Ruth Saldanha: We recently published our inaugural Global Investor Portfolio Study, which examines how individual investors in 14 markets across the world construct their portfolios. The study finds that there is wide divergence in portfolio preferences, mostly based on where an investor is located. Ian Tam, Director of Investment Research for Morningstar Canada, was one of the authors for the Canadian section. He is here today to talk about the report for Canadian investors. Ian, thank you so much for being here today.
Ian Tam: Thanks again for having me, Ruth. Great to be here.
Saldanha: One of the things we've noticed is that asset allocation funds dominate the Canadian landscape. Why is that?
Tam: Yeah, I think, a lot of that has to do, Ruth, with the way that the Canadian market is structured. So, when you're a mass affluent investor, you're typically going to talk to an advisor, and many of these advisors are employed by vertically integrated firms, so firms that both provide advice and also manufacture products for sale, so mutual fund and ETF products. So, from the perspective of an advisor, an asset allocation fund is actually a very efficient way to give a client diversification across geographies and across asset classes. And it's all done within a single ticket. It's all managed by a professional fund manager somewhere else in the firm, typically. So, it makes it very easy for an advisor to recommend those kinds of products to many Canadians, and I think that's a big reason why you'll see a lot of these assets sit within those balanced or asset allocation funds today.
Saldanha: So, that's one way for investors to get external exposure. One thing you and I have discussed quite a bit is home country bias. What are your findings around that?
Tam: Yeah. So, the study showed that home country bias is more prevalent in less developed markets – India and China in particular. And the way that we measured it is we took a look at holdings in equities and bonds within the mutual fund space and compared those holdings, those weightings against a broad market index. So, for example, in Canada, about 30% of equity assets are held in domestic or Canadian equities. But if you look at a market index, like the Morningstar Global Market Index, it's actually less than 5% of equities held in Canada. So, that's a pretty big discrepancy, and that's essentially the basis of our study. And certainly, Canada is one that – there's this quite a large discrepancy, but certainly not as bad as China or India, which are less developed.
Saldanha: One of the things that I personally found interesting was that Canadians, who we generally think of as being more conservative, really embrace the whole crypto and liquid fund landscape. Why is that? And what happened with those investments?
Tam: Yeah, it's an interesting one, because Canada – back in 2014, the Canadian parliament was one of the first governments in the world to sort of approve the trade of crypto. And today, there are many crypto currencies – Bitcoin, Ethereum and so forth – that are available widely through discount brokerages in Canada. We also saw a very successful launch at least of a crypto fund which today still holds about $600 million in Canadian assets despite all the recent poor performance. So, I think what drives Canadians and probably any investor to crypto is the fact that it's not really correlated to any asset class. And it's risky, it's new, so certainly some interest there, and certainly having it just available to Canadians freely to trade is a motivator for Canadians to invest that way, if they still choose.
The liquid alt space is a bit different. It allows investors access to two things. One is strategies that they would not normally have access to. So, a liquid alt for those not familiar, it's a modification of the hedge fund. So, hedge funds, you typically think of long short hedge funds. So, the recent change in regulation allowed for some of these strategies to be sold as a traditional mutual fund. So, for the investor, it's a big advantage if you wanted to access those strategies because you don't have to have as much capital to do so when compared to investing in a traditional hedge fund. So, that's one thing. And the second thing is, I would say, asset classes. There are certain types of asset classes, specifically private equity and private debt, which again the typical retail investor is not going to have enough to make a reasonable investment in that space. So, there are – I think there's about 15 private debt funds available in liquid alt space in Canada, for example, that are available to retail investors. So, just another way for the everyday Canadian to be able to access asset classes like private equity, private debt that they haven't been able to access before.
Saldanha: Great. Thank you so much for joining us with your perspectives, Ian.
Tam: Thanks, Ruth.
Saldanha: For Morningstar, I'm Ruth Saldanha.
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