In a flurry of economic news this week, Ottawa announced the creation of a sovereign wealth fund to finance a shopping list of infrastructure projects.
Prime Minister Mark Carney didn’t release details but kicked things off with a $25 billion commitment over three years to spur private investors at home and abroad.
Sovereign wealth funds are nothing new globally and even among Canadian provinces, but are usually financed with excess cash such as oil revenues.
The other big difference with the proposed Canada Strong Fund is that it will be open to Canadians to invest in directly through a new retail investment product. That suggests everyday Canadians can benefit directly from a national economic restructuring through tax perks offered in their registered retirement savings plans (RRSP) and tax free savings accounts (TFSA).
Ottawa says the fund will be a non-partisan Crown corporation managed by a CEO and independent board of directors in a way similar to the Canada Pension Plan Investment Board (CPPIB), the investment arm of the Canada Pension Plan.
Safe alternative for risky retirement portfolios
The investment strategy for the Canada Strong Fund has not been formalized but it has the potential to address growing risk in Canadian retirement portfolios.
Workplace pension plans have become a shell of their former selves as millennials overtake the aging baby-boom generation. While the post Second World War generation fades, so does the defined benefit pension plan (DB).
The DB pension was the gold standard when boomers dominated the workforce. Worker and employer both paid into it, and regular income - most often tied to the rate of inflation - was guaranteed after retirement. Some included provisions for survivor benefits and other perks younger workers can only dream of today.
According to Statistics Canada, 48.4 per cent of employed men and 34.5 per cent of employed women were covered under a DB pension plan in 1977. The proportion of DB pensions (almost exclusively public sector plans) has now plunged below 25 per cent.
If younger workers are lucky enough to have a workplace pension it is likely defined contribution (DC), where workers and often employers contribute a fixed per cent of the worker’s salary to be invested by a third party. The amount the employee receives in retirement depends on how much is contributed and how well the investments perform; exposing a good chunk of their savings to the whims of broader markets.
Employers who sponsor group pension plans are not required to make contributions. In addition to the overall decline in pension quality, research from Deloitte Canada recently found that only 24 per cent of private sector workers participated in any employer-sponsored pension plan.
The death of the 60/40 split
That leaves retirement investors with the challenge of minimizing risk and maximizing returns through their RRSP and TFSA portfolios.
One way to do that is through a diversified mix of equities and fixed income. The theory is a 60/40 per cent split in favour of equities, but the fixed income portion should increase as the investor ages to ensure the cash is there when they need it.
With guaranteed investment certificates currently yielding about 3.5 per cent annually, fixed income will probably hinder the performance required to meet retirement goals.
You can boost income yields through dividend stocks or bond funds but returns are far from consistent.
Opportunity knocks for the next generation of Canadians
The Canada Strong Fund has the potential to fill that void to anchor retirement portfolios and help provide a reliable income stream.
The $51.8 billion CPPIB investment strategy is a good model. As of 2023, the infrastructure-focused portfolio had stakes in 29 direct projects spanning 13 countries.
The investment arm of the Crown corporation focuses on acquiring long-term, high-quality assets such as data centres, toll roads and utilities - primarily in the US, Europe and India to diversify risk.
That strategy can be tweaked in the new fund to generate income directly to investors through bonds and utilities like pipelines, toll roads and deep water ports.
Ottawa says the initial investment would have the backing of the Federal government but a good inflation hedge can also lock in returns.
An investment for the masses?
Ottawa’s big challenge is to sell the fund to skeptical millennial, gen-Z and eventually, generation Alpha investors.
They’re catching on to how investment fees can eat into returns and gravitating toward low-cost, high-risk investments.
If you haven’t been living under a rock, you know Mark Carney has to chops to pull it off. Before being elected Prime Minister he successfully managed $25 billion in long-term income generating funds for Brookfield Asset Management.
Before that, he pulled the monetary levers at the Bank of Canada during the 2009 global financial meltdown and went on the steer Britain through Brexit.
Restructuring a G7 economy while generating strong and steady investment returns should be a breeze.
