RussellInvestor

VOLUME 6 ISSUE 2 Helping you make informed investment decisions for your future

With Compliments of:

Kelly R.H. Shannon Investment Advisor www.kellyshannon.ca Telephone: (403) 299 7046 Toll Free: (800) 310 6484 Fax: (403) 299 6597 kelly.shannon@rbc.com

RBC Dominion Securities 333 7th Ave SW Calgary AB T2P 2Z1

PORTFOLIOS without Borders

Imagine winning a vacation that allows you to fly anywhere in the world. China, Europe, India, Brazil, Japanthe possibilities are exciting and endless. Instead, you decide to stay at home.
Likewise, many Canadian investors have chosen to stay grounded in domestic stocks despite an unprecedented opportunity to enhance their portfolios by investing globally. Previously confined to 30% foreign equities in registered investments, the elimination of foreign content restrictions now allows investors to take full advantage of the diversification and return benefits available in foreign markets. With the S&P/TSX Composite Index outperforming most international markets over the past three years, its understandable why some investors have focused on Canadian equities. But those who continue to keep their portfolios isolated in Canada may face challenges that could increase portfolio risk and limit return potential. Here are some of the biggest reasons to consider increasing the foreign content in an investment portfolio:

Greater investment opportunities Less dependence on commodities Long-term return potential

More country and sector diversification Reduced risk and volatility

A RUSSELL INVESTMENT PROGRAM

GLOBAL LEADERS IN MULTI-MANAGER INVESTING

top ten stocks: msci world ex-canada index* vs. s&p/tsx composite index
sector
Industrials Energy Technology Financials Energy Con. Staples Financials Financials Health Care Health Care

msci world
1. General Electric 2. Exxon Mobil 3. Microsoft 4. Citigroup 5. BP PLC 6. Proctor & Gamble 7. Bank of America 8. HSBC Holding 9. Johnson & Johnson 10. Pfizer

s&p/tsx
1. Royal Bank 2. Manulife 3. Bank of Nova Scotia 4. EnCana 5. TD Bank 6. Suncor 7. BMO 8. Cdn Nat. Resources 9. Sun Life 10. BCE

sector
Financials Financials Financials Energy Financials Energy Financials Energy Financials Telecom

balanced selection of industries and multi-national corporations available when investing in foreign markets (Figure 1). The MSCI World ex-Canada Indexs most heavily weighted sectors are Financials at 24.7%, Consumer Discretionary at 12.0%, Information Technology at 11.4% and Industrials at 10.7%. Unlike the Canadian market, there is greater balance among the sector weights. In addition, the combined weight of the Health Care and Consumer sectors in the S&P/TSX Composite Index is less than 10%, compared to approximately 30% in the MSCI World ex-Canada Index. Canada is particularly under-represented in these key sectors and is primarily represented by firms that would be considered small- or mid-cap by global standards.

source: tsx group, msci. *the msci world ex-canada index is a custom index calculated by msci.

foreign markets offer more choices

A major factor in favour of investing in foreign equities is the limited opportunity set currently available in the Canadian equity market relative to international markets. While Canada offers attractive investment choices, it represents only 3.5% of the world's capital markets. That means that over 95% of investment opportunities exist outside our borders. Most of the largest companies in the world are not based in Canada. According to a 2005 report by Forbes Magazine, five of the top 10 largest firms in the world were from the US (Citigroup, General Electric, American International Group, ExxonMobil, and Bank of America); two hailed from the UK (HSBC, BP); two were from the Netherlands (Royal Dutch/Shell, ING); and, one was based in Japan (Toyota). No Canadian companies finished in the top 50, and the Royal Bank of Canada was the highest ranked Canadian firm at number 89. The companies were ranked based on four key metrics: sales, profits, assets, and market value.

greater sector diversification

By focusing too much of your portfolio on Canadian equities, you are not only under-diversified geographically, but also overly dependent on a limited number of sectors, industries, and companies. Over 70% of the Canadian stock market is weighted in just three sectors: Financials at 31.6%, Energy at 27.4% and Materials at 15.1%. In fact, financial services companies account for six of the top 10 largest holdings in the S&P/TSX Composite Index. The Canadian market has become even less diversified over the past year as more Energy stocks entered the top 10 in 2005. As a result, underperformance in either the Financials or Energy sectors could significantly impact Canadian market performance. To gain sufficient sector diversification, it is essential to incorporate foreign investment in your portfolio. The top 10 most heavily weighted stocks in the MSCI World ex-Canada Index offer a glimpse of the more diverse and

canadian equities are vulnerable to commodity prices

Since the Canadian stock market is so heavily weighted in the Energy sector, you likely have a significant portion of your assets allocated to the oil industry if you are overweight Canadian equities in your portfolio. Relying too much on Canadian equities may mean you are exposing yourself to the extreme short-term volatility of oil prices. Figure 2 highlights this point by comparing the return patterns of the S&P/TSX Energy Sector and the S&P/TSX Composite Index to the price fluctuations of crude oil prices over a one-year period ending February 28, 2006. When oil prices fall, Canadian energy stocks often stumble

accordingly. Since the S&P/TSX Energy sector makes up a large part of the S&P/TSX Composite Index, any major decline in oil commodity prices can have a negative impact on the broad benchmark. This was the case as recently as October 2005, when oil prices fell below US$60 a barrel and the S&P/TSX Energy sector fell over 12%. The S&P/TSX also declined over 5% that month. This is not to say that the Canadian stock market is only swayed by energy stocks. There are many other contributors to Canadian stock market performance, such as currency movements and economic factors. However, the rise and fall of oil prices is clearly a major factor in the Canadian markets returns and volatility.

dont get left behind

According to the Investment Funds Institute of Canada (IFIC), the two most popular categories for new fund sales in 2005 were Canadian Balanced Funds ($11.2 billion) and Canadian Dividend and Income

Funds ($8.6 billion). In contrast, the biggest redemptions came out of Foreign Equity funds ($2.98 billion). An examination of historical mutual fund sales shows that investors who tried to time the market or chase performance, often ended up

over-dependence on oil

foreign equities outperformed over the long run

Although Canadian stocks have an annualized return of 23.5% over the past three years, foreign equities have outperformed over the long run. Over the past 25 years, the MSCI EAFE Index returned 11.2%, outpacing the S&P/TSX Composite Indexs return of 9.9%. Although the return differential may seem minimal, these percentage points can make a significant difference in dollar terms. Figure 3 shows how $10,000 invested in the MSCI World Index would have grown to $177,683 from 1980 to February 2006. An invesment of $10,000 in the S&P/TSX Composite Index over the same period would have grown to $133,065, resulting in a difference of $44,618.
source: bloomberg

every dollar counts

source: msci & s&p/tsx composite index

the perils of chasing performance

extensive stock research on your behalf by making on-site company visits in foreign countries, interviewing management teams of different cultures, meeting company competitors, and talking to industry specialists in order to better evaluate global investment prospects. While the investment managers research companies across the world, Russell researches the managers. Through Russell, investors receive extensive coverage of all the worlds major regions with research teams in Canada, US, Europe and Asia. Russell continually monitors and meets with investment managers across the globe, analyzing their portfolios and evaluating their capabilities. With 494 investment professionals spread across various countries and continents, Russell has the expertise to develop strategies that can help clients keep on top of changes in the markets. Contact your investment advisor if you wish to expand your portfolios horizons or simply want to review the foreign content in your portfolio.

COMMISSIONS, TRAILING COMMISSIONS, MANAGEMENT FEES AND EXPENSES ALL MAY BE ASSOCIATED WITH MUTUAL FUND INVESTMENTS. PLEASE READ THE PROSPECTUS OF THE MUTUAL FUNDS BEFORE INVESTING. MUTUAL FUNDS ARE NOT GUARANTEED, THEIR VALUES CHANGE FREQUENTLY AND PAST PERFORMANCE MAY NOT BE REPEATED. THE SOVEREIGN INVESTMENT PROGRAM AND THE RUSSELL LOGO ARE REGISTERED TRADEMARKS OF FRANK RUSSELL COMPANY. SOVEREIGN AND MULTI ASSET MULTI STYLE MULTI MANAGER ARE TRADEMARKS OF FRANK RUSSELL COMPANY. THIS ARTICLE HAS BEEN PREPARED BY FRANK RUSSELL CANADA LIMITED FOR USE BY RBC DOMINION SECURITIES.* IT IS NOT INTENDED TO BE CONSTRUED AS INVESTMENT ADVICE OR AS AN OFFER TO BUY OR SELL SECURITIES. NEITHER RUSSELL NOR RBC DOMINION SECURITIES MAKE ANY WARRANTY AS TO THE ACCURACY OR COMPLETENESS OF THE INFORMATION, ANALYSIS OR VIEWS EXPRESSED IN THIS PUBLICATION. YOU SHOULD NOT UNDERTAKE ANY INVESTMENT TRANSACTION ON THE BASIS OF THIS PUBLICATION, BUT SHOULD FIRST CONSULT WITH YOUR INVESTMENT ADVISOR TO ENSURE ANY PROPOSED TRANSACTION IS SUITABLE FOR YOU. NEITHER RBC DOMINION SECURITIES NOR FRANK RUSSELL COMPANY ACCEPT ANY LIABILITY WHATSOEVER FOR ANY DAMAGES OR LOSSES YOU MAY INCUR BY RELYING ON THIS PUBLICATION. *MEMBER CIPF

source: investor economics, ific, msci eafe index

missing out in the long run. Figure 4 compares the year-by-year purchases of foreign equity funds with the returns of the MSCI EAFE Index. Investors who abandoned foreign equities robbed themselves of the opportunity to benefit from the strong gains of the foreign markets. This trend was evident over the past three years, as investors who reduced their foreign equity holdings in 2003, 2004, and 2005 missed out on steady returns from the MSCI EAFE Index.

the russell global advantage

For those wishing to explore this new world of portfolios without borders, Russell can be your passport to the thousands of investment prospects across the globe. The Sovereign Investment Program utilizes the complete resources of Russells manager research team and gives investors access to highly ranked global equity managers that are used by some of the largest pension plans in the world. These global equity managers conduct

copyright russell investments canada limited 2006. date of first use: may 1, 2006 cmsovqca0506e