Nearly eight years ago, Canada did away with the Foreign Property Rule (FPR) that forced tax-deferred retirement plans to invest primarily in Canada. Today, many plans still hold mostly Canadian investments. One reason: significant interest in liability-driven investing (LDI).
Paul Malizia, a partner with Aon Hewitt, says that as plans start to take pension risk more seriously, changing their focus from return generation to risk reduction, there has been more interest in LDI. “This has resulted in a stronger allocation to long-term bonds, which has necessitated a shift in investment dollars away from equities, both foreign and domestic,” he says.
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The implementation of an LDI strategy has had an effect on foreign content at the Healthcare of Ontario Pension Plan (HOOPP). That plan has actually reduced its foreign asset holdings in recent years, from roughly 30% in 2003 to about 25% today. According to Jeff Wendling, senior vice-president and chief investment officer, equity investments, the initial phase of HOOPP’s LDI strategy “involved reducing exposure to Canadian and international public equities and increasing fixed income (primarily Canadian) exposure to better match plan assets with the pension liabilities.”
Wendling says he doesn’t expect his plan’s foreign content to drop any further. “The main adjustment has been done,” he says. In fact, he expects foreign real estate holdings to increase from comprising about 9% of the plan’s approximately $5-billion real estate portfolio today to 15% to 20% in the coming years, depending on where opportunities are identified. Private equity—a $2-billion portfolio at HOOPP now comprising 60% foreign holdings—is under review, and its foreign exposure may also increase.
Imperial reduces foreign content
LDI led Imperial Tobacco Ltd. to reduce its foreign content holdings over the past decade. Algis Janusauskas, manager of pension investments and insurance, says foreign content limits never drove the plan’s asset allocation but affected how it was implemented. Imperial Tobacco won’t be changing its proportion of foreign assets unless the fixed income allocation changes dramatically, says Janusauskas. Such a change would affect the amount invested in Canadian and international equities in the portfolio.
Although the trend towards LDI is at least one factor keeping plans from investing heavily in foreign markets, another factor sees plan managers carefully scrutinizing potential foreign investments before diving in. At the Ontario Pension Board (OPB), Tanya Lai, vice-president, public markets, expects foreign content to stay within a range of 32% to 35%, up from 25% in 2004. In her view, it’s not the total foreign content that is important, “it’s what’s inside [the foreign content] that makes the difference.”
In 2007, OPB conducted an asset-liability study of the plan. “We took the opportunity to rethink the sources of future global growth, and we believe that growth will likely come from the developing nations as their economies industrialize, populations move toward middle income and domestic consumption increases,” explains Lai. OPB is looking for emerging market investment managers that have capital preservation embedded within their process to dampen downside volatility, she says.
OPB’s strategic asset mix calls for 15% of its entire portfolio to be invested in emerging market equities, a level recently reached. The emerging market mandates are broad based, not dedicated to region or country, Lai says.
George Haim is a writer and financial services marketer based in Toronto. george.haim@gmail.com