Study finds Canadian home country bias in equities hurting pension funds

While it’s generally known Canadian pension plans have a home country bias when it comes to fixed income, a new study by FTSE Russell suggests there’s an equity home bias as well.

The report looked at the ratio of domestic and global equity for pension funds in Australia, Canada, Japan, the U.K. and the U.S. It found a home bias in all five countries between 2008 and 2019.

“Home country bias is not just unique to Canada, but has historically been a global challenge for institutional investors,” said Paul Bowes, head of FTSE Russell Canada, in a press release.

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In Canada, in particular, the ratio was seven times global to domestic equity. To reach this number, FTSE Russell used a Willis Towers Watson study, which found Canadian pension funds allocated about 38 per cent of total assets to equities in 2018. Of this, 21 per cent was invested domestically. The FTSE Russell then divided the number by Canada’s weight in the FTSE all-world index, which is three percent, producing the home-bias ratio of seven times.

The ratio was highest in Australia, which had a global-domestic equity ratio of 26 times. The U.S., on the other hand, had the smallest disparity.

Apart from the U.S., the home bias in all countries contributed to negative performance relative to the FTSE all-world index for this period, noted the study.

In Canada, the commodities and financial sector dominates the market, with oil and gas, basic materials and financials composing approximately 70 per cent of the universe. As a result, a home bias would mean substantial exposure to these industries, the study found.

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“Canadian pension funds have increased their level of global diversification over recent decades, but still have a distance to go, according to our recent study,” said Bowes. “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.”