World Traveler - Winter 2006

With the foreign content cap removed, your registered investments are free to travel the global markets without having to use more costly RSP clones....but keep your passport with you at all times, don't drink the water, and get your shots

It's been several months since the Canadian government, after much financial industry lobbying, removed the foreign content limit on registered investments. It had sat at 30%, encouraging Canadians to keep 70% of what they invested in the Canadian market. While the financial community had already gotten around this limit with the creation of clone funds, these have been eliminated, opening the doors to global investment opportunities and potential cost savings for investors.

Some investors are skeptical about dipping further into foreign markets, especially when the Canadian market has been performing well. But to be a safe investor, diversification remains the best way to go - to do this your portfolio should not depend too much on any one market or asset class.

The same rule that applies to asset classes - Canadian, US, international - also applies to markets: if you spread your investments around, you protect your portfolio from market downturns.

Although more recently our market has been one of the strongest in the world, it represents less than 3% of the entire global market [Moneysense, March 2005]. Having 70% of your investments in 3% of the global market may expose you to greater risk than you are aware. Should that one market perform badly, a large chunk of your portfolio will follow suit.

Another reason against relying too heavily on the Canadian market in particular is its heavy concentration in three industries - financials sat at 31%, energy at 27%, and materials, largely forest products and mining, at 14% of the market on September 30, 2005 (University of British Columbia, December 2005). If any one of these sectors was to underperform, the market and your portfolio could certainly feel the impact. The Global equity markets are more evenly dispersed. Granted, there are a few sectors that occupy a large piece of the pie, but the remainder of the market is more evenly dispersed than the Canadian market.

Global markets, then, give Canadian investors the chance to take part in sectors that aren't high performers at home. Not only does this afford a better opportunity to diversify, but it also means taking advantage of activities around the world that could generate good returns.