According to the Canadian Investment Management Research Study sponsored by Greenwich Associates, Canadian institutional equity portfolios are changing the way they invest.
With the levy lifted on foreign investments, and investors’ desire to diversify and reap higher returns, the tendency to invest in foreign markets has increased. In 2007, allocations to international equity rose to 58%, up from 51% in 2004. Foreign equity now represents 30% of institutional assets in Canada, with non-domestic equities making up more than 29% and international bonds accounting for approximately 0.5%.
“Since Canada represents roughly 3% of the MSCI World Index, we would contend that foreign exposure is still under-represented in Canadian equity portfolios and we expect those percentages to continue to rise,” says Rodger Smith, a consultant with Greenwich Associates.
Despite the fact that this shift in investment is new to some funds and carries increasing currency risk, 35% are choosing not to hedge their non-domestic investments. “Many funds opt not to hedge their foreign exposure on the belief that, over a long-term investment horizon, currency fluctuations will even out to the extent that hedging is not worth the cost,” says Smith. He adds that currency risk should not be taken lightly and investors should make informed decisions about hedging.
On the alternative investing side, Canadian institutional investors are leaning more toward real estate and private equity. The allocation of assets to real estate jumped to 8.4% in 2007 from 5.5% in 2006, and in private equity to 5% in 2007 from 2.6% in 2004. In contrast, hedge fund allocation has dropped from 1.6% in 2004 to 1.2% in 2007.
The study also showed that pension plan management is changing dramatically. A large number of plan sponsors are fostering new strategies that will help align their investment portfolios with their pension liabilities. One quarter of institutions have adopted some sort of asset-liability matching strategy and another 19% say that they plan to do so. Additionally, about 10% have implemented liability-driven investment strategies and approximately 18% plan to implement these types of strategies in the future.
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