By Terry Flanagan

Energy Seeps In Canada, Soaks the U.K.

When pointing at markets that lack diversity, one buy-side manager points fingers at the U.K.

Resource-rich markets such as Canada and a large majority of Latin America spell a positive story for commodity traders and investors. But, what about traditional portfolio managers that are sticking to their core tenet to stay diversified?

Canada has been long dominated by three major industries: energy, materials and financials. These three sectors comprise nearly 80% of the S&P/TSX Composite Index. If one of those sectors were to weaken it could lead to an unbalanced portfolio, adding to the dangers of an already undiversified investment plan.

Canadian investors don’t seem to mind.

“Canadians have a marked preference for holding domestic investments, and they’re comfortable with seeking familiar, trusted stocks, especially given that the Canadian financial sector fared decently in 2008, unlike that in the U.S.,” a source told Markets Media.

For some, a sector-saturated market is problematic in Canada, but pales in comparison to sector-saturated benchmarks that are not representative to the real economy, such as the U.K.

“I have made the point that Canada is largely undiversified from time to time, but at least the S&P/TSX benchmark is representative of the economy and Canadians recognize their home bias,” said the source, noting that a greater problem exists in the United Kingdom.

“The U.K. benchmarks, such as the FTSE 100, is very dependent on energy companies and miners and is hardly representative of the U.K. economy,” the source said. “The Canadian Index is more weighted to miners than is the economy but since Canada is indeed very dependent on mining, the index isn’t as out of wack with the economy, as it is in the U.K.”

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