Removal of FPR rational, not earth-shaking, says CIBC

(April 13, 2005) History suggests that the amount of foreign content in registered pension plans won’t change significantly, despite Ottawa’s proposal to eliminate the 30% cap.

A report from CIBC World Markets on foreign content in Canadian pension plans and RRSPs notes that in the heady days of the tech boom, foreign content did jump, coinciding with a two-stage rise in the limit from 20% to 30%.

However, foreign content fell off sharply after that, with levels now hovering around 24% for RRSP mutual funds, and that’s factoring in clone funds. Even for unrestricted non-RRSP investments, foreign assets are still below 30%.

Canadians are gun-shy about going abroad, the report notes, partly because the benefits of global diversification have to be weighted against foreign exchange risk. “It [also] reflects the desire to invest in what you know best, and smaller pension funds and individual investors are naturally more familiar with Canadian corporate stories than what’s happening in more distant climes.”

That “home-country bias” is not unique to Canada, CIBC points out. Britain removed its foreign content limit two years ago and its average share of foreign assets is 25%, roughly in line with Canadian pension portfolios. And Australia, Japan and the U.S. all have lower foreign content levels compared to Canada.

“Canada’s existing foreign content is already higher that most other countries with similar degrees of home bias in their investment behaviour,” say economists Avery Shenfeld and Benjamin Tal. “So we would expect that the current foreign content of Canadian pensions isn’t that far from where it will settle in the absence of restraints.”

Still, CIBC says removing the foreign content restrictions makes sense for a number of reasons. Canada has a current account and budgetary surplus. And nationalistic economic policies are “a relic from the past,” with Canadians already accepting free trade and the sale of many public sector companies.

In addition, pension assets must be built up in preparation for the baby boomers’ retirement. “Too much money chasing too few stocks could water down returns and miss risk-reducing diversification opportunities.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com