The Bay Street Financial District with the Canadian flag in Toronto on Aug. 5, 2022.Nathan Denette/The Canadian Press
Keith Ambachtsheer is director emeritus of the International Centre for Pension Management (ICPM), senior fellow of the National Institute on Ageing, executive-in-residence at the Rotman School of Management and co-founder of CEM Benchmarking and KPA Advisory Services.
Sebastien Betermier is associate professor of finance at McGill University’s Desautels Faculty of Management and the executive director of ICPM. The views of the authors do not necessarily represent those of ICPM.
In a highly publicized open letter to the Canadian government, a group of business leaders have opined that Canadian pension funds are not investing enough in Canada and that this is hurting the Canadian economy.
Their opinion contradicts a well-established empirical fact in academic research showing Canadian pension funds and other investors allocate a disproportionately large portion of their portfolio to domestic assets, such that it has been termed as the “home bias.”
Even though Canada makes up approximately 3 per cent of the global stock market index, large Canadian pension funds invest about 20 per cent of their listed equity portfolio in domestic firms. That extra 17 per cent is the “home bias.” Therefore, Canada’s leaders must examine the issue carefully before taking any policy action, such as amending the rules governing pension funds to push them to invest even more in Canada, as the open letter proposes.
Finance academics, who have long studied the topic of domestic investments, have been scratching their heads over this “home bias” and why investors tilt their portfolio toward domestic assets. Such a disproportionate tilt is risky, especially when the local economy is comparatively small and concentrated in a few industries.
Consider that Canada’s GDP is comparable to that of Texas and heavily driven by the natural resource sector. To avoid the proverbial “all eggs in one basket” scenario of concentrated risk, our pension funds choose to invest in a highly diversified and global portfolio of companies to spread out the risk so that if one investment fails, the others will be there to buffer the loss. So, by investing globally, outside of Canada, the funds are able to decrease the risks in their portfolio and, in turn, provide greater retirement security for their millions of members and reduce the cost for the government in cases of severe losses requiring government financial intervention.
On the other hand, domestic assets do bring distinct benefits to investors which may be the reason we see this “home bias.” For one, domestic investments are relatively effective for hedging local interest rate and inflation risks. Additionally, pension funds have a home-court informational advantage which can result in high risk-adjusted returns for their domestic investments. Over the past 20 years, Canadian pension funds have not hesitated to go big on strategic domestic investments and make use of their superior information at home.
For example, in 2000 Ontario Teachers’ Pension Plan acquired Cadillac Fairview – a large owner, operator, investor and developer of best-in-class real estate primarily located in Canada. The $6-billion transaction represented close to 10 per cent of the fund’s $67-billion of assets under management at the time. The acquisition of Cadillac Fairview has allowed Ontario Teachers’ to create and capture significant value while retaining talent in Canada.
What is clear from this discussion is that 1) the risk-return trade-offs of domestic investments are complicated and need to be carefully assessed; 2) the 20-per-cent allocation to Canadian assets by our pension funds represents a considered strategic balancing of these trade-offs; and 3) we should not rush to conclusions about any policy measures proposed by the open letter.
If capital is not flowing into Canada, as the business leaders say, then the underlying issues could be structural and have to do with barriers to investing. Nothing discourages investment more than an uncertain policy environment which makes it difficult for long-term investors to commit large amounts of capital to Canadian ventures.
For example, let’s look at infrastructure. Assets such as toll roads have appealing properties for pension funds because they provide a steady and indexed stream of cash flows. But an uncertain policy environment makes such infrastructure investments high risk for the funds. The recent legislation introduced by the Ontario government to ban tolls illustrates the kind of policy risk pension funds are exposed to. If they had already invested in road infrastructure, they would lose their return on investment, which means a loss in retirees’ pensions.
The question we should ask ourselves is not whether Canadian pension funds invest enough in Canada, but instead how we can make Canadian assets more appealing to investors. Reducing the barriers to investing in Canada will unlock capital not only from our own pension funds but also from a much larger pool of international investors.
NEW YORK (AP) — Shares of Tesla soared Wednesday as investors bet that the electric vehicle maker and its CEO Elon Musk will benefit from Donald Trump’s return to the White House.
Tesla stands to make significant gains under a Trump administration with the threat of diminished subsidies for alternative energy and electric vehicles doing the most harm to smaller competitors. Trump’s plans for extensive tariffs on Chinese imports make it less likely that Chinese EVs will be sold in bulk in the U.S. anytime soon.
“Tesla has the scale and scope that is unmatched,” said Wedbush analyst Dan Ives, in a note to investors. “This dynamic could give Musk and Tesla a clear competitive advantage in a non-EV subsidy environment, coupled by likely higher China tariffs that would continue to push away cheaper Chinese EV players.”
Tesla shares jumped 14.8% Wednesday while shares of rival electric vehicle makers tumbled. Nio, based in Shanghai, fell 5.3%. Shares of electric truck maker Rivian dropped 8.3% and Lucid Group fell 5.3%.
Tesla dominates sales of electric vehicles in the U.S, with 48.9% in market share through the middle of 2024, according to the U.S. Energy Information Administration.
Subsidies for clean energy are part of the Inflation Reduction Act, signed into law by President Joe Biden in 2022. It included tax credits for manufacturing, along with tax credits for consumers of electric vehicles.
Musk was one of Trump’s biggest donors, spending at least $119 million mobilizing Trump’s supporters to back the Republican nominee. He also pledged to give away $1 million a day to voters signing a petition for his political action committee.
In some ways, it has been a rocky year for Tesla, with sales and profit declining through the first half of the year. Profit did rise 17.3% in the third quarter.
The U.S. opened an investigation into the company’s “Full Self-Driving” system after reports of crashes in low-visibility conditions, including one that killed a pedestrian. The investigation covers roughly 2.4 million Teslas from the 2016 through 2024 model years.
And investors sent company shares tumbling last month after Tesla unveiled its long-awaited robotaxi at a Hollywood studio Thursday night, seeing not much progress at Tesla on autonomous vehicles while other companies have been making notable progress.
TORONTO – Canada’s main stock index was up more than 100 points in late-morning trading, helped by strength in base metal and utility stocks, while U.S. stock markets were mixed.
The S&P/TSX composite index was up 103.40 points at 24,542.48.
In New York, the Dow Jones industrial average was up 192.31 points at 42,932.73. The S&P 500 index was up 7.14 points at 5,822.40, while the Nasdaq composite was down 9.03 points at 18,306.56.
The Canadian dollar traded for 72.61 cents US compared with 72.44 cents US on Tuesday.
The November crude oil contract was down 71 cents at US$69.87 per barrel and the November natural gas contract was down eight cents at US$2.42 per mmBTU.
The December gold contract was up US$7.20 at US$2,686.10 an ounce and the December copper contract was up a penny at US$4.35 a pound.
This report by The Canadian Press was first published Oct. 16, 2024.
TORONTO – Canada’s main stock index was up more than 200 points in late-morning trading, while U.S. stock markets were also headed higher.
The S&P/TSX composite index was up 205.86 points at 24,508.12.
In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.
The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.
The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.
The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.
This report by The Canadian Press was first published Oct. 11, 2024.
