Immigration Canada: Mutual fund

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DAVID PARKINSON | Columnist profile | E-mail

From Saturday's Globe and Mail

Published Friday, Jul. 22, 2011 5:20PM EDT

Last updated Friday, Jul. 22, 2011 5:44PM EDT

Canadian investors have long been accused of being homers. As the rest of the world has been telling us lately, that might not be such a bad thing.

Despite the elimination of foreign-content restrictions on registered retirement savings plans six years ago, most Canadians still keep the vast bulk of their investments in domestic securities. A recent study showed that even the country’s wealthiest investors – those with more than $250,000 to invest – average only 15 per cent of their portfolios in overseas holdings.

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But while investing experts have been telling us for years that we should be looking beyond Canada, data this week from Statistics Canada highlighted that foreign investors have increasingly been flocking to Canada. Foreign buyers snapped up a net $15.4-billion of Canadian securities in May, adding to a year that is shaping up as another big one for foreign buying of Canada’s stock and bond markets.

Seeing as most of us – for better or worse – have most of our money in the Canadian market anyway, it might be worthwhile taking a closer look at what those investing tourists in our country have been buying.

Destination of choice

Warren Lovely, head of macro strategy at CIBC World Markets, broke down Statscan’s data in a report this week to get a better sense of where the foreign money has been flowing.

While equity purchases are up significantly for the year to date, bonds have increasingly replaced equities as the destination of choice for foreign buyers – punctuated by a big surge in bond buying in May, particularly in federal government and federal Crown corporation bonds.

The impetus may be the deterioration of the government debt situation in Europe and the United States, which has fuelled a flight to safe, high-quality bond markets such as Canada. At the same time, it has convinced investors to step back from so-called “risk assets,” such as equities. Canada is being perceived as a low-risk market in risky times, and government bonds are the lowest-risk option for investors.

Crowning your portfolio

One particularly interesting trend has been the sharp gains in buying of bonds issued by federal Crown corporations. Mr. Lovely said that as big foreign buyers such as central banks have become more comfortable with Canada, they have begun to move past the federal government debt to buy high-quality Crown issues such as Canada Mortgage Bonds – which carry the same top-notch credit rating but offer higher interest rates.

“It’s yield enhancement without erosion in credit quality,” he said – adding that this same logic makes sense for smaller retail investors, too.

“There is a very strong argument that this could be a diversification tool for investors of all stripes.”