Portfolio Pie
I like to think about the asset allocation of a portfolio as different pieces of a pie. You can choose from various ingredients to create a portfolio pie that best satisfies your needs. The asset mix of most Canadians’ portfolio pie contains a big piece of Canadian stocks and bonds. However, there is a much bigger pie to choose from, where Canada represents only a small slice. It helps to know what the size of the global investable pie is, and how it is divided up, before sitting down to take a bite of what is on offer.
The Veggie Pot Pie
Similar to how this pie is a complete meal, Chart 1 is a high-level view of the global investable pie. Since I am talking about the sum of all the investments that can be purchased by individuals or institutions, whether they are foreign or domestic investors, the numbers are in billions of U.S. dollars.[1] It may surprise you to see that the global fixed income market is the biggest piece of the pie at 50% of the $137 trillion total. Alternative markets are the smallest portion at 10%.
Chart 1
The Fish Pie
While not the first preference of many pie eaters, like the fixed income market it contains ingredients that are good for you and should be part of your menu. As you can see from Chart 2, bonds issued by governments are the largest slice at 51% of the $69 trillion of bonds outstanding. Bonds issued by higher quality (investment grade rated) corporations are next at 34%. And while you may hear a lot about high yield (commonly referred to as junk) bonds in the financial press, they are only 3% of the total. The Canadian market is a small taste of the pie at 2%. Not shown in the chart is that bonds issued directly or guaranteed by Canadian federal, provincial, and municipal governments and their agencies are 70% of the Canadian fixed income market.
Chart 2
The Bumbleberry Pie
A real crowd pleaser, the mixture of berries in this pie is analogous to the appetite for yummier returns through investing in stocks. Not surprisingly, Chart 3 shows that U.S. stocks are the lion’s share of the pie, representing 58% of the $54 trillion in stocks you can buy out there. International developed markets are next at 27%, followed by emerging and frontier markets at 12%. Canada’s 3% sliver is only slightly larger than its share of the global fixed income market.
Chart 3
The Pumpkin Pie
While not to everyone’s taste, like a good pumpkin pie alternative investments can satisfy some investors’ appetites. Although alternatives are the smallest part of the global investable pie at $14 trillion, they garner more than their fair share of the financial headlines.
Alternatives are primarily used by large institutional investors such as pension funds to provide diversification, match long term horizons, and potentially offer higher returns in exchange for less liquidity. Large institutional investors have the resources required to have their own internal teams research these investments. In addition, they can invest directly in them rather than paying a series of intermediaries or fund managers to do it for them. The biggest slice of the alternative pie is commercial real estate at 56%, followed by private equity at 29%. Hedge funds don’t show up in this chart as they buy and sell global investable assets, or their derivatives, from the other parts of the pie.
Chart 4
The Last Slice
Knowing what the global investable pie is gives you the range of ingredients that are available from the investment pantry. Canada represents just a small slice; there are many other geographic areas and markets to choose from. Before you bake in your asset allocation consider the complete list of investment ingredients for your portfolio pie. You may be able to lower expected risk, increase expected return, or both to get a sweeter result.
Invest Wisely,
Dave Schaffner, CFA
Principal, Wayfairer Capital Management Ltd.
[1] Sources: Dec 2019 update of Doeswijk, R., Lam, T., and Swinkels, L., 2014, “The Global Multi-Asset Market Portfolio, 1959–2012”, Financial Analysts Journal 70(2), pp. 26-41; MSCI; FTSE Russell; Preqin; S&P Global.