Salman Ahmed: In investing, you often hear the adage don't put all your eggs in one basket, which refers to diversification. Now, diversification across sectors is especially difficult in Canada, where three sectors tend to dominate the broad equity market. You have energy, financials and materials, which make up more than 70% of the TSX Composite Index. Now this sector diversification problem is even more pronounced in what's considered the "conservative" Dividend Income [Equity] category.
Adam Fisch: Yeah, I think, in times of uncertainty or in a downturn, investors will often move to their perceived safe heavens -- gold, fixed income -- and within equities, they'll move to dividend payers. They're generally larger, more established companies, and they get some yield while they're waiting for things to turnaround. But what a lot of Canadian investors may not be aware of is that, if you look at the typical Canadian Dividend Income fund, you end up with about 60% of your portfolio in just energies and financials, and while that's something that we've become used to, because those are just the biggest players in our market, you end up with an enormous amount of sector risk in those two specific sectors.
Ahmed: This is probably I guess a Canadian-centric problem, because if you were an American investor and you had that same kind of allocation to, let's say, financials, during the big crash in 2008-2009, you would have wiped out more than half of your portfolio. So, we've been fortunate that Canadian financial companies are well-regulated and have performed better than their American and European counterparts, but that concept of having such a big portion of your portfolio in just two sectors is still not very conservative.
Fisch: Yeah. It's something that Canadian investors think of as normal because that's just the way our market operates, but I think an American investor looking at a typical Canadian portfolio would be shocked at how concentrated it is. I think we've been fortunate that Canadian banks have done better as you said, but I think we'd be remiss in assuming that Canadian financials for example are a perfect safe heaven going forward, if there was some sector-specific problem that caused things to turn the other way across the board.
Ahmed: Yeah. Well, it just goes to show investors may invest in these dividend income funds thinking that they are the conservative option, but they really may not be that conservative after all.
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