Archive for March, 2010

Portfolio Allocation to Canadian Stocks

March 31, 2010

30 comments

Though the Canadian market makes up just 3.6% of the World stock markets, Canadian investors are justified in being overweight in our stock market for the following reasons:

  1. A Canadian investor who is saving for her retirement in Canada needs to fund her liabilities in Canadian dollars and having too much exposure to foreign markets introduces foreign exchange risk. Since valuations among developed markets are comparable and earnings growth in these markets is similar, the expected returns from Canadian stocks isn’t materially different from other developed countries. Therefore, the purpose of foreign stocks in a Canadian investor’s portfolio is diversification. One study by money manager Leith Wheeler found that Canadians can get most of the benefits of diversification by allocation 50% of their stock portfolio to overseas markets. Some could reasonably argue that the 70% allocation to foreign markets in the stock portion of the Sleepy Portfolio is too much, not too little.
  2. In taxable accounts, eligible dividends paid by Canadian stocks receive favourable tax treatment. Assuming a 2.5% yield, investors in some tax brackets may find that more than 40% is lost to taxes for international stocks but only 20% in the case of Canadian stocks. Over the long term, all things being equal, a Canadian investor will earn greater after-tax returns with Canadian stocks than international stocks.
  3. Canadian investors capturing exposure to global markets through ETFs listed in the US stock markets will experience additional leakage through withholding taxes. These taxes add to the cost of foreign investments and act as a drag on a portfolio return.

What’s your take? Is the 70% allocation to US, EAFE and International stocks in the Sleepy Portfolio too much diversification? Or is it too little, considering Canada makes up less than 4% of global markets?

PS: Spring has sprung and this weekend promises fine weather for an Easter Egg Hunt and just hanging out on the patio. Hope everyone has a great Easter weekend.

Stock Market Weightings excluding Canada

March 31, 2010

10 comments

The holdings page of the Vanguard Total World Stock ETF (VT) is a good place to obtain data on the regional weightings in the world stock markets. The ETF tracks the FTSE All World Index, which in turn tracks the performance of about 2,700 stocks in the U.S., Europe, Pacific, Emerging Markets and Canada. If you net out the 3.6% allocation to Canada, here’s how the regional market weightings stack up (as of Feb. 28, 2010):

United States: 43.5%
Europe and Pacific (EAFE): 42%
Emerging Markets: 14.5%

It is interesting that the share of Emerging Markets has grown in the world stock markets from roughly 10% in 2005 to close to 15% now. Correspondingly, the share of US and EAFE markets has declined from about 45% each to 43.5% and 42% respectively today.

The Sleepy Portfolio started out with a 22.5% allocation to US and EAFE markets and a 5% allocation to Emerging Markets. This data suggests that the share of Emerging Markets in the portfolio should be boosted to 7% and US and EAFE market allocations cut by 1%.

Portfolio Snapshot with Google Docs

March 29, 2010

39 comments

I am frequently asked about the tools I use to track investment portfolios. I use Microsoft Money to keep track of our portfolio, the components of which are spread across RRSP, Group RRSP and investment accounts. Microsoft Money is quite good at many tasks (such as keeping track of transactions) but is useless when it comes to others. One major shortcoming is the lack of useful reporting on the asset allocation of a portfolio because bond, large-cap, mid-cap and small-cap are the only asset classes available in Microsoft Money. So, I’ve been using a simple spreadsheet I put together in Google Docs to do just that: provide an asset allocation snapshot of a portfolio.

The spreadsheet takes advantage of stock price information available through the GoogleFinance function. For example, you can use ‘=GoogleFinance(“XIC.TO”, “price”)’ to obtain the recent price of the iShares CDN TSX Capped Composite ETF. For US-listed stocks or ETFs, drop the “.TO” suffix. The Canadian dollar to US dollar exchange rate can be obtained by processing the Yahoo! Finance quote for USDCAD=X. (If you are interested here’s how the exchange rate is obtained: ‘=Index(ImportHTML(“http://finance.yahoo.com/q?s=USDCAD=X”,”table”,1),8,2)’.).

The rest of the spreadsheet is straightforward. The last column shows how much an asset class is below target. When I add some money to the portfolio, I simply buy the asset class that is the most below target.

Updates from readers:

  1. The “.TO” suffix for Canadian stocks is needed only if the same ticker symbol is used in an US exchange. For stocks such as Bombardier (BBD.B) or Telus (T.A) that have multiple class of shares, their TSX ticker symbols should do the trick. Similarly, for income trusts, simply use their TSX ticker symbol to obtain the price. Example: RioCan’s price can be obtained through ‘GoogleFinance(“REI.UN”, “price”).
  2. You can also obtain exchange rate is a much simpler manner through ‘=GoogleFinance(“CURRENCY:USDCAD”)’.
  3. The GoogleFinance function can obtain price of Canadian mutual funds when you prefix the mutual fund code with MUTF_CA. For instance, the price for TD Canadian Index e-Series can be obtained with =GoogleFinance(“MUTF_CA:TDB900”, “price”)
  4. You can also obtain mutual fund price information in a slightly round-about manner by processing the Morningstar.ca pages. For instance, the price for TDB900 can be obtained through ‘Index(ImportHTML(“http://www.morningstar.ca/globalhome/quicktakes/fund_overview.asp?fundid=5428″,”table”,15),1,3)’.