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Ian MadsenSome Canadian institutional investment and pension funds have faced scrutiny recently because they owned or own shares in American prison-management companies GEO and CoreCivic. That criticism is unwarranted and unfair.

These firms operate prisons, detention centres and rehabilitation facilities in the U.S. Given that the U.S. incarcerates more people than anywhere else in the world, that’s a huge enterprise.

And contracting out in this sector may well increase, since it often saves public money.

These firms been entwined in the volatile and politically fraught border migration crisis in the southern U.S. They’ve also been accused of applying undue influence over politicians, encouraging ever-more harsh sentencing, which increases the need for more prison space and associated services.

If true, such actions should be rigorously investigated and prosecuted.

But it’s not necessarily fair to categorize such firms and their functions as inherently immoral or unethical.

Yet that’s exactly what some critics are saying.

The Canada Pension Plan Investment Board (CPPIB) has a daunting task: invest the payroll contributions of millions of Canadians in financial instruments and other assets that will return a substantial gain over time. They need to meet actuarial requirements so pensioners have annual incomes that support basic living expenses. And they need to ensure that the federal government, and taxpayers, won’t have to make up any shortfall.

Pension funds can buy government or corporate bonds; commercial or residential mortgages; real estate; equity in private companies or buyouts of public firms; venture capital; infrastructure such as ports, airports, highways, transit systems, bridges or tunnels; royalties in firms, inventions, or mining or oil and gas assets; contracts for commodities; futures and options; and some more unconventional assets.

As they are very large, in the tens of billions or, in the case of the CPPIB, hundreds of billions of dollars in deployable money, they’re shut out of investing in smaller companies entirely. And they can’t put money in some government-related areas for conflict of interest reasons. Political risk keeps them out of many countries. Policies can also prohibit investments in such things as gambling, alcohol, tobacco or armaments firms.

Fund managers must also diversify their risks – geographically, by industry and asset category, and by investment style. There are several recognized styles, including value, growth, index and tilted index. Funds also employ quantitative, high frequency and algorithmic methods.

Some techniques are completely blind, meaning they may invest in securities – perhaps for just hours or days – without recognizing what they are. In such circumstances, it can be difficult to exclude companies that some people may find offensive.

Never mind that reducing the choices available to a fund manager can result in negative consequences for pensioners.

CPPIB owned the two stocks for relatively short periods. If the stocks were disallowed, the strategy used would have resulted in unsatisfactory returns, meaning the pension plan would fall short of its needs.

This may seem a relatively small matter, since these are just two mid-sized companies out of the hundreds that CPPIB buys shares in. But the list of unsatisfactory investment targets can be expanded almost indefinitely. There are always more companies with questionable products, services or practices.

The burden should be on critics to show tangible evidence that a company is truly criminal and should be prosecuted. If not, that company should remain among the valid potential investment targets.

Pension funds must have as wide a variety of choices available as possible to ensure they can make sound investment decisions. Our future pensions and economic growth depend on it.

Ian Madsen is a senior policy analyst with the Frontier Centre for Public Policy.

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