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Canada: Buy-side limit on foreign stock holdings set to go

The proposed removal of a cap on pension funds' foreign holdings could change the shape of Canadian fund management

If the long-delayed Canadian federal budget announced in February is approved, foreign content limits on Canadian institutional pension funds and private tax sheltered retirement plans could be scrapped, enabling funds to buy more foreign securities and encouraging international fund managers to enter the Canadian market. Canadian funds are currently required to cap overseas assets at 30% of their portfolios. If the budget is passed, these funds will be able to invest where they like. As Canadian funds have traditionally used their foreign allocation to seek out enhanced returns, focusing their domestic investments on safe Canadian bonds, the new ruling could have the biggest impact on fixed-income managers.

"To date, Canadian bond fund managers have needed specific domestic expertise," says David Wolf, head of economics and chief strategist for Canada at Merrill Lynch. "If the budget is passed, there will be demand for a more global perspective, which could allow more international fund managers to break into the market or expand their operations in Canada."

This is already happening. The world's largest fixed-income fund, Pimco, founded a Toronto-based office in 2004 to push higher-margin fixed-income strategies than those deployed by the more conservative, local fixed-income managers.

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