What is a safe asset class? What’s risky? In the last few years, perceptions and reality have changed dramatically.
The typical Canadian investor has a home market bias — that is, a large Canadian equity component and Canadian bond holding in their portfolios. PWL portfolios by contrast to our competitors are engineered to be globally diversified.
More to the point, a globally diversified portfolio delivers a stable and robust return over the long term. Canadian bonds, which many would consider a “safe” asset class, can have very exceptionally negative volatility. Unfortunately many investors abandoned equities during the recent financial crisis. Investors behave this way because emotions get in the way of their thinking. Investors who overemphasize fixed income in their portfolios are unconsciously taking unworthy risks. In contrast, having a diversified portfolio gives the long-horizon investor an edge.
So far in 2013, for example, Canadian bond yields (after inflation) are mostly negative. Canadian equities, after a great period of outperformance relative to other developed global equity markets, have also returned a negative return year to date. U.S. equity markets on the other hand have dominated all other asset classes. An interesting illustration is to compare the return difference between the results of the S&P 500 Index this year (in Canadian currency on a total return basis) compared with a Government of Canada 10 year bond. The bond total return was -3.9% and U.S. equities was +20.45%. The difference of 24.35 % is quite staggering.
By following PWL’s disciplined investment philosophy and remaining globally diver-sified, we help our clients avoid making emotional decisions that can lead to bad investor behaviour. This is what we do every day for our clients, and it works.
PWL Capital Inc.