sure many were spooked by the headlines about Greece and concerns of a Euro area meltdown during 2015, they probably weren’t aware that the European Equity fund group was plodding along and racking up returns of 19% in Canadian dollar terms for the year.
Proper diversification improves returns and lowers risk
We are not suggesting people chase historical performance. It’s always easy to point to something that underperformed or outperformed last year. The performance might reverse next year. It’s just a very poignant example of why Canadians need to better diversify their portfolios and subject themselves to less specific risk from single stocks, sectors, countries and currencies. Any change to your portfolio should be done with a view to improving returns and/or risk exposure. We believe proper diversification does both.
With respect to fees, Canada still has among the highest mutual fund fees in the world – these fees, often higher than 2% per year and lacking transparency, are charged even in down years like 2015 and over the long run have a punishing impact on the value of your portfolio.
So for 2016, take a moment to review your investment portfolio with a particular focus on diversification and fees. We wish everyone all the best for a happy and prosperous 2016.
Graham Bodel is the founder and director of a new fee-only financial planning and portfolio management firm based in Vancouver, BC., Chalten Fee-Only Advisors Ltd. This blog is republished with permission: the original can be found on Bodel’s blog here.