How does home bias impact Canadian investment funds?

“Vanguard and DFA did research around how much they would want [to allocate] in Canada, and both hold around 30% of their equity in Canada. It just maps across to their all-equity fund,” he says. “A balanced fund holding 30% of its equity in Canada might not stand out. But when you expand that and put it into global equity, that 30% in Canada looks like an outlier. And you see that in the tail ends of these very large allocation series.”

On the fixed-income side, the report took a look at home bias across three categories: global fixed income, multi-sector fixed income, and global corporate fixed-income funds. Within the global fixed income category, it found that the average fund-of-fund experienced a sharp 38-percentage-point drop-off in Canadian bond exposure over the 10 years ended in September 2023.

“A lot more global fixed-income funds have come to market over the last 10 years,” Dobson says. “For investors looking to actually move away from a Canadian bond fund, the number of options has grown significantly.”

Looking at the past 10-year record of performance for global bond funds, Dobson says a home bias toward Canadian bonds didn’t prove to be either a setback or a benefit. Based on returns alone, he says currency-hedged global bond funds and unhedged funds didn’t show a material difference in performance, though the hedged versions showed far less volatility than their unhedged counterparts.

“That’s consistent with what we talk about with investment managers,” Dobson says. “It’s almost a default requirement to hedge your global bond exposure, because you don’t want the currency risk associated with investing in other countries.”

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