M&A underscores need for global portfolio

With the addition of Alcan to a growing list of Canadian blue-chip stocks that are subject to foreign takeover bids, Canadian investors may wonder about the future of Canadian-owned companies. But just because corporate Canada is being hollowed out, it doesn’t mean an investor’s portfolio should be. On the contrary, the thinning of Canadian equities just underlines the importance in investing in foreign blue-chip stocks.

The Canadian stock market is only a tiny fraction of the world market, and those companies that do flex some international might tend to be concentrated in either the resource or financial service sectors of the economy.

While it may seem like staying at home is playing it safe, investors that buy only Canadian are ignoring one of the key fundamentals of long-term investing: diversification.

“We’ve consistently advised our clients to diversify their portfolios to include solid, dividend-paying global stocks,” says Hedy Luetjen-Scott, a financial advisor with Edward Jones in Thornhill, Ontario. “Now, with even fewer choices due to the recent increase in buyouts, we believe that investing globally is even more essential.”

Luetjen-Scott recommends that clients weight 30% to 40% of their portfolio in international blue-chip stocks and avoid replacing delisted Canadian stalwarts with smaller riskier ventures.

“It does seem that pickings on the TSX are fairly narrow, particularly for us because we have a history in investing in large-cap companies that pay dividends,” Luetjen-Scott says. She adds that diversifying globally actually mitigates risk because the majority of companies that have shown long-term stability and steady growth are not Canadian based.

Edward Jones has access to the London Stock Exchange, so Luetjen-Scott’s clients can directly purchase shares in international blue-chip giants such as the Royal Bank of Scotland. But she says that if her clients are looking for safe international investing, they should likely invest in global mutual funds with a track record of steady performance.

Looking at things from a global perspective is how Canadians should be looking at even their own companies, says Tony North, director of Canadian index operations at Standard & Poor’s, which oversees Canada’s benchmark index, the S&P/TSX Composite Index.

North points out that while some investors may be hesitant to do business outside Canada, many of the companies they invest in are not. “There are a huge number of companies listed on the index right now that derive the lion’s share of their revenue from outside Canada. The Canadian market itself is very small,” he says.

For example, Canadian information giant Thomson Corp. derives 97% of its revenues from outside Canada, he says, and the majority of Alcan’s business is done internationally.

“If you want to use proportion of revenue derived from outside Canada as [a selection criterion], it’s a lot smaller index already,” he points out.

North says the TSX Composite is nondiscretionary and is compiled mathematically, so changing its composition would result only from changing the selection criteria for what companies are listed.

Right now, he says, there is no discussion from anyone to change those criteria. He concedes that over the long term, if the landscape shifts dramatically, changes to the index would not be unprecedented.

S&P has an advisory panel that it consults with on a regular basis, and if there are significant demands in the marketplace, changes can be made, such as when the decision was made to include income trusts in the index.

“As the landscape shifts, to keep ourselves relevant both within our own marketplace and internationally, we will be required to shift with it,” North says.

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

(05/08/07)

Mark Noble