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Global investing dos and don’ts from a top investment manager

by Wayne Cheveldayoff, 2006-07-06

With overseas stock markets plunging recently, Canadian investors with foreign holdings are likely wondering if they’ve made a mistake.

But global investing expert Gavin Graham, chief investment officer of the Toronto-based Guardian Group of Funds (GGOF), says Canadians are on the right track in diversifying their investments on an international basis as long as they do it the right way.

He outlined his global investing dos and don’ts in a recent interview, drawing on his extensive experience, including nearly a decade managing investments in Hong Kong and Britain.

“First, as a Canadian investor looking to invest globally, you have to ask yourself what is your view on the Canadian dollar,” Mr. Graham says. “Those who believe that it is likely to remain strong should probably invest with managers who hedge the Canadian currency.”

Global mutual fund managers who hedged the Canadian dollar recorded superior performance in recent years. Among the few global mutual funds that hedge are the GGOF HighYield Bond Fund and the GGOF Asian Growth and Income Fund.

Second, Canadians should look to invest abroad in sectors that aren’t available here, he says.

“Canada has a very concentrated stock market with 45 per cent in resources and 35 per cent in financials and it doesn’t have a lot of exposure to a number of important sectors such as pharmaceuticals or consumer staples where you can buy world-class companies such as Johnson and Johnson, Cadbury Schwepps or Nestle which have very reasonable valuations at 13 or 14 times earnings, paying 3 to 4 per cent dividends. If you are concerned about the U.S. dollar, these are multinational companies and exporters so they will have some natural protection against a weaker U.S. dollar.”

Third, in pursuing diversification, Canadians should look for markets that don’t move in line with North American markets. “For example, it wouldn’t necessarily be a great diversification if you were buying funds investing in countries like Australia or South Africa because they tend to have a lot of the same exposure as Canada does. You instead want markets like Japan or the Asian economies which tend to have a different makeup of their market and which don’t necessarily move in line with Canada. So they’d be a good diversification and would reduce the volatility of the portfolio.

“Lastly, we’d say one of the reasons you might want to diversify is that Canadian bonds and U.S. bonds are not giving you a very high yield at the moment. If you for example felt that 4 to 5 per cent yields here are not attractive given that inflation seems to be on the rise again, you perhaps should look at some global bonds. If a global bond fund has not performed well lately, you may want to inquire if the fund manager was hedging the currency.”

One of the mistakes Canadians commonly make, he says, is investing in the United States and thinking it gives global exposure. “Because of how closely linked the Canadian and the U.S. markets are, you are basically getting the same exposure with the exception of one or two sectors like the pharmaceuticals and consumer products.”

Another mistake is not asking if the portfolio is hedged on the currency. He doesn’t agree with advisors who say that in the long run, currency movements cancel themselves out. “If you were not hedged over the past four years, you got little benefit from the very good bull market in the United States because the Canadian dollar went up nearly 45 per cent during that time. That approach didn’t work for the last few years and it likely won’t work in the next few years either.”

One way to cope with the volatility of overseas markets is dollar-cost averaging, he says, “where you buy more when it is cheap and less when it is expensive.

“You shouldn’t be frightened off because we’ve had a sharp sell-off. There have been numerous sharp sell-offs in the past few years but generally they have been pretty good times to buy.”

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at www.smartinvesting.ca and he can be contacted at wcheveldayoff@yahoo.ca.

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©2006 Wayne Cheveldayoff