Private placements, very popular with large institutional investors, are prohibited for the sovereign wealth fund which grows Norway’s oil wealth for the benefit of future generations.
No question, its government shareholder responded again this year to the fund’s managers who would like to broaden their investment horizon.
The Norwegian fund, one of the largest in the world with assets of 1,500 billion euros (nearly 2,200 billion dollars), would nevertheless have the means to bet on this type of investment. THE private equity are illiquid investments that require patience on the part of investors before being profitable. The fund does not pay money directly to retirees, but rather to the Treasury, and its investment horizon is as long as the expected life of oil reserves, between 30 and 50 years.
Norway wants the fund’s 1.5 trillion euros to be invested only in publicly traded company shares and bonds. Private placements lack transparency and are risky, complex and more expensive to manage, according to the government, which prefers the simplicity and transparency of organized markets.
This simplicity has served him well so far. The fund, which is entirely invested outside Norway, shows a return of 16.1% in 2023.
Performance is what we expect first and foremost from those who manage our money, like our pension funds, but the list of expectations is growing longer and more complex.
The egg or the chicken
Large pension funds are under pressure to ensure their investments respect environmental, social and governance values, and they are increasingly required to report on their progress in this regard. This is good, because they have the power to influence the choices of the companies in which they invest.
In Canada, those who boost workers’ pensions are now being criticized for not investing enough in the Canadian economy, while they compete in foreign markets to get their hands on the best opportunities.
Canadian pension funds’ investment in publicly traded companies in Canada has fallen from 28% to 4% of their total assets over the past 20 years. In addition to investing in stocks, Canadian pension funds can invest in infrastructure and other less liquid investments such as real estate. All told, approximately 10% of their total assets are invested in Canada.
This is too little, have publicly denounced an impressive number of directors and former directors of large companies, including Henri-Paul Rousseau, who, incidentally, was president of the Caisse de dépôt in 2006 when it invested 2.4 billion in London’s Heathrow Airport, the largest foreign investment in its history.
The arguments of these big guns of the Canadian economy have convinced Ottawa that this is a problem and that it must be tackled1.
This is not a problem for everyone, at least not for pension fund beneficiaries. Canada’s pension system works well and is the envy of many countries. It ranks year after year at the top of the Mercer firm’s ranking of the best retirement plans in the world.2.
In Canada as in Norway, investing abroad is a necessity for large investors looking for the best returns. The entire Canadian stock market accounts for less than 3% of global stock market capitalization.
Over the last 10 years, the return of the American stock market (S&P 500) has been twice as high as that of the Canadian stock market (TSX 60).
The Canadian economy has long had a problem of underinvestment and low productivity. Before forcing pension funds to invest more in Canada, we should know if the economy is doing poorly because pension funds are not investing enough or if they are not investing in Canada because the economy is less efficient.
Former Bank of Canada Governor Stephen Poloz will have to answer this question. He was mandated by the Minister of Finance, Chrystia Freeland, to try to find, with the directors of pension funds, ways to increase their investments. He already knows a thing or two about the issue. If there is an answer, surely this is the right person to find it.
1. Read a letter sent to the federal government
2. Check out Mercer’s rankings
reference: www.lapresse.ca