Canada’s largest pension funds have begun a huge expansion into private credit. Four of the country’s largest pension funds will put nearly $1 trillion in assets towards the area, which banks held onto in the past.
But what do Canadians need to know about this exposure to “shadow banking?” Let’s look at what’s happening and whether Canadians should be concerned.
What happened?
The four pension funds planning to increase their exposure are well known to Canadians. The Canadian Pension Plan (CPP) Investments, Ontario Teachers’ Pension Plan (OTPP), Ontario Municipal Employees Retirement System (Omers), and OPTrust will be contributing a total of $1 trillion.
The exposure to private credit means these funds will provide loans to companies — loans underwritten by companies that are not banks. CPP alone plans to double its credit portfolio over the next five years, with private credit a key part of the strategy.
Meanwhile, OTPP, OPTrust and Omers will all expand their private credit as well, seeing an opportunity not seen in many years, not just in Canada but on an international scale.
Why now?
This comes as banks around the world continue to face higher capital requirements. This has led many to take a step back from lending. Meanwhile, pension programs have been taking over private credit around the world and insurers as well, with the offer of higher returns — even higher than fixed-income products and with a lower downside compared to investing in equities.
The non-bank finance sector has been growing in the lending area for a while now, now worth US$218 trillion. This accounts for almost half of financial assets around the world, according to the Financial Stability Board.
There is an issue, however. As seen in the past, any sector that sees rapid growth could also see a rapid fall. The “shadow banking” industry continues to climb with higher borrowing costs and economic weakness. But this also poses the risk of businesses defaulting on these loans. So, if you’re a Canadian worried about your pension, perhaps seek diversification elsewhere.
Get diversified
If pension funds are getting a bit risky, then Canadians should consider being more conservative. That’s why it’s always a good idea to look at your portfolio and be diversified in your investments. There should be a strong mix of fixed income through bonds and Guaranteed Investment Certificates (GIC), as well as a diverse set of equities.
If you’re looking for an easy way out, I would consider picking up one of the many strong exchange-traded funds (ETF) out there right now — ones that provide passive income through dividends are even better! And a great option right now includes Vanguard Balanced ETF Portfolio (TSX: VBAL).
VBAL ETF is exactly how it sounds: it invests in a balanced set of holdings, with 60% in stocks and 40% in bonds. Moreover, it’s an ETF that invests in other Vanguard ETFs. So, one investment is like picking up hundreds, if not thousands, of other investments.
Shares are up 9% since bottoming out in October, with a dividend yield of 2.37% as of writing. Therefore, investors can receive the diversification they need while letting these pension funds take on the risk.
