Canadians aren’t keen on American investments: Investors Group

Canadians haven’t thought twice about spending their dollars at American stores this holiday season, but when it comes to investments they’re doing anything but looking south of the border for a deal.

A new Investors Group survey found that just one in six Canadian investors thinks the U.S. is a favourable place to invest, while almost half of those surveyed said next year won’t be a good one for American investments.

“People are getting more conservative,” says Brian O’Neill, a fund analyst with Morningstar Canada. “They’re skeptical about the real estate situation, the structured investment situation and the other areas that have been hurting the markets lately.”

Dom Grestoni, IG’s senior vice-president and head of North American equities, is surprised by the aversion to U.S. investments. If anything, he says, Canadians should be able to find a number of good deals in the States right now.

“This indicates that people are paying too much attention to the media,” he says. “It’s puzzling to understand. People are making more trips to the U.S. to use their newfound marketing power with the strong dollar, but they’re not carrying through and looking at that from an investment opportunity as well.”

O’Neill agrees that a strong Canadian dollar has presented investors with a number of good opportunities down south, but mutual fund investors generally aren’t a risky bunch. “I don’t know how contrarian the typical mutual fund investor is,” he says. “I think there are opportunities right now, but we’ve seen time and time again the fund flows tend to follow where performance has been hot.”

Despite America’s poor 2008 economic forecasts, Grestoni says it could be time for investors to take a contrarian approach to investing. “I can’t help but think that things may be reversing themselves,” he says.

For the past five years, Canadian markets have outperformed American ones. Commodity and energy valuations have been close to historic highs, and the banking sector is hot. So why consider looking beyond the Great White North? “After five or six years of outperformance, there might be better opportunities globally,” says Grestoni.

It might be hard to convince the 22% of Canucks who prefer to buy Canadian equities that they should look elsewhere, but O’Neill is seeing more and more domestic investors turning to global funds. “There’s still a domestic bias, but the numbers have shown less of an emphasis on that,” he says.

Instead, investors are turning to short-term options and global balanced funds. Just last month, global balanced funds made $758 million in net sales, while money markets took in $1.87 billion.

Investors Group has seen its own global dividend fund explode over the past year and a half. In that short time, Grestoni says, the fund has grown from nothing to more than $1 billion in assets. “There’s still a strong appetite from clients to diversify their investments, and picking a global balanced fund seems to be the more conservative way to do it,” he says.

He adds that emerging market funds, though riskier, have also seen tremendous growth. Part of that could be related to the shrinking Canadian large-cap market, especially in mining. With companies like Falconbridge and Alcan now in foreign hands, the only way to invest in a large business in some sectors is to look beyond this country’s borders.

Even so, America doesn’t seem to be benefiting from Canada’s increasingly wandering eye. “It’s been a while since investors put a lot of money in U.S. equity mutual funds,” says O’Neill. “We haven’t really seen it since the bullish days of the late ’90s or early 2000.”

And don’t expect things to change anytime soon. “They’ll continue to stay this way as long as the headlines continue to play into people’s fears,” says Grestoni. “But it’s probably all temporary. America has the most flexible economy in the world. It always seems that there’s been a remarkable resilient nature in their economy, and when that perception starts to be believed by investors, it could cause a significant shift of global flows into the U.S. market.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com