This morning Reuters reported that the Canada Pension Plan Investment Board (CPPIB), the nation’s largest pension fund manager, is increasing its exposure to India’s financial services, telecoms and logistics sectors. This comes at a time when millions of baby boomers are retiring, dependant upon CPP to meet their basic needs. CPPIB’s Asia Pacific head Suyi Kim had some aggressive comments for readers on Wednesday.
CPPIB has already invested more than C$4 billion into real estate and other investments in the country. According to Suyi Kim,
“All our teams — infrastructure, real estate, private equity and natural resources — are looking for opportunities.”
Investors need to Diversify by Thinking Global
If Canada’s largest pension fund is looking abroad for yield and diversification, shouldn’t the average investor?
The IMF released its World Economic Outlook (WEO) Update in January of 2017. The report paints the same old story of 5-7% growth in emerging markets, including China and India, with much more reserved growth in developed or advanced economies of the West. Its forecast reported,
“Advanced economies are now projected to grow by 1.9 percent in 2017 and 2.0 percent in 2018, 0.1 and 0.2 percentage points more than in the October forecast, respectively.”
Meanwhile, when it comes to EMDE or emerging market and developing economy growth,
“EMDE growth is currently estimated at 4.1 percent in 2016, and is projected to reach 4.5 percent for 2017, around 0.1 percentage point weaker than the October forecast. A further pickup in growth to 4.8 percent is projected for 2018.”
It is important for every investor to understand that, where there is higher growth, there is usually higher risk. Steady growth, less perceived risk and healthy dividends have kept Canadians heavily vested in domestic companies for decades.
Why have Canadians shied away from Emerging Markets?
Blackrock, an American global investment management firm with $5.1 trillion of assets under management, put out a survey on foreign investment by Canadians in late 2015. The report found that just 24% of Canadian investments focus on international markets, leaving a disproportionate 76% invested domestically.
Best way to play the emerging markets by individual investors in Canada is far and away through ETFs or exchange traded funds.
Vanguard FTSE Emerging Markets ETF (VWO)
The Vanguard FTSE Emerging Markets ETF which trades under the symbol (VWO) is a favorite for many because of its low fees. When investing in ETFs, arguably the most critical metric to be aware of is the MER or management expense ratio. Vanguard has one of the lowest and its VWO ETF has an expense ratio of just 0.14% as of February 2, 2017.
Vanguard is quick to disclose on its website that,
“This is 90% lower than the average expense ratio of funds with similar holdings.*”
Note the asterisk: (Vanguard average expense ratio: 0.19%. Industry average expense ratio: 1.03%. Sources: Vanguard and Lipper, a Thomson Reuters Company, as of December 31, 2015.)
According to RBC the percentage of net assets the ETF holds is Financial Services at 24.15% and Technology at 19.07%.
Further fund notes provided by RBC are as follows:
“The fund employs an indexing investment approach designed to track the performance of the FTSE Emerging Markets All Cap China A Inclusion Index, a market-capitalization-weighted index that is made up of approximately 3,658 common stocks of large-, mid-, and small-cap companies located in emerging markets around the world.”
The funds 1-year performance is 17.60%. When you look at the past 5 to 10 years, the returns are less impressive; this is due, in part, to the complete collapse of emerging markets during the financial crisis of 2007 and 2008.
With the west slowing, putting up year after year of anemic growth in the 0-2% range, it only makes sense to have exposure to economies enjoying more robust growth. Canadian investors would be wise to continue their education in emerging market ETFs, particularly those with low expense ratios. Canada’s economy has failed to sustain growth above 2% in the past 10 years, excluding 2011.