Peter Letko Calls For 'Sanity Check' at Large Canadian Pensions

Paul Bagnell of BNN Bloomberg reports that Peter Letko blasts pension funds' lack of Canadian companies and calls for 'sanity check':

Large Canadian pension funds should be investing more of their assets in Canadian equities, a top executive at a leading Canadian investment management firm told BNN Bloomberg Tuesday.

The firm, Letko Brosseau, has published a statement in which it criticizes the trend of declining investments in Canadian stocks by the country’s large pension plans.

In an interview, Peter Letko, senior vice-president at Letko Brosseau, said the firm was “shocked” at a recent decision by a Canadian union which uses Letko Brosseau as its pension fund manager. The union had changed its investment policies to require just two-to-three percent weighting in Canadian equities – down from the 40 per cent threshold it had maintained for years.

“Quite frankly, we were surprised, if not a little shocked, at this announcement,” Letko said.

Letko Brosseau believes investing in Canadian equities is not only good for Canada, but good for investment returns as well.

“Canada has outperformed the Morgan Stanley World by about one per cent,” Letko said, referring to the MSCI World Index, which includes more than 1,500 stocks from 23 developed market economies. That outperformance has occurred over the past 30 years, he said. At Letko Brosseau, the outperformance of Canadian stocks held in client portfolios is wider, he said.

Letko noted that in other developed market nations, ownership of domestic stocks by big institutional investors has remained high, citing Japan, South Korea and Norway as examples.

By contrast, domestic equities now account for just four per cent of the holdings of major Canadian pension funds, according to the Pension Investment Association of Canada. That’s down from 28 per cent in 2000.

It’s enough for Letko to call for a “sanity check.”

“There are some consequences to this,” he said. “There has to be an impact on economic activity in the country, and on innovation.”

He argued more ownership of the stocks of Canadian corporations by big investors would likely lead to more issuance of shares into the public market and, in particular, more initial public offerings.

Peter Letko isn't just anyone, he's a legend in the Canadian investment management industry. I last saw him speak at a CFA luncheon n Montreal two years ago where he and Pierre Boivin spoke eloquently about the importance of resilience in the investment management industry and life.

Letko and his partner, Daniel Brosseau, started off working at CN's Pension Fund before starting their own firm in 1987 and they successfully manage billions for Canadian and foreign institutional clients.

Last week, LetkoBrosseau put out this press release covering why they are worried about the significant reduction of Canadian equities at Canada's large pensions:

MONTREAL – SEPTEMBER 8, 2021 – LetkoBrosseau, a leading Canadian investment manager, today announces its concerns about the significant reduction of investment in Canadian publicly traded equities by the country’s pension fund industry.

The Pension Investment Association of Canada, the country’s leading pension fund association, reported for the year ended December 2020 that Canadian publicly held securities represented approximately 5 per cent of its members’ total assets. This is down from 28 per cent in December 2000.

“It should be a major policy concern for Canadians and our leaders that the country’s pension industry has moved large amounts of its funds to other countries.,” said Daniel Brosseau, President of LetkoBrosseau. “When investment managers send Canadians’ hard-earned savings outside of Canada, they aren’t just moving money out of the country, but also some of its important associated economic benefits. That means less innovation, fewer jobs, and reduced economic activity and security for Canadians.”

Our objective is to highlight the rapid withdrawal of Canadian institutional investment from Canada in order to spark an important conversation about both the economic and moral justification for repatriating hard-working Canadians’ monies.

Some of the key considerations for greater investment in the country by pension funds include:

  • Pension funds benefits are payable to plan members in Canadian dollars and there is real currency risk being so heavily invested outside of the country.
  • Over the long run, domestic stocks have performed better than foreign ones. Since 1988, the S&P/TSX generated an 8.7 per cent annualized return, while over the same period, foreign stocks generated a 7.8 per cent annualized return (according to the MSCI Index). [1]
  • Pension plan sponsors are increasingly shifting their investments to private equity which often employ leverage adding to returns but also risk. These investments are illiquid and not subject to the same daily mark-to-market requirements and transparency as public equities.

“While we understand the need for international diversification, a principle we have followed for many years, balance is required. No doubt, there are sectors such as pharmaceuticals and technology, where investors need to look abroad to gain appropriate exposure,” said Peter Letko, Senior Vice President at LetkoBrosseau. “That said, the strength of the Canadian economy and self-sustaining benefits of investing in our own industries should be an equally important priority. Further, it is time plan sponsors speak up. While they have pressed fund managers on important ESG issues, it’s also time they emphasize that their money goes to support their members’ interests in this country.”

Investing in Canada isn’t just the right thing to do; it makes good financial sense. Since inception of the firm in 1988, our Canadian portfolios have generated $17.5 billion in net gains[2] by investing in Canadian equities, equivalent to a 14.6 per cent compounded annualized return. This is almost double the 7.8 per cent annualized return delivered by international markets over the same period—hardly an investment record that argues for underweighting Canada.

We at LetkoBrosseau are bullish on Canada. With favourable demographics; a tolerant, well-educated and diverse population; an expanding economy with moderate debt levels; abundant natural resources; modern infrastructure; world renowned educational institutions; and political stability, Canada is rich with opportunity.

In our 30-plus years, we have never given up on Canada—investment managers, pension plan sponsors, and leaders shouldn’t either.

I will come back to the concerns expressed by LetkoBrosseau in their comment.

First, a bit of humor mixed with some seriousness.

When I read the BNN article earlier today, I immediately fired it off to Frederic (Fred) Lecoq, former Canadian portfolio manager at PSP Investments back in my days who is now swing-trading his personal portfolio using custom technical analysis indicators he has perfected and continues to perfect over the years (he used to be all about fundamentals but is now laser focused on making money, not being stubborn with markets).

Anyway, Fred is a mentor, has taught me a lot and he's just a great all-around standup guy who will always tell it to me like it is with no bs.

This is how our conversation went:

LK: "So, Fred, what do you think, is Letko talking up his book?"

FL: "Well, he may be talking up his book but he makes good points as well."

LK: "How so?"

FL: "Don't quote me on the exact figures but when I started in this industry back in 1978-79, it used be 80% Canadian stocks, 20% foreign. There was a cap on the amount of foreign equities Canadian pensions could hold. Over the years, it slowly moved to 50/50, then 20% Canadian equities and now 4% as stated in the article.:

LK: "And? Why is that bad?"

FL: "Well, it's bad in the sense that you see how marginalized Canadian equities have become over the years and how insignificant they are in global markets. It's also bad in terms of productivity because the less institutional money flows into Canadian equities, the less investments Canadian companies make and that's not good for our economy over the long run. So, I am in agreement with Letko on these points."

LK: "I'm not sure Fred, I only invest in US stocks and I'm a long-term bull on the US dollar. Canadian equities really boil down to three value sectors -- energy, financials and telecoms - with a few great technology companies (growth) like Shopify or LightSpeed. Canadian pensions can buy most of these companies on US exchanges along with a ton of other great companies and not worry about liquidity. If they start snapping up Canadian equities to move back to 20%, they'll be like whales in a pond!"

FL: "Yes, good point but it's interesting to see other countries like Norway, Japan, South Korea and others buying more local equities relative to our large pensions which shun them. I'm not sure what the right balance is."

LK: "Forget Japan, I remember in December 2020, Bloomberg published an article on how the Bank of Japan had taken over as the biggest owner of the nation’s stocks, with the total value of its holdings climbing well above $400 billion. It's come down since then but it's still the biggest owner of Japanese equities and I'm worried the Fed and other central banks are headed that way."

FL: "Buy more stocks if you feel that way."

LK: "Ha! No, there is a lot of anxiety in these markets and I don't see great deals in stock market but noticed stocks came back strong this afternoon."

FL: "I still like energy stocks here."

LK:"What about politics? Are you ready to vote on Monday?"

FL: "Unlike LetkoBrosseau, I think the long-term prospects for this country are bleak and dismal. Our energy, industrial and other policies like housing are laughable, politicians spending money like crazy but there's nothing really to show for it in terms of improving productivity and standards of living."

LK: "You're making my point, over the long run, I remain Long US/ Short Canada! The problem is we are becoming like Greece before the crisis hit them. Over decades, successive Greek governments kept buying up votes, pandering to the masses, and then the debt time bomb exploded. A buddy of mine who worked on a toll road in Greece for a German engineering company before the Greek crisis hit and is now living back in Canada tells me the IMF will come knocking on our doorstep in ten years, and that's when it will hit the fan."

FL: "The good news is we have less Greeks in Canada than Greece! LOL! Our only hope in the future is if some third generation Indian or Chinese Canadian becomes Prime Minister and starts implementing sensible long-term policies. Till then, we are doomed voting for Tweedledee or Tweedledum!

LK: "You're the best, let's leave it at that."

Alright, let me now get serious and specifically delve into the the key considerations LetkoBrosseau raises for greater investment in Canada by our large pensions:

  • Pension funds benefits are payable to plan members in Canadian dollars and there is real currency risk being so heavily invested outside of the country.
  • Over the long run, domestic stocks have performed better than foreign ones. Since 1988, the S&P/TSX generated an 8.7 per cent annualized return, while over the same period, foreign stocks generated a 7.8 per cent annualized return (according to the MSCI Index). [1]
  • Pension plan sponsors are increasingly shifting their investments to private equity which often employ leverage adding to returns but also risk. These investments are illiquid and not subject to the same daily mark-to-market requirements and transparency as public equities.

On the first point, over the long run, you're better off investing in US stocks and being long the US dollar. Yes, some years our loonie outshines (like last year) but over the long run, the loonie is a reflection of our economy and long-term growth, and here I still believe the US will do better than us over the long run (this is why most of the large Canadian pensions do not hedge F/X risk, only some currencies, but not the USD).

On the second point, the S&P/TSX might have generated 90 basis in excess annualized return over the MSCI World Index  over the long run but that doesn't mean this outperformance will continue over the next 20 years. 

And when compared to the S&P 500 which is a lot more diversified, the S&P/TSX has underperformed over the long run.

Yes, I know, the Fed is driving the game, you can make a lot of excuses but the reality is US stocks are where most foreign investors invest, not in Canada.

On the third point, Canada's large pensions are increasing their exposure to foreign (mostly US and developed markets) private equity because they have the right approach there and have generated significant value add over the long run (remember, pensions have a long investment horizon so they can afford to take some illiquidity risk).

Specifically, they invest in top funds all over the world and co-invest with them on large transactions to reduce fee drag, allowing them to generate huge returns over the long run while they maintain sizable allocations to PE and reduce the costs of investing in this asset class.

I'm not picking on LetkoBrosseau but Canada's pension industry has changed significantly since they left it in 1987 and it's high time we all recognize that our large DB pensions are the envy of the world. 

If only more Canadians can enjoy the peace and security that comes from well-managed and well-governed large DB pensions. 

But that's pension policy and unfortunately, like other policies, our politicians haven't figured out what's in the best interest of the majority of Canadians (at least they enhanced CPP, it's a start).

Alright let me wrap it up there. Will send my comment to Peter Letko and Daniel Brosseau but I doubt they'll get back to me. If anyone else wants to chime in, feel free to email me at

Below, Peter Letko, co-founder of Letko Brosseau, discusses why Canadian pensions should invest more in Canadian equities. Listen carefully to his comments as he's much more sensible when he outlines his thoughts here and always worth listening to. 

Update: Jérôme Bichut, the former Managing Director and Head of International Equities at PSP Investments, sent me his take on this debate:

Interested read. With all due respect to Peter Letko, I think his arguments are misplaced. 

The ownership level of domestic stocks by Canadian pension funds does not affect domestic company competitiveness. The causality is the other way around.

Money is flowing to places where attractive investment opportunities reside and the low percentage of AUM invested in Canadian stocks is sadly the result of the lack of attractiveness of Canada as an investment universe. 

It is well known that Canada has been lagging the US for decades on productivity for a variety of reasons but certainly not the lack of pension funds involvement. 

It is worth remembering that Canadian governments have historically protected several key industries, favoring the creation of oligopolies in energy, banking, telecommunication, retail, transport, hardly an environment conducive of innovation! Heavy regulations and punitive personal tax rates did not help either. 

Let's be positive though. Canada is a small country which had its share of success (Nortel and Blackberry) and nowadays Shopify, but we have to admit there is no real breath

The real reason why we should continue to invest in Canada versus the world is more a matter of comparison. Europe is sclerotic, Japan is managing its decline and emerging markets (including China) exhibit a different risk profile.

I thank Jérôme for sharing his excellent insights. 

Another former senior pension manager who prefers to stay anonymous shared these insights with me:

  • Just because you are buying foreign equities does not mean that you have to take foreign currency risk. Pension plans are sophisticated enough to hedge their currency exposure if they want, and they often do hedge. But you can also argue that having foreign currency can be a good tail hedge and we have good examples of this as the CAD fell 12% in the first quarter of 2020 and 30% in the second half of 2008. Also, public equities are just one component of a fund's asset and currency mix. They will still have fixed income, real estate, private equity, infrastructure, etc, much of which will be in CAD. Typically pretty much all fixed income is denominated in CAD and real estate tends to have a huge home market bias. So even if a fund only has a 3% weight to Canadian public equity they can still have close to 50% of their assets denominated in CAD.
  • Peter may be cherry picking both his global index and time period. According to Bloomberg (see below) from 12/31/1987 to yesterday the MSCI ACWI has returned 7.98% in CAD and the S&P/TSX earned 7.9%. ACWI is more relevant than World as most pension plans include an allocation to Emerging Markets which is the difference between World and ACWI And the 1998 starting point will be very punitive to the MSCI World as Japan was in a bubble and was the largest country in the World index at that time, even larger than the US, and the Japanese market has trailed horribly since that time period. From 10/01/71 to yesterday the MSCI World has returned 8.86% vs 7.99% for the S&P/TSX - that is the earliest starting date that my Bloomberg terminal shows. The World index has been around since 1969 but ACWI and EM indexes just started in 1987. So using the longest time periods available both ACWI and World have beaten the S&P/TSX.
  • Peter seems to be ignoring the fact that the most efficient portfolio is the total market portfolio. In the global total market portfolio Canadian equities are only 2.8% of the ACWI by market cap.

I thank this person for sharing such great insights.