Getting rid of a client’s home country bias regarding their investments means talking about more than just diversifying equities, according to Paul Bosse, principal, Vanguard Investment Strategy Group.

Bosse spoke at the Exchange Traded Forum hosted by Radius Financial Education in Toronto on Monday.

Said Bosse: “Most people focus on [diversifying] equities but it’s also true in bonds.”

Many investors don’t feel they need to globally diversify their bonds because international interest rates tend to move together, said Bosse. However, according to Vanguard research the correlation between Canadian interest rates and other countries ranges from 0.4 to 0.6, which Bosse sees as an opportunity to diversify.

As well, the long duration of Canadian bonds means investors are likely going to want exposure to other markets as interest rates start to rise. “The Canadian index has about one to one and a half year extra duration — it’s a longer index,” said Bosse. “So, if you’re concerned about interest rates you might want to pause and diversify.”

The biggest risk in investing globally in bonds is currency, according to Bosse. As such, it’s important to find products that are hedged. Unhedged bonds are volatile because of interest rate parity, he said, which means there is a connection between currency and interest rate movements.

“Your unhedged bond component becomes a currency component. It’s no longer acting like a bond, it’s acting more as a currency,” said Bosse. “So, if you want it to act like a bond, and there are many reasons why you want it to, then you ought to hedge that exposure away.”

Even if the Canadian dollar continues to decline, hedging the global bond component of the portfolio will help to mitigate risk, he said. However, clients may have to decide whether they are willing or not to give up some return in order to reduce risk.

Not every client however needs to worry about diversifying the bond portion of their portfolio. Bond diversification has very little effect on portfolios that are heavily weighted in equities — about 70% — said Bosse, because there simply aren’t enough bonds in the portfolio to make a difference. Instead, this strategy is best for clients with bond heavy portfolios.