‘There are opportunities to reduce that home bias and broaden issuer sector credit exposure,’ says Capital Group’s Naoum Tabet
Canadian pension plans pride themselves on global diversification. They hold equities across multiple continents, alternative assets spanning private equity to real estate, and sophisticated hedging strategies.
But, according to Capital Group’s Naoum Tabet, there's a blind spot that few want to address as he believes fixed income remains stubbornly domestic.
"If you think about pension plans and institutional investors, they're highly diversified on the equity front, on the alts front, they have exposures across the globe. But when it comes to fixed income, pension plans in Canada are highly concentrated in Canadian fixed income," Tabet said, noting that “95 per cent of institutional investors’ fixed income allocation are in Canadian fixed income.”
While he acknowledged the rationale of matching Canadian liabilities with Canadian bonds, he argues that corporate credit exposure introduces risks that many overlook.
"If you think about the Canadian corporate bond market, it's really two sectors: energy and banks. It's highly concentrated in the top 10 issuers," he said.
This concentration creates what he describes as “uncompensated risk”, particularly as investors accept sector and issuer concentration without receiving additional yield for the exposure. Additionally, a pension plan holding Canadian corporate bonds isn't diversified across industries but rather making a leveraged bet on two sectors that already dominate the Canadian economy.
"The exposure to domestic corporate bonds introduces concentration and diversification and challenges and risks," said Tabet.
Kathrin Forrest, equity investment director at Capital Group Canada, sees parallels on the equity side, noting that The TSX suffers from similar structural issues.
"Materials and financials were the only two sectors that posted returns ahead of the TSX overall,” she said. "These are also two of the three sectors that continue to dominate the Canadian equity market. Together with energy, they make up about two thirds of the index. While concentration can create really compelling opportunities, it can also come with greater volatility," she said.
To that end, Tabet expects a widening gap between the US and Canadian economies in 2026. He forecasts US GDP growth of around two and a half per cent, with consensus estimates stretching from one and a half to three per cent.
Meanwhile, Canada is likely to reach just one per cent growth, a “tepid pace” that leaves little room for excitement, argues Tabet.
Tabet traces Canada's current economic weakness to a series of setbacks. Aggressive rate cuts in 2024 failed to spark growth, and difficult tariff negotiations with the US rattled business confidence. As a result, companies that depend on exports have pulled back on capital spending and hiring.
The government has responded with increased spending and larger deficit projections, but Tabet cautions that stimulus takes time to flow through, things like approvals, corporate uptake, and deployment could stretch over multiple years. Add in Canada's longstanding productivity gap, and the near-term picture looks challenging.
"From an economics perspective, I think Canada over the short term is unlikely to grow at high levels," he said, adding over time he does see a path forward through stronger trade ties beyond the US productivity gains and infrastructure investment. But he doesn’t expect that turnaround to come quickly.
While fixed income allocators have been slower to confront home bias, Tabet believes this needs to change.
"By rethinking the role of corporate credit within the Canadian pension context, I think there are opportunities to reduce that home bias and broaden issuer sector credit exposure beyond that handful of issuers," he said.
‘Attractive opportunity’
Government bonds, in his view, should remain central to any liability-matching strategy. But he sees an opportunity to rethink corporate credit, broadening exposure beyond the narrow set of domestic issuers that currently dominate Canadian pension portfolios.
"Today, US fixed income is the most attractive opportunity. Its true valuations are tight, but total yield is extremely attractive when compared to other regions, be it Canada or Europe," he said.
Beyond yield, the US market offers something Canadian bonds can’t- breadth. With the economy growing at a solid pace and rate cuts likely on the horizon, Tabet notes that American fixed income also provides exposure across a far wider range of issuers and sectors than its domestic counterpart.
Both Tabet and Forrest see balance as the guiding principle for fixed income and equity investors right now. That means staying open to both US and international markets, growth and value names, and cyclical as well as secular themes.
According to Forrest, index concentration and higher valuations have shifted the playing field compared to where it stood five or ten years ago. For active managers, she emphasized this creates room to look beyond past winners and focus on companies with strong future prospects, including those the market has overlooked or dismissed.
She also cautions that strategic asset allocation models built on historical volatility and correlation data may not reflect current realities. Indexes have changed particularly the concentration by geography, sector, and individual company has increased which means past behaviour offers a less reliable guide to future performance.
She suggests institutional investors need to take a hard look at what's actually in the portfolio, the rationale behind each holding, and whether the pieces still fit the plan's objectives. A bottom-up approach across global markets, she argues, offers a path to more durable long-term returns.
Sizing private credit exposure
Meanwhile, Tabet has been examining how Canadian pension plans stack up globally in their private credit exposure and finds they're heavily allocated compared to peers in other regions. He sees why the allocation has grown, particularly as private credit has helped smooth returns, align assets with long-term liabilities, and reduce the noise of daily market pricing.
Yet, he stresses that this part of the portfolio comes with meaningful vulnerabilities, including opaque valuations, slower recognition of losses, refinancing pressures and liquidity risks, particularly as more retail money flows into private markets.
“Sizing exposure makes a lot of sense for 2026 when it comes to allocation to private assets,” noted Tabet.
