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Dale Jackson

Personal Finance Columnist, Payback Time


A group of nearly 100 Canadian business leaders is calling on Federal Finance Minister Chrystia Freeland and her provincial counterparts to "amend the rules governing pension funds to encourage them to invest in Canada.

The open letter says forcing Canada's biggest pension plans to allocate a greater portion of the billions of dollars in investments they hold to Canadian companies would strengthen the domestic economy, and the funds themselves in turn.

Concentrated risk, limited opportunity

The proposal is being presented as a win-win but a Canada quota would restrict investments made by pension plan managers to less than three per cent of global equities; roughly two-thirds of which are directly tied to the finance and resource sectors.

Limiting investments to that tiny sliver of the world's publicly traded stocks - comprised mostly of two sectors in one country - exposes plan holders to concentrated risk and denies them a world of opportunity.  

In contrast, U.S.-listed equities account for roughly half of publicly-traded global equities in every sector imaginable, giving Americans everything they need for a home-grown diversified investment portfolio. 

The dangers of 'home bias'

Canadian investors are already notorious for overweighting their registered retirement savings plans (RRSPs) in Canadian equities, which is probably a holdover from before 2005 when a 30 per cent cap on foreign holdings was lifted.

As an example of the inherent risk of home bias, 2023 was a lacklustre year for Canadians who invested in the old Toronto Stock Exchange stalwarts through Canadian equity funds, defined contribution pension plans, or directly.

As borrowing rates rose alongside a five per cent increase in the Bank of Canada interest rate, the U.S. benchmark S&P 500 advanced by 24 per cent while TSX Composite lagged way behind with an 8 per cent gain for the year.

Canadian utilities and real estate investment trusts (REITs) posted negative returns and even the big Canadian banks, insurance companies and resource companies struggled to break even.

There are some years when the TSX outperforms the S&P 500 and others when it flat-out loses value because overall performance is closely tied to global resource prices.    

Canadian equity performance is volatile and any qualified investment advisor would recommend a diversified portfolio that spans geographic regions and sectors. 

Jim Leech, former president and CEO of the $250 billion Ontario Teachers' Pension Plan, told BNN Bloomberg last week that pension funds must remain independent of government to guarantee the best returns for Canadians.

Canada's investment quota 'self-serving'

For one Toronto-based investment advisor, limiting investments to such a narrow field is not in the best interest of plan holders.

"It’s a terrible idea for a variety of reasons and does seem entirely self-serving," says Dave O'Leary, founder and principal of Kind Wealth Management.

He says the economic benefits of a Canada investment quota, and the motives behind the push are suspicious. The nearly one hundred signatures on the open letter include a who’s who of corporate leaders from that tiny sliver of TSX-listed finance, resource and telecommunications companies that stand to benefit from the flood of cash coming into Canadian equities.

"Canadian pensions buying more large public equities doesn't create any tangible economic impact. It will only serve to increase the stock price of these big companies - to which these CEO's bonuses are heavily tied - and will disproportionately benefit the wealthiest Canadians," says O’Leary.