YOUR PRACTICE-Canadian investors look south for growth

Mon Jul 29, 2013 9:56am EDT

* Wealth managers increasing U.S. exposure as rebound beckons

* Investors still skittish, advisors fear clients will miss the boat

* Canadian growth expected to lag U.S. in next two years

By Andrea Hopkins

TORONTO, July 29 (Reuters) - Dean Owen has been trying to talk his Canadian clients into shifting to U.S. equities for months, with only limited success. With slow growth expected at home, he says it is more important now as the U.S. economy gets stronger.

"U.S. consumers are getting out of debt and making sure they have a comfort zone before they start buying, but they will start buying," said Owen, a personal financial planner at Cherry Financial Services in Saskatoon, Saskatchewan.

"But the fears of clients are always going to be 'What happens if they go into another recession?'"

Once bitten, twice shy, Canadian investors have taken to the sidelines or are making cautious bets in Canada's shallow but steady markets in the wake of the 2008-2009 global financial crisis and U.S. housing crash that decimated portfolios.

While the home-country bias might have protected some investors from the worst of the downturn, wealth managers worry that Canadians will miss out on a rebound in the United States, where growth is expected to outstrip Canada's for several years.

"We don't necessarily believe Canada is going to have any major issues, but we just see more upside in the United States," said Dean Orrico, chief investment officer at Middlefield Capital Corp, a Toronto-based asset manager.

"We look at the U.S. market as being in a period of economic recovery, driven by a recovery in the U.S. housing sector, U.S. auto sector, and an improvement in the U.S. labor market."

Middlefield has focused more on U.S. markets over the last 12 months, increasing the U.S. exposure in its Mint Income Fund and Income Plus fund to close to 20 percent.

Owen of Cherry Financial is also comfortable increasing U.S. exposure to 20 percent or 30 percent for clients looking for growth.

Dylan Reece, an associate portfolio manager at Nicola Wealth Management in Vancouver, said several sectors are poised to outperform in the United States, starting with real estate.

"We are definitely cautious about owning residential real estate in Canada, it is very unaffordable versus the world. If you have excess holdings in Vancouver or Toronto, now is not a bad time to take a bit of money off the table ... shifting it down to U.S. real estate, where there is far more opportunity for growth," said Reece.

But Canadians should also look to the United States to diversify into sectors where investment opportunities are scarce in Canada, including information technology and health care, and be wary of Canadian stalwarts, like banking and natural resources, which have peaked.

"When real estate softens, our banks will be impacted. The commodity cycle is slowing down, China is slowing down, and therefore there will be slower demand in those sectors," Reece said. "But any investor will have home-bias in investment, and Canadians are no exception."

Middlefield's Orrico and adviser Owen both say there is more than one way to give Canadian investors better exposure to U.S. growth, particularly if they are reluctant to leap into U.S. equity funds or the stock market.

The first is to watch which funds are boosting their U.S. allocation, as Middlefield has done with its income funds, so that just by staying invested in a certain fund, clients increase their U.S. exposure.

Bob Gorman, chief portfolio strategist at TD Wealth, said its benchmark exposure for U.S. stocks is typically 13 percent, but has risen to 18 percent as investors rotate into the non-resource areas, both in Canada and south of the border.

"Relative to where we normally are, we're significantly overweight the United States," Gorman said.

For more active clients, it is a good time to add a U.S. fund to a portfolio, or shift out of a Canadian fund into one that is focused on U.S. returns.

Clients can also leave existing investments alone, but reinvest gains to take advantage of U.S. returns.

Export-driven Canadian companies will also benefit from a U.S. recovery, Orrico noted. The United States is Canada's largest trading partner, and Canadian manufacturers in particular stand to benefit from a ramp-up in U.S. industrials.

Owen said sooner is better than later.

"Everyone will move their assets more to a U.S. allocation after this year - after 2013, into 2014. They will wait until the price goes up, that's the way it has always been ... but that's such a backward way of doing things."