One Canadian pension plan is very enamored with its home country's bonds.
Healthcare of Ontario Pension Plan, Toronto, owned about C$40 billion ($27.8 billion) in Canadian federal and provincial government bonds at the end of 2024, representing almost one-third (32.5%) of the plan’s total assets of C$123 billion at that time. For comparison’s sake, another major Canadian pension fund, C$434 billion Caisse de Depot et Placement du Quebec, Montreal, had only about 11.2% of its assets in Canadian government bonds, as of Dec. 31, 2023, the most recent data available.
While the HOOPP exposure might seem like an unusually high allocation to this particular asset class, HOOPP’s exposure to Canadian government (and corporate) bonds has actually been declining the past few years.
In 2019 HOOPP held about C$94 billion in Canadian bonds, including both government and corporate issues. By 2024, that overall figure had declined to about C$70.7 billion. HOOPP did not specifically break out Canadian government bonds in its asset allocation data until 2024, according to a source, as such, an apples-to-apples comparison is not possible. Nonetheless, CIO Michael Wissell, said in an interview that the Canadian government bond exposure has been gradually dropping.
Wissell explained that the gradual paring back of the pension fund’s Canadian government bond exposure coincided with shifting its investment strategies — from liability-driven investing, which performs well during periods of low inflation, to liability-aware investing, which takes into account such elements as liquidity, pension liability hedging, economic growth and inflation.
Wissell pointed out that the annual inflation rate in Canada had been around 2% for about 25 years until 2020 when the COVID-19 pandemic struck, eventually pushing the rate of inflation to as high as 8.1% by June 2022.
Moreover, a decision by Canada’s federal government in 2022 greatly impacted the composition of HOOPP’s fixed-income portfolio he said. In November of that year, the Ministry of Finance said it would stop issuing real-return bonds in Canada after more than three decades. The government explained its decision to cease its real-return bonds program by citing low investor demand and the bonds' poor liquidity.
Real-return bonds served as an effective hedge against inflation, Wissell noted, since these bonds adjust their payouts based on the rate of inflation. As a result of the Canadian government’s decision to cancel real-return bonds, HOOPP switched to buying U.S. Treasury inflation-protected securities, better known as TIPS.
Nonetheless, Canadian government bonds remain a core holding in the portfolio. In its 2024 annual report, HOOPP said: “We maintain very large holdings in Canadian federal and provincial government bonds which generate safe and reliable returns. These investments, along with the annual pension payments to our members, inject billions into Canada’s economy, supporting growth at home.”
Still, the fixed-income portfolio of the pension fund returned a modest net 1.9% in 2024 — only real estate, at a net 1.4%, delivered a worse performance for the year. Overall, the pension fund returned a net 9.7%, with public equities the top-performing asset class, with a net 17.9% return.
In that latest annual report, HOOPP explained that its bond portfolio “weathered another year of extreme volatility resulting from concerns over inflation and government deficits earlier in the year, followed by softening inflation and a slowing Canadian economy, leading to sizable rate cuts by the Bank of Canada during the second half of the year.” Fixed income still generated a positive return, HOOPP said, due to “interest and coupon income, as well as by price performance in shorter-term Canadian government-guaranteed bonds, including provincials, agencies and mortgage bonds,” which more than mitigated the price losses on longer-term bonds in Canada and on TIPS.
HOOPP is committed to maintaining a significant fixed-income exposure, Wissell said, since, among other things, the bonds in the portfolio provide government-guaranteed rates of return as well as diversification.
Moreover, HOOPP remains committed to investing domestically. At the end of 2024, 50% of the pension funds’ assets were parked in Canadian securities, well ahead of the U.S., which came in second place, at 27%.
“Canada is the core of our investment portfolio because it is a safe and stable country that offers attractive investment opportunities,” HOOP said in its latest annual report, adding that “all else being equal, we prefer to invest in Canada when the risk and reward are appropriate.”
