Pensions must invest in Canada
Politicians should push to keep more money at home.
The federal election has no shortage of candidates talking about their plans to rebuild our economy post-pandemic, so it is surprising no one is talking about how our country’s own major pension plans have stopped investing in this country.
While party leaders talk about selling our country as a desirable investment destination for foreign interests, they have mostly been silent about how our own pension managers have abandoned Canada as a place to invest.
This dichotomy existed long before this election. As the federal government’s Invest in Canada website plainly puts it: Canada combines top talent, unbeatable market access and an unparalleled tax environment to give global investors abundant growth opportunities. As both proud Canadians and investment managers, we wholeheartedly agree with this message. But what are we doing to encourage domestic investors to take advantage of these opportunities as well?
Over the past two decades, Canadian institutional investors, particularly pension plan sponsors — including provincial governments, the federal government, large corporations and pension managers — dramatically reduced their exposure to Canadian equities. To put it in perspective, the Pension Investment Association of Canada reported that, in 2000, the annual weight of Canadian equities in overall asset allocation of pension plans in Canada was 28 per cent; in 2020, it was approximately five per cent.
Whatever the reason for this shift — whether to gain access to a larger international market in search of the next Amazon, or to avoid the daily fair value accounting requirements of public equity markets — the steep decline of institutional investment in Canadian equities is problematic for everyday Canadians for a host of reasons.
When institutional investors send Canadians’ hard-earned savings outside of Canada, they aren’t just moving money out of the country, but also some of its most important associated economic benefits. That means less innovation, fewer jobs and reduced economic activity and security for Canadians — the majority of whom are beneficiaries of pension plans that appear increasingly and inexplicably uninterested in investing in Canada.
We believe in the value of a diversified and balanced portfolio. That said, the investment strategies of most institutional investors today cannot even charitably be called balanced. In fact, the extent to which institutional investors have moved their money out of Canada looks like a complete retreat from the country.
Canadian institutional investors must understand that investing in Canada isn’t just the right thing to do, it makes good financial sense. It is how we will shape our future.
Built upon its favourable demographics, expanding and diversified economy, reasonable debt levels and political stability, Canadian equities have generated strong returns for investors. In fact, since 1988, the S&P/ TSX Composite Total Return Capped Index generated an 8.7 per cent annualized return, while over the same period, foreign stocks as represented by the MSCI World Total Return Net Index generated a 7.8 per cent annualized return.
We should be laser focused on building the next made-in-Canada global success story — the next Shopify. If Canadians don’t invest in our own country to support the development of these businesses, who will?
As politicians and the federal government tout all the reasons why Canada is such an attractive market for global investment, we urge each of Canada’s political leaders to also make this argument directly to domestic institutional investors and encourage them to show more confidence in the very people who fund their plans.