A McGill quantitative study completed in 2021 placed Canadian pension funds at the top of their global peers in performance and risk management.Nathan Denette/The Canadian Press
Christian Hensley is a Canadian investor who has managed significant asset portfolios for some of Canada’s largest pension plans. He serves as a senior adviser to several family offices and institutional investors.
The global economy is at a turning point, as countries battle to contain inflation amid rising debt levels and geopolitical uncertainty. Canada faces economic adversity, but also a great moment of opportunity.
We have a choice: Commit to a positive path of innovation and competitive leadership or retreat behind the familiar, but costly, shields of regulation, bureaucracy and protectionism. Will we rise to the occasion?
In the 2024 federal budget, the government said it would look at ways to incentivize pension funds to invest more domestically, after lobbying by business leaders. It is vital that we get this right.
Investors of all sorts, Canadian and otherwise, have relatively simple objectives. They want to earn a return on their investments that is reasonable for the risk they take. They look to enhance their returns by seeking out markets and companies that grow, and favour those that demonstrate profitability and productivity (a high return on effort). They seek to manage risk through diversification, access to liquidity (so they can quickly buy and sell if needed) and careful research.
Canadian pension funds are sophisticated global investors – a McGill quantitative study in 2021 placed them at the top of their global peers in performance and risk management. As fiduciaries, Canadian pension fund managers are required to act in the best interest of their pensioners. Those managers clearly believe they can find investment opportunities that feature better growth, higher profitability and stronger diversification abroad. So why exactly do they invest outside of Canada?
Well, for starters, the Toronto Stock Exchange is dominated by a few industries – natural resources and financial institutions collectively represent more than 60 per cent of its principal index. If you want to invest in health care, you’re going to have a difficult time – those stocks represent less than 1 per cent of the market. The technology and consumer sectors are similarly under-represented. This lack of domestic diversity forces domestic capital abroad.
Growth and productivity also remain economic challenges for Canada. From 2023 to 2024, the per capita growth rate of Canada’s gross domestic product was the lowest among the G7 countries, and our struggles with productivity are well documented. Here again, investors feel they must go abroad.
So how can Canada position itself to outperform its peers, secure more investment and deliver greater growth? The answer is definitely not higher taxes, more regulation and forced repatriation of pension money. The prescription is honey, not vinegar.
First, let’s attack the lack of diversity within the Canadian market. Natural resources might not represent the most valuable or value-added assets of the future. We need to support research and development, attract global talent and invest in industries that will drive economic growth and prosperity for the next 100 years.
And we already have a fantastic template to work from. The Canadian government’s Renewed Venture Capital Catalyst Initiative is an impressive program that has brought attention and resources to growing businesses. By offering to take a first loss position, the government has de-risked investing in Canadian companies, and done it in a capital efficient way for taxpayers. Let’s take this model and expand it to targeted high-potential areas such as quantum computing, artificial intelligence, battery technology and biotech.
Second, let’s improve our productivity by cutting regulations, local friction and inefficiency. We can lower taxes to increase the profitability of our companies and motivate business owners to build for the future. Let’s lower bureaucratic barriers that impede entrepreneurship by expanding the scope and impact of the government’s Annual Regulatory Modernization Bills, and work to cut red tape at every level of the economy.
Third, we must encourage, rather than reduce, corporate competition, not just for the sake of Canadian consumers, but for Canadian and global investors. If we don’t, we rob our domestic industries of the competitive forces needed to keep them strong and prepare them to be global champions. We rob our consumers of better products and services.
And if we force, rather than attract, pension capital home, we risk dooming our retirees to lower returns and weaker portfolios for generations to come. If individuals and institutions can’t invest in the things they want, because we restrict or fail to develop better alternatives, they will invest in the only things they can – and can create dangerous asset bubbles and unstable markets.
From challenge comes opportunity. We can learn from our past, and chart a new course. Together we can make Canada a destination of choice for investors and consumers for years to come.