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The TMX Group is urging the federal government to allow retail investors to buy stakes in the sovereign wealth fund through publicly traded units. (Credit: Pawel Dwulit\/Bloomberg) <\/p>\n The TMX Group is urging the federal government to allow retail investors to buy stakes in the sovereign wealth fund through publicly traded units. (Credit: Pawel Dwulit\/Bloomberg) <\/p>\n
The CEO of the Canada\u2019s largest stock exchange group is urging the Carney government to allow retail investors to buy stakes in a new $25-billion sovereign wealth fund through publicly traded units such as exchange traded funds (ETFs).<\/a><\/p>\n \u201cOur team has reached out to (the Department of) Finance on this,\u201d said John McKenzie, chief executive of TMX Group Ltd.<\/a>, which owns the Toronto Stock Exchange.<\/p>\n \u201cOur recommendation was you do that in the form of a closed-end fund, or an ETF, (and) that you could put a piece of it on the marketplace. \u201d<\/p>\n Prime Minister Mark Carney<\/a> announced plans for a sovereign wealth fund<\/a>, which would back priority national projects in the areas of energy, critical minerals, agriculture, and infrastructure, on April 27, and said all Canadians would be given an opportunity to participate through a retail investment product.<\/p>\n The next day, in an economic update, the government said the retail component of the Canada Strong Fund \u2014 while still open to consultation on specific design \u2014 would be broadly accessible to Canadians, easy to purchase, hold and transact and provide returns based on the fund\u2019s success, while initial invested capital would be protected.<\/p>\n McKenzie said the government\u2019s wording sounded more like a bond than an ETF, but that the government has indicated it is open to input.\u00a0<\/p>\n \u201cThey\u2019re in listening phase,\u201d he said. \u201cI think they brought this out as a concept without having it completely baked as to what they want to do, so they\u2019re open to ideas.\u201d<\/p>\n While a structure that involves a public exchange stands to benefit TMX Group, McKenzie said a fund that owns a number of assets such as the proposed Canada Strong Fund could easily incorporate a retail component by listing it on an exchange, whether that\u2019s an ETF or simply units.<\/p>\n What\u2019s more, he said, that structure would offer key selling points to retail investors such as transparency and disclosure requirements and, unlike a bond, it would trade easily on a public marketplace.<\/p>\n \u201cIf it\u2019s a public market product, we\u2019re going to insist on disclosure around it, like we would on any other fund,\u201d he said.\u00a0<\/p>\n \u201cYou need to have be able to value the things in it and that\u2019s why I like an exchange-traded product, not just because we\u2019re an exchange, (but) because it forces transparency, disclosure and liquidity in the way a private product wouldn\u2019t.\u201d<\/p>\n This is particularly important because the sovereign wealth fund is being designed to operate like a large pension fund, which typically doesn\u2019t have to contemplate the needs of retail investors, he said.\u00a0<\/p>\n \u201cMy worry in these models is that performance of the fund is not transparent,\u201d he said. \u201cWe don\u2019t have the visibility into the assets that are in it in terms of how they\u2019re performing, what are the returns?\u201d<\/p>\n Story Continues <\/p>\n Ari Pandes, a professor of Finance at the University of Calgary\u2019s Haskayne School of Business, said a closed-end fund as suggested McKenzie is compatible with a sovereign wealth fund. By raising a fixed pool of capital upfront and listing on exchange, investors would be able buy and sell freely without forcing the fund to liquidate underlying assets, which are expected to include long-duration, illiquid investments such as infrastructure and natural resources.<\/p>\n However, there are drawbacks.<\/p>\n \u201cThe problem with closed-end funds is that they almost always trade at a discount to their net asset value \u2014 often 10 to 20 per cent in normal markets, sometimes wider under stress,\u201d Pandes said.<\/p>\n If, for example, Canadians were to buy in at a unit price of $10, the market price might still settle around $8.50 even if the underlying assets are worth $10.\u00a0<\/p>\n \u201cFor a fund being sold partly on the idea of broad public participation, that could be both a reputational and a political problem,\u201d he said.<\/p>\n Pandes said an alternative structure could be a principal-protected retail bond, essentially a new version of the Canada Savings Bond. The government would guarantees a return of principal and tie the upside to the fund\u2019s performance above a set hurdle rate.\u00a0<\/p>\n \u201cIt\u2019s clean, it\u2019s familiar, and it eliminates the discount-to-NAV problem,\u201d he said.\u00a0<\/p>\n But, again, there would be trade-offs.<\/p>\n \u201cThe (principal) protection cost sits on the government\u2019s balance sheet, and it gives retail investors less of an \u2018ownership\u2019 feeling,\u201d Pandes said.\u00a0<\/p>\n A fundamental consideration when designing the sovereign wealth fund is that, traditionally, they don\u2019t have a retail component and successful ones, such as Norway\u2019s, work precisely because the capital is patient and locked up, he said.<\/p>\n \u201cSo every mechanism designed to give retail investors comfort adds cost or complexity and works against the fund\u2019s ability to deploy capital\u2026 There\u2019s no clean off-the-shelf model here,\u201d Pandes said.<\/p>\n \u201cHow this design question gets resolved will probably say a lot about whether the fund is primarily an investment vehicle or primarily a political product.\u201d<\/p>\n Carney has said the Canada Strong Fund will expand beyond priority infrastructure and energy projects identified by the federal government\u2019s Major Projects Office, and TMX\u2019s McKenzie said his team is pushing Ottawa to include growth companies.<\/p>\n Canada has long struggled to get sufficient capital into companies that need the funds to build scale, with many turning instead to the United States, McKenzie said, adding that a particularly discouraging part of his meetings with private companies in the \u201cgo-public pipeline\u201d is encountering Canadian founders running companies in Silicon Valley.<\/p>\n \u201cThat means that the IP is there, the talent went there, the taxes went there, but they\u2019re still Canadians,\u201d he said.<\/p>\n \u201cThe problem to solve is getting capital into growth companies \u2026 so they can grow in Canada, as opposed to just get bought out and go to the U.S., or go straight to the U.S. and start there.\u201d<\/p>\n