Time for a Canadian state of mind?

However, SEI says there is a growing desire by Canadians and their clients to consolidate more of their assets here in Canada.

“The Canadian focused portfolios offer investors the benefits of diversification within an economy that is poised for growth,” says Janesse McPhillips, managing director of SEI Private Banking. “Canada is forecasted by the International Monetary Fund (IMF) to have a higher growth rate than many other developed economies as the global recovery takes hold. SEI is demonstrating its commitment to Canadian advisors and their clients by bringing them the investment solutions they need.”

The two new portfolios are comprised of a SEI Canadian Balanced Portfolio and the SEI Canadian Growth Portfolio. The Portfolio invests primarily in Canadian equity funds and Canadian fixed income funds. The Canadian Focused Growth Portfolio seeks to provide long-term capital appreciation with a small level of current income. The portfolio invests primarily in equity funds, with a focus on Canadian equity exposure, and Canadian fixed income funds.

“A similar mandate to our Canadian Balance portfolio is our core growth income, and the core growth and income portfolio would have had 25% foreign equity and another 5% in U.S high yield bond funds. In the Canadian balanced fund we have a foreign equity cap of 10% and no investment in the non-Canadian income market,” McPhillips says. “Our traditional growth portfolio had a foreign content of 35%, whereas the Canadian Growth Portfolio has a cap on foreign equity at 20%, and no representation in the non-Canadian bond market.”

Roy Borzellino, a senior portfolio manager with SEI, says while the caps may seem like limited exposure for foreign content, he says it provides enough room to diversify Canadian holdings for a strong contingent of Canadian clients with a strong home bias in investing.

“These two strategies are meant to assist some clients who feel they want more of a local presence and have that home country bias. That’s a very strong temptation, it always has been for Canadians,” Borzellino says. “However, we think the timing is very strong for these strategies because Canada will do very well in this global environment. Canada is selling everything the world needs right now.

Unlike the other developed nations, Canada’s investment profile seems more correlated to emerging markets than U.S. and Europe. It’s the emerging markets that are poised to once again drive most of the global growth over the next few years.

“One of the investment themes out there is the global secular theme in commodities right now. That secular bull market is not abating. It’s as strong as ever. Canadian companies [that produce commodities] are good ideas, they are very sound in this environment,” he says. “The first place we create diversification is through asset classes, even in our growth strategy we have 20% outside of Canada. Even though that sounds like a ridiculously low exposure to outside of Canada, 15 years ago many Canadian investors probably only had 10% outside of Canada.”

There is also a very real currency risk for Canadian investors who diversify too much outside of Canada.

“We are very concerned about foreign investments at this point because we do see the Canadian dollar increasing. We believe strongly and it will hit parity over then next two quarters and will continue to be very strong after that. The one thing I’ve been saying to most of our clients is we’re at a historic point where we are probably going to see the U.S. dollar stop being the reserve currency for the rest of the world,” Borzellino says.

The rapid ascension of gold seems to point towards this trend.

“This is a moment I would have never predicted. I think over the next year you will see the U.S. dollar fall out of favour as the world’s reserve currency,” he says. “Investors already seem to be choosing gold as the old/new standard. That as a barometer tells us the U.S. dollar is in store for further weakening, so the Canadian dollar is poised to increase in value. There could be a multi-year story here where the dollar keeps rising.”

SEI is not alone in its predictions of Canada’s comparative strength to other markets.

Maxime Lemieux, the lead portfolio manager on Fidelity Investments Fidelity True North Fund, has been a vocal advocate for investing in Canada for similar reasons. It offers the stability of a developed economy with direct exposure to the growth prospects of the developed world.

Lemieux says a global economic recovery means a return to the secular cycle of rapid industrialization of the emerging markets, particular the BRIC countries of Brazil, Russia, India and China.

He expects Canadian investment performance to be a continuity of what investors witnessed between 2002 and 2008.

“We escaped most of the shenanigans experienced in the U.S. market. We’re coming out of storm on a much better posture on that front. We don’t have to do a lot of repair work other economies do so we’re on better footing going into a recovery,” Lemieux recently told Advisor.ca. “To be blunt, with Canada you’ve got to believe in the emerging markets or the BRIC markets. These countries need more infrastructure, which means more commodities and more oil. This is part of the Canadian investment thesis – it’s quite central.

Even in the non-commodity areas, Lemieux thinks Canada offers opportunities for out performance.

“Comparatively, if GDP in the U.S. were to grow faster than Canada it would be a short term phenomenon because they are coming back from a much lower base. Secondly, they have more massive stimulus programs to sustain at this point and that growth is going to be coming at the expense of every citizen there, meaning their debt level is rising faster than Canadians. At some point that will be an issue,” he says. “In terms of productive growth, I think Canada should be do better at this point.”

(12/02/09)