Since 2008, the performance of pension plans worldwide — and in Canada — has suffered from home-county bias, says a recently published report from global index provider FTSE Russell.
The FTSE Russell study examined the pension fund allocations of five countries — Canada, the U.S., the U.K., Japan and Australia — between 2008 and 2019. All five had a home-country bias during that period, as indicated by each country’s ratio of domestic equity to global equity allocation according to their weights in the FTSE All-World Index.
Canada had an average 21% allocation to Canadian equities and 3% allocation to foreign equities, giving it a ratio of 7x. As such, the country was in the middle of the home-country bias spectrum.
Australia had the largest home-country bias, with a ratio of 26x, and the U.S. had the smallest, at 1.2x. (The report noted that the relatively small disparity for the U.S. largely reflects that the U.S. accounts for more than half the weight of the global index.)
Except for the U.S., home-country bias contributed to negative performance relative to the FTSE All-World Index for the period, the report found. In Canada, the U.K., Japan and Australia, domestic equities generated higher risk-adjusted returns than overseas equities for only 25% (or less) of the period reviewed.
For example, Canadian equities delivered better risk-adjusted returns than overseas equities in only three of the last 12 years.
The report noted that, for Canada, sector composition and currency contributed to underperformance. Oil, gas and basic materials make up about 70% of Canada’s equity market — sectors that have underperformed their overseas peers in the last 12 years. And Canada base currency appreciation improved returns in only five of the the last 12 years, the report said.
In a release, Paul Bowes, head of FTSE Russell Canada, said Canadian pension funds have increased their levels of global diversification in recent decades but room for improvement remains.
“Through education and analysis, we are working with our institutional investor clients in Canada to encourage them to take a broader approach into additional asset classes and outside our borders,” he said.
For full details, read the FTSE Russell study.