Building a truly diversified portfolio means going global.

Many advisers suggest investors supplement their US investments with stocks and bonds from fast-growing nations like China and Brazil. Growth prospects are grim in Europe, but there may be bargains to be found in the continent's depressed markets. But it can be easy to overlook opportunities much closer to home. Think Canada. The Canadian stock market has long been one of the world's top performers. The lone US mutual fund specializing in Canadian stocks, Fidelity Canada, has earned its investors an average annualized return of 12.2 percent over the last 10 years. By comparison, funds tracking the Standard & Poor's 500 index averaged about 3 percent a year. Fidelity Canada's five-year record ranks first among more than 100 of its foreign large growth fund peers, according to Morningstar.

Bond investors may also be missing out on an opportunity to the north. Although, 10-year government bonds in Canada and 10-year Treasury notes in the United States both offer yields of around 1.9 percent, the risks to achieve that return are arguably much smaller with Canada's bonds Canadian leaders have proved more fiscally
adept than their counterparts in Washington, where partisan dysfunction has left the US
government owing roughly as much as the nation's economy produces in a year. In contrast, Canada owes less than half the value Canada is very much in a sweet spot now.
Elaine Stokes comanager of Loomis
Say les Bond
BXsiness
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Canada¶s fiscal strength and political stability are key reasons why one top US
multisector bond fund holds about 9 percent of its portfolio in Canadian government
bonds, while avoiding US Treasurys.
“Canada is very much in a sweet spot now," says Elaine Stokes, a comanager of Loomis
Sayles Bond, which Morningstar currently gives a gold-medal rating.
Stokes views the US Treasury market as “scarier¶¶ than Canada¶s government debt
market. She cites Treasury market volatility, in part because of steps the Federal
Reserve has taken to prop up the economy, and uncertainty over the Fed¶s next moves.
Then there was last summer¶s downgrade by Standard & Poor¶s, which cut the US
government¶s credit rating to AA+ from the top rating, AAA.
Stokes sees plenty of other reasons to like Canada:
 The economic recovery from the recession has been more rapid in Canada than in the
United States.
 Canada¶s outlook is improving because the US recovery is gaining momentum. The
nations¶ fortunes are strongly linked because Canada is the largest trade partner of the
United States. It sends more than 70 percent of its exports across its southern border.
 She likes the long-term outlook for energy and materials producers, which make up
about half the market value of Canada¶s major stock index.
Despite those selling points, mutual fund investors have relatively few options to invest
in Canada. Besides the Fidelity Canada mutual fund, five exchange-traded funds track
segments of Canada¶s stock market. A sixth ETF, recently launched by PIMCO, invests
in Canadian bonds. The biggest is iShares MSCI Canada index, with $4.6 billion in assets.
There¶s plenty of emerging competition, however. Five of the Canadian ETFs have been
launched within the past two years.
Here are some considerations for US investors:
 Think small: Canada¶s stock market represents about 4 percent of the value of stocks
globally. Investors seeking broad diversification probably shouldn¶t allocate more than
that amount to their portfolio.‹ 2012 THE NEW YORK TIMES COMPANY
 Avoid overdoing it on commodities: Canada¶s economy is very dependent on
commodities, so its stocks closely track those of commodities producers globally,
Morningstar analyst Samuel Lee says. An investor who already has substantial
investments in companies that produce energy and raw materials should probably avoid
a Canada-focused fund.
 Buckle up: Expect volatility north of the border. That¶s because Canada¶s many
commodities stocks typically rise faster and fall harder than other stocks.
 Don¶t get overexposed to North America: Because economic links between Canada and
the United States are strong, stock markets in the two countries often work in sync.
Loomis Sayles¶ Stokes also cautions that Canada is vulnerable to risks from the
European debt crisis. But she still likes Canada¶s solid fiscal health, and strong prospects
for its energy and materials producers to profit from long-term global economic growth.
“We understand there will be volatility,¶¶ she says. “But if you take a long-term view, it¶s
hard to not make a case for a country like Canada.¶¶

By Mark Jewell | A S S O C IA T ED PRES S JA NU A RY 1 5 , 2 0 1 2