Canadian fixed income underperformed most other regions in 2023, time for a global approach

CEO at Insight Investment David Leduc reminds us there is more out there than Canadian fixed income

Canadian fixed income underperformed most other regions in 2023, time for a global approach

Canadian pension plans exhibit a striking contrast in their investment strategies, with a strong global perspective in equities but a pronounced “home bias” in bonds, according to Willis Towers Watson's annual Global Pension Asset Study. In 2018, Canadian plans began to explore global bonds more actively, yet their fixed income investments have often underperformed compared to other regions, highlighting the missed opportunities in a globally diversified portfolio.

CEO North America at Insight Investment, David Leduc provides insights into how it’s the golden age of fixed income if you know where to look, saying, “In most years, including 2023, a globally diversified approach would have likely benefited investors. A domestic approach leaves a wealth of opportunity off the table.” 

In 2023, Canada was one of the lowest-performing global bond markets, underscoring the volatility and the potential benefits of diversifying investments internationally. With Canada representing only 3.5 percent of the global investment-grade bond market, focusing solely on domestic bonds significantly limits investment opportunities available in both developed and emerging markets.

The report suggests that looking towards the United States for bond diversification is a logical step for Canadian investors. The U.S. bond market, valued at US$25 trillion, offers far greater diversification and liquidity.

A global investment approach allows investors to capitalize on inefficiencies across different markets. Leduc says, “Active investors with a global mandate can overweight one bond and underweight the other for potential profit and no change in underlying credit risk.”

For pension plans considering expanding their fixed income allocations beyond Canada, Leduc maintains partnering with well-resourced managers who have on-the-ground analysis capabilities in the U.S. and internationally is crucial. Opting for managers who are capable of being nimble, despite their size, can better position them to take advantage of relative value opportunities without being hindered by overly large strategies that limit flexibility in portfolio adjustments.