John Davies, chair of the board of trustees of the Carpentry Workers’ Benefit and Pension Plans of British Columbia, gives his thoughts on alternative investment strategies.
What alternatives do you hold in your portfolio?
We have infrastructure, two portable alpha mandates, privately held real estate and real estate funds, mortgages [and] all the standard bond allocations. We have EAFE. We have U.S. and Canadian equities, and we have two hedge funds.
What is your investment philosophy?
We depend on a fixed contribution rate and how well our assets perform, which is fairly basic to most plans of our time, but we’ve taken it a little further. We like to squeeze as much juice out of the lemon as we can. Like a portable alpha, the long-bond strategy does that for us. We maximize what we have. One of the phrases I use is ‘The status quo is never acceptable.’ We must always be examining what we are doing and why. What we do, we believe, gives us an upside on returns and reduces risk.
Some plan sponsors are hesitant to invest in alternative assets because they’re concerned about the risks involved. What’s your perspective?
Most smaller plans have this notion that they can’t do these things, that they have to be a big plan. I do not subscribe to that idea. Bigger isn’t necessarily better. So we are always looking for what’s available to us, and we are not stuck in this 60/40, 70/30 mindset.
We’ve been early adopters of a lot of things. We went into infrastructure way before most people. We have different mandates for equities rather than just the stock EAFE. We also do very different things in our equity portfolio. It’s very easy for plans to just sit in their comfort zones. I think you really need to get outside your comfort zone if you want to perform well.
How did these assets fare during the recession? Have you made any changes to your asset allocation?
When we decide to do something, it’s [influenced by] the circumstances we are in. You make decisions in a time box, and you can’t go back when times change and criticize it. We’ve gone back over our alternative investment strategies, and if we had to do it again, we would. We haven’t changed our mind just because we went through this economic hiccup. It made sense when we did it, and it makes sense today.
We want to be patient investors. We want to give our managers and strategies as much time as possible to run their course. If you made a sound decision in the initial instance and you hire good managers, let them do their job and give it time to work. It irritates me when people skip out on pension plans based on fear rather than fact. We do not do that.
Do you have a target allocation for alternatives?
We have 50% of our long-bond portfolio leveraged—that’s about $50 million. Right now, we are looking at a situation that we see as full of opportunities. We believe we are through the bottom, and we don’t think there is going to be a roller-coaster ride up. We are projecting that we may want to do more leveraging of the bond portfolio.
Have you faced any challenges in building a portfolio with alternatives?
The challenge for us—and for any plan going into esoteric investment vehicles—is understanding them. Before we did it, we spent months sitting down and speaking with people. One of the things the alternative investment community has to do is demystify a lot of it. That is the biggest single challenge: understanding what you are buying.
With hedge funds, we need to demystify them; we need to understand them. Understanding your choice fully before you buy it—that’s going to take more work than anything you do as an investment board. Everything else compared to the alternative vehicles is relatively simple. It’s a really complicated game; you have to understand what you’re doing and your board has to understand.
What suggestions would you give to other plan sponsors considering alternatives?
First, ask why. Can you benefit from it? If the answer is yes, then you have to go out and educate yourself. You have to spend a lot of time [on this]. My view is, if my board of trustees doesn’t have a good idea of what it is voting on, that is not a happy place to be.
Say it’s an EAFE portfolio; there are three or four discernible styles, each of which can be relatively easily explained to any layperson. Now go out and take a look at alternative investments. Every manager is different. There are nuances; some are subtle, some not so subtle. It is extraordinarily difficult to understand what each of these shops does.
Often, it is easier to keep a plan in the traditional investment sphere because, as an advisor, there is less risk for you. That is not something that I subscribe to. You need to understand what your plan needs and not be afraid to go out and get it. Small plans shouldn’t think small; they should examine what’s out there in its entirety. Be small, think big.
What investment trends do you anticipate in the coming years?
Nobody knows what the future regulations will be; we don’t know what the global regulatory situation will be. One of my fears is that we will become overregulated and it will stifle creativity. And that doesn’t just go for investments. I was on the B.C./Alberta pension panel, and one of the things we thought is that there should be more creativity in plan designs.
We tend to live in yesterday, and that’s not a good place to be. But now, there is a fear that government will put unnecessary handcuffs on. I have this fear that there will be some regressive rule changes; I may be pleasantly surprised but I don’t think so. I think we will enter a period of far more regulation—and not necessarily productive regulation.
Alyssa Hodder is editor and April Scott-Clarke is assistant editor of Benefits Canada.
alyssa.hodder@rci.rogers.com
april.scottclarke@rci.rogers.com
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© Copyright 2009 Rogers Publishing Ltd. This article first appeared in the December 2009 edition of BENEFITS CANADA magazine.