Opinion: Should Canadian pensions invest more in Canada, less abroad?

The Canadian federal government is keen to encourage its pension funds to increase their domestic investment portfolios, a move that is causing a stir within the investment community.

The government pledged in its 2023 Fall Economic Statement that it would work collaboratively with Canadian pension funds to create an environment that encourages them to put more of the billions of dollars in assets they collectively manage to work on home soil.

The government’s push for increased domestic invesmtments comes at a time when inflation, volatile financial markets and geopolitical tensions make it harder to create better risk-adjusted returns.

Unsurprisingly, there has been pushback on the initiative from some of the more high-profile leaders of the Canadian pension system.

With good reason. Political decisions to direct money into investment propositions, without considering other imperatives of asset owners, rarely result in sound investment decisions.

Pension funds have a huge responsibilty to manage the retirement savings of their members effectively and productively.

Conventional wisdom suggests they should have the independence to invest where they find the best returns.

Evan Siddall, the chief executive officer of Alberta Investment Management Corp. (AIMCo), which manages $121 billion (C$164 billion) in assets, warned that the move could undermine Canada’s pension system, seen globally as a gold standard for the industry.

In an op-ed in local media, Siddall said there are "mounting concerns about the ability of plans to operate in the most efficient manner, unfettered by political influence."

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AIMCo, currently has around 43% of its investments in Canada, but is actively pursuing large-scale infrastructure investments in other markets like Asia.

“In short, we will pursue the best investments wherever they exist, consistent with our fiduciary responsibility to maximise risk-adjusted net returns,” he said.

INDEPENDENCE AND DIVERSITY

As some other industry observers have pointed out, if the government wants to encourage more local investments, the best thing it can do is create an environment that is conducive to invest more locally.

It's also good to remember a golden rule in investing: don't put all your eggs in the same basket. Similarly, pension funds should not be concentrating their investment bets in any particular market, including Canada.

The responsibility of pension funds is primarily to generate returns for their pensioners, not to prop up the Canadian economy.

Pushing for more domestic investment could cause substantial harm to the individuals who rely on these funds for their retirement.

The government should find other ways to boost the Canadian economy.

As Siddall says, "Pressuring pension funds to 'make Canada great again' is not the way Canada will grow its economy."

GROWING INTERNATIONALISATION

For the massive pension funds --whose cumulative assets can be measured in the trillions -- local markets can be very limiting for their investment activities.

They will need to look beyond their national borders and continue to invest on a global scale.

"Investing on a global scale offers these funds a broader opportunity set, allowing them to tap into offshore expertise and find compelling investment opportunities. It also helps them to mitigate the concentration risk associated with investing primarily in their domestic markets," a pension fund executive told AsianInvestor.

Canadian pension funds, such as CPPIB and the Ontario Teachers' Pension Plan, are among the largest institutional investors globally. They also have sizeable investments in Asia.

Their substantial asset size enables them to pursue investment opportunities in various markets, that may not be available to many other investors  -- while generating above-average returns, at least most of the time.

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"Pension funds have a long-term investment horizon, as their primary objective is to secure retirement benefits for their members over many decades. This long-term perspective aligns well with investments that have longer gestation periods or require patient capital," said the executive.

To sum up, the global expansion of Canadian pension funds is not just a strategy for growth, but a necessity in a world and the success of these funds in the international investment arena stands as a testament to the effectiveness of this strategy.