A new kind of ‘Made in Canada’?

Home may be where the heart is for many Canadian investors, but taking a Canada-only approach is an increasingly risky proposition. It’s this philosophy AIM Trimark took when it announced that it’s increasing the allowable amount of foreign equity in almost all of its Canadian equity funds.

Canadian anchored equity funds, as they are classified by Morningstar, are funds that have a Canadian equity allocation of more than 50% but less than 90%. Until now, most of these types of funds have hovered around 70% Canadian equity and the rest foreign content, thereby decreasing risk by diversifying outside of the Canadian market.

Now, almost all of AIM Trimark’s Canadian funds will have a ceiling of 49% for foreign content, the maximum allowable amount in order to remain in the Canadian anchored equity category.

Patrick Farmer, AIM’s chief investment officer, believes the move is necessary because investing in Canada alone is not a very safe bet. He says Canada represents less than 3.5% of global market capitalization, and the majority of that is heavily weighted in commodities and the financial services. In essence, he points out, while investors may feel they are safe with what they know, they are actually increasing their risk by investing only in Canada because offerings are not very diverse.

“I believe our funds will offer Canadians better risk-adjusted returns. Over time, the global market will have less volatility. Every client would like that,” Farmer said. Apart from RIM, which is first in its industry, there aren’t too many number-one companies located in Canada, and Canadian retailers are nowhere near world-class. Increasing foreign content increases the possibility to get in your portfolio those world-class companies that can become the most profitable.

Farmer adds that investing in AIM Trimark’s Canadian anchored funds not only takes advantage of the strong gains of the global markets over the last while, but over the long-term, it will present investors with better risk-adjusted returns. He stresses it’s the long-term risk reduction though that leads him to believe that his company is only on the crest of a wave of companies that are going to offer similar products.

Brian O’Neill, senior analyst at Morningstar, says he is not surprised by AIM Trimark’s move and generally thinks they are going in the right direction by allowing for more foreign equity. He says since the foreign content limit was dropped in 2005, there has been a push by a number of companies investing globally, but there is some appeal to maintaining the Canadian name on some of the funds, particularly for a company like AIM Trimark, which has a history of trying to avoid the volatility of commodities.

“They have underweighted resources fairly consistently. They tend to have a fairly common investment style across all their mandates — and that is finding companies that can grow over the long term,” O’Neill says. “They were having Canadian equity funds that were underweighting resources, and in the meantime, there is not an awful lot else in the Canadian market that you can go out and buy. Allowing for 49% foreign allows them a lot more options for the more secular growth stories they would be looking for.”

Dan Hallett, president of independent investment research firm Dan Hallett and Associates, agrees with O’Neill’s assessment about the positive aspects of flexibility, especially for good fund managers, which, he says, Trimark has. But he does have some concern about these funds, and similar offerings by other companies, meeting the asset allocation needs of clients if they are expecting to have a certain amount of Canadian assets.

“We have mixed feelings about this news. On the one hand, we love to see good managers with more flexibility. On the other, Canadian equity funds are becoming increasingly rare — and a floating asset mix can play havoc with a client’s target asset allocation.”

Farmer says he understands concerns by some investors about the uncertainty of a floating asset allocation, but, given what he sees as a diminishing Canadian marketplace, he thinks their funds will go heavy on the foreign equity.

“It becomes difficult if you take that content back from 0% to 49% in some crazy frequency. I wouldn’t be surprised if we gravitate towards 49% and stay.”

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com