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© Copyright 2000 Rogers Media. The following article first appeared in the May 2001 edition of
BENEFITS CANADA magazine.
Editorial: A small world after all
Burton Malkiel says your portfolio may not be providing the diversification you think it
is.
The problem with the anti-globalization movement is that its protestors labour under the delusion that
globalization is up for debate. Protesting the global expansion of capitalism is like demonstrating against the
waistline expansion of nearly middle-aged editors. There are certain laws of nature you just can't beat.
Canadian pension fund executives have understood this for years. As we reported last month, the assets of
Canada's Top 100 Pension Funds have never been as internationally diversified as they are now. The global
equity holdings held by the country's 100 largest funds jumped almost $9 billion in 2000 alone.
The importance of international diversification is critical for institutional investors in Canada. This
country represents less than 3% of the global economy for heaven's sake. Too significant a reliance on
domestic stocks and bonds is a recipe for disaster.
But while the importance of international diversification is understood, its effectiveness has to be seen
within the context of this emerging global economy. Just as globalization helps Canadian pension fund
managers develop international investment portfolios, it may also reduce the diversification benefits those
portfolios offer.
That warning comes from one of the world's most influential economists. Burton Malkiel, the Chemical Bank
Chairman's professor of economics at Princeton University in New Jersey and author of A Random Walk Down
Wall Street, says it is time to re-examine the assumption that international markets don't move in
lock-step.
"Our global markets are much more closely tied and the correlations among markets are much higher than they
have been in the past," says Malkiel. He made his comments during an interview with BENEFITS CANADA last
month. "The diversification benefits are likely to be a little less."
Malkiel isn't suggesting Canadian pension asset managers buck the international investment trend. In fact
he describes himself as a "big believer in globalization." But Malkiel warns you can't assume a level of
diversification that isn't there.
Globalization lends stability to international markets--it encourages higher correlations. For example, we
need look only as far as British Columbia to understand the international impact of a financial crisis in
Asia.
What is Malkiel's recommendation? There's more to investing than geography.
"There are three asset classes where correlations have not increased," he says. "One is real estate--global
real estate as well. The second is bonds. I consider high yield bonds to be an equity type of asset. You're
really getting paid to take those risks in the bond market, and the correlations don't seem to have gone
up. Third, I think the risk of inflation is going to be a worldwide phenomenon. One asset class that is
uncorrelated with both equities and real estate are inflation-protection securities such as are issued by
the U.S. and Canadian federal governments."
There is another problem with the anti-globalization movement. Its leaders are not anti-globalization so
much as they are anti-capitalist. They argue against allowing capitalism to exercise, unfettered, its
natural expansionist tendencies. This is a perfectly appropriate debate for the world to engage in right
now--just as long as we all understand what we're debating.
--Kevin Press
kpress@rmpublishing.com
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