From Canada: A Cautionary Tale on Government Investing

October 18, 2001

The recent experience of the Canadian Pension Plan (CPP) offers a cautionary example of what can happen when the government mandates investment decisions. The CPP Investment Board was mandated by law to invest at least 35 percent of its assets in a portfolio that tracks the Toronto Stock Exchange 300 composite index. When Nortel shares rose higher than $120 last summer, it came to dominate the TSE 300 -- and the CPP board's portfolio. By August 2000, 28% of the board's assets were in Nortel stock. When the stock's price began to collapse this year, the board was unable to protect itself by selling. Forced by government fiat to hold a falling asset, the CPP lost $852 million.

Much of the opposition to government investing has focused on the potential for government intervention in business decisions and the political manipulation of investments. The experience of federal, state, and municipal provide clear evidence of these dangers. Fully 44 percent of such funds operate under investment mandates, such as requirements that they invest in in-state industries, affordable housing, or renewable energy. An additional 25 percent face investment restrictions, such as prohibitions on investing in tobacco stocks or companies doing business in certain countries. In addition, state pension funds have occasionally used their voting power to interfere in corporate governing decisions. (See, Michael Tanner, "The Perils of Government Investing," Cato Institute Briefing Paper no. 43, December 1, 1998.)

However, as the CPP experience shows, government investing often simply lacks the flexibility to react to rapidly changing markets. The simple lesson should be-bureaucrats make poor investors.

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