'No choice to be absent from US markets'

US markets have historically played a key role in supporting pension fund performance, not just for CPP and OMERS but also for smaller Canadian plans, like UPP and OPTrust.

But with current geopolitical and headwinds at play, are pension funds planning to change strategy?

Jason Campbell believes that unless something drastic were to happen over the next year or two, most pensions will likely stay the course. After all, institutional investors typically plan for the long term and don’t get bogged down with short-term turmoil.

He pushed back on the idea that pension funds are dependent on the US for returns, emphasizing that strong performance is more a consequence of market dynamics than a deliberate reliance.

“The returns are a fallout of how markets perform,” explained Campbell, principal at Eckler. “The biggest geographic allocation with our clients after Canada would be to the United States, and it's simply a function of the size of their economy, the size of the investment markets and the liquidity within those markets.

“Investors don't have really a choice to be absent from US markets, given their importance and size on a global basis,” he added.

However, Campbell noted that while the US has historically been a performance leader in pension portfolios, this year is breaking from the norm, pointing to a shift from long-standing tailwinds to mounting headwinds - many of them policy-driven.

“This year is definitely shaping up to be different,” he said, underscoring that among the most significant concerns facing many institutional investors is the resurgence of tariffs and the uncertainty they bring, which has contributed to the US market underperforming relative to others.

Indeed, according to CPP’s latest annual report, one of the sources of the Plan’s relative underperformance was a deliberate underweight against US-based risk assets, specifically public equity markets, noted the Plan’s CEO and president John Graham.

“We continue to believe building a diversified portfolio, and avoiding overconcentration in any one geography or sector, is the prudent long-term approach for managing the Fund. While short-term results relative to the benchmark are important accountability tools, our focus remains on generating stable, long-term risk-adjusted returns,” he said in the report.

Campbell also pointed to Bill 899, part of Trump’s “One Big Beautiful Bill” noting legislation could impose taxes on foreign investors previously exempt.

“If you get five to 20 per cent tax rates on US investments, when other geographies may continue to have tax treaties and be tax exempt, that can have a pretty substantial impact on asset allocation and fund flows into the US,” noted Campbell.

Adding to the strain is the country’s worsening fiscal outlook. With ballooning deficits and deteriorating budget proposals, the US recently lost its last AAA credit rating, fueling weakness in the US dollar and challenging its safe-haven status.

While these developments haven't triggered sweeping reallocations, they are nudging some funds to rebalance, said Campbell.

“We’ve seen clients starting to trim their US allocations,” Campbell noted, though he emphasized it’s a marginal move, aimed at pulling back toward target weights after years of being overweight on the US market.

Despite the growing uncertainty in US markets, most pension funds aren’t making sweeping changes to their geographic allocations just yet.

“From a broader investment strategy perspective, I’m not seeing large changes within the geographical allocation,” he said. “Any movements have been more on the margins than long-term directional.”

However, Andreas Jones, founder of KindaFrugal and personal finance expert, emphasized pension funds who rely heavily on one region always carries risk. Notably, geopolitical tensions, interest rate shifts or an unexpected correction in the US could change the picture quite quickly.

“Diversification across geographies and sectors is what keeps these funds resilient. We’re already seeing some pensions gradually increasing allocations to emerging markets, renewables and alternative assets to reduce that US concentration,” he noted. “While the US has been a major driver recently, it’s unlikely pensions will keep all their eggs in that basket moving forward.”

This certainly is true for CPP, who has a diversification strategy with Europe, Asia Pacific and Latin America over a five-year net return, outlined in their annual report.

Meanwhile, Campbell explained that volatility is an expected part of long-term investment planning, citing past disruptions like COVID-19 and inflation shocks but also acknowledged that the underlying themes - concerns about growth, risk aversion, widening credit spreads - tend to repeat.

Because of this, Campbell underscored the importance of stress-testing portfolios for liquidity. He said pension funds need to ensure they can cover everything from benefit payments to capital calls during turbulent periods.

“CPP, along with most Canadian pension plans, are building strategies that will get through these periods of volatility,” he said, adding that the long-time horizon of these funds means short-term disruptions rarely trigger immediate structural changes.

One such strategy consists of hedging currency, one Campbell believes some pensions are missing out on. Part of the rationale stems from the behaviour of the Canadian dollar, which tends to weaken alongside equity markets. In this context, Campbell believes holding unhedged US or foreign currency assets can actually help reduce volatility.

Campbell explained the US dollar has been trading above its fair value for some time, largely due to persistent capital inflows. If that inflow slows, because of tariffs, taxation risks, or broader policy uncertainty, demand for the dollar could taper off, leading to depreciation. He linked this to economic policy challenges, particularly around manufacturing.

Because of these dynamics, Campbell said it may be time for pension funds to reconsider their exposure, particularly as the Canadian dollar has strengthened in recent months, going from 69 to 73 cents, while the US dollar has failed to perform as “a safe haven currency over the last few months that it historically would during periods of volatility,” he said.

However, Campbell ultimately believes that pulling out of US markets isn’t a viable option for Canadian pension funds.

“Divestment is not an option,” he said. “The investment markets are way too big.”

With the US making up roughly 70 percent of the MSCI World Index by market capitalization, Campbell emphasized that its size and global weight leave investors with little choice but to remain exposed.

However, he acknowledged that this position could shift if the US were to lose, notably around “policy changes that reduce the productivity advantage that the US has, that certainly may lead to trimming those allocations,” he said.

He also flagged the potential impact of US tax policy changes, such as new levies on foreign investors. If those stick, he noted, “that certainly changes the calculus substantially as well.”