Peter Letko and Daniel Brosseau are founding partners of Letko Brosseau and Associates.
Pension funds need to seek out more investments in Canada, and Ottawa’s push for that in last week’s fall economic statement is a step in the right direction.
Canadian pensions are generally well managed in accordance with sound financial principles and the system is secure. They should be allowed to continue to explore the globe for investment opportunities and to do so without political interference. There is no reason to doubt that this will continue to be the case.
But this does not mean everything is perfect in pension land. Contrary to the household financial assets held in banks and insurance companies, those deposited in pension funds are not limited to safe, fixed-income assets but can take patient, long-term risk. These are the type of investments that should be used to build Canada’s future.
Yet Canadian pension funds invest only 33 per cent in the domestic economy and twice as much abroad. This is down from 90 per cent in Canada 30 years ago. Our peers – in terms of the top 100 state-owned funds reported by Global SWF – invest 60-per-cent more domestically, and the U.S. does so more than twice as much.
We do not know how this 33 per cent is invested by asset class because there is insufficient disclosure. However, based on sources such as financial reports, we can estimate the allocations of the Maple 8: the eight largest funds in Canada. Over all, they invest 25 per cent in Canada, lower than the 33-per-cent industry average. Healthcare of Ontario Pension Plan and Alberta Investment Management Corporation having the highest exposure, and Canada Pension Plan and Public Sector Pension Investment the lowest.
If we exclude fixed income, which is principally invested in government debt, the Maple 8 ratio falls to 15 per cent. This means that 85 per cent of their public and private equities, real-estate, and infrastructure investments put together are not Canadian but foreign. This high level of foreign investment is not limited to public equities.
The flight from Canada could be justified if returns were higher abroad. However, that is not the case. Returns in Canada have been better than practically everywhere in the world over the last 20 to 30 years apart from the U.S. And even for the U.S., there have been decades where Canada has led and others where it has lagged.
But Canada has done better than Europe, Asia and the emerging markets by a significant margin. Funds such as the Caisse de dépot et placement du Québec and the Fonds de solidarité FTQ have proven that it is possible to prioritize Canadian investments without compromising returns.
Pension managers have been focused on their portfolios, as they should, and see little difference between domestic and foreign investments. They cannot compute the full macroeconomic effect their investments will have on their member’s incomes, on their contributions.
This is the missing link. Properly deployed, domestic investment not only generates returns but also creates domestic jobs, increases incomes and raises gross domestic product. Foreign investment benefits are mainly limited to returns.
It’s not as if Canada does not need investment. The U.S invests more than twice as much in non-residential investments per worker than Canada does. Canada invests 25-per-cent less than the G7 average in research and development. For every $1 Canada invest in startups, Israel invests $2 despite being an economy a quarter the size. The US invests $39.
Less investment in Canadian businesses increases their cost of capital, discounts their value, reduces their ability to grow and makes this country less attractive. Over the last 40 years, Canada’s gross domestic product per capita has fallen from 95 per cent of the U.S. to 75 per cent.
For pension funds to seek out more investments in Canada surely requires more work and more personnel. But our personal experience, having successfully managed pension savings for more than 50 years, tells us we can do it.
In the 1970s and 1980s, we worked at the CN Investment Division, investing the railway’s pension fund. During that period, CN essentially created Canada’s pension model.
Just as we were able 30 years ago to very profitably manage portfolios that were 90-per-cent Canadian, we have no doubt that today’s managers can build portfolios that have Canadian content comparable with our peers without compromising on the returns and risks.
Domestic and foreign investments are not the same. The former trigger a feedback loop with very positive effects on the domestic economy that cannot be ignored. Canada is rich in opportunity, and it needs people that believe in its future and do not walk away.