The top seven Canadian pension funds are increasingly shifting toward traditional fixed-income assets in their portfolio allocations, according to a report released July 16 by Fitch Ratings.
The report, titled "Canadian Pension Fund Peer Comparison Report," found that pension funds north of the border are “increasingly pivoting to government bonds given the higher-for-longer interest rate environment.”
Pension funds were largely net sellers of private equity assets in 2023, after becoming overallocated to this asset class, in the wake of several years of increasing allocations and strong returns.
But Fitch said it still expects Canadian pension funds to continue to be long-term investors in private assets despite recent efforts to reallocate inflows and sale proceeds to fixed-income investments.
As of Dec. 31, among Canadian pension funds, Ontario Municipal Employees' Retirement System, Toronto, had the highest exposure to private equity, real estate and infrastructure in the aggregate (with a 55% allocation), followed by Ontario Teachers' Pension Plan, Toronto (52%).
OMERS had total net assets of C$128.6 billion ($97 billion) as of Dec. 31, while OTPP had C$247.5 billion.
Fitch also noted in the report that allocations to credit, which include public investments for some funds, remain robust at the largest Canadian pension funds. “Pension funds expect increased opportunities to invest directly in private debt, as banks face higher capital constraints that reduce their lending capacity,” Fitch said in the report. “Funds have also formed strategic partnerships and syndication relationships with large alternative investment managers focused on private credit as a way of accessing the market.”
Fitch also said it expects real assets to remain a “meaningful allocation” at the largest Canadian pension funds with RE focused on “high conviction” sectors such as industrial, multifamily residential, student housing and data centers, while infrastructure allocations benefit from income-producing and inflation-hedging capabilities, along with trends fueling decarbonization, deglobalization and digitalization.
In terms of regions, Canadian pension funds have the largest exposures to the U.S., Canada and western Europe. Although these funds have no significant exposure to China, emerging markets remain an area for potential expansion, particularly high-growth Asian and Latin American markets, Fitch said.
On the whole, the top seven Canadian pension funds had about C$2.1 trillion of net assets as of Dec. 31, up 8% over the prior year, influenced by both contributions and investment returns.
Fitch also said it believes Canadian pension fund investment portfolios will remain “pressured by a challenging market backdrop, as the increased cost of debt and anticipated slower growth weigh on private asset valuations.”
Still, Dafina Dunmore, senior director in Fitch’s North American nonbank financial institutions group, said in a news release issued along with the report that the “exceptionally strong liquidity of the funds provide sufficient cushion to absorb investment volatility and gives them flexibility to work through troubled investments as they are not forced sellers of assets.”
