Dalhousie University’s DB plan is driving in a new direction
Dalhousie University’s DB pension plan is no longer like other plans. Over the past few years, the plan has moved from a typical portfolio of 60% equities (it had one-third each in Canadian, U.S. and global stocks) and 40% bonds into a new set of asset classes.
“It’s been a gradual change,” says the university’s treasurer, Colin Spinney. “Around the mid-2000s, we modified the plan with the introduction of private equity at first. That was followed by a small allocation to absolute return strategies and then also a buildup in real assets.”
The move to a new investment strategy was driven by a number of asset/liability studies, which looked at various outcomes for the plan’s objectives using different asset mixes. Spinney says the process was like putting together puzzle pieces that would improve the consistency and likelihood of those return objectives with risk the trustees believed the plan could tolerate. “Avoiding overreliance on any particular strategy was paramount.”
When adding strategies, the plan wants to determine whether that strategy will allow it to earn the same level of return with less downside risk and less volatility, or to maintain the same downside risk and same volatility levels and enhance returns. “If the strategy’s really great, maybe we can achieve both; that is, we reduce downside risk and enhance returns,” says Spinney.
Changing Lanes
While Towers Watson’s 2014 Global Pension Assets Study shows that most plans have allocated about one-third of assets toward domestic equities, Dalhousie’s plan is aiming for much less, at 14%. “We think we’re somewhat overweight in Canada,” Spinney explains, noting that Canada’s equity market is much smaller than equity markets on a global scale. According to Credit Suisse, the domestic equity market was 3% at the end of last year. “Essentially one-third of our public equity exposure remains here at home,” Spinney adds.
Twenty-six percent of the plan’s total portfolio is allocated about equally to American and non-North American equity markets, which consist primarily of developed markets and a minor amount of emerging market exposure.
The plan has also reduced its bond allocation to 30% of assets. Any allocation to a particular asset class is more relevant to what the plan’s needs are, as opposed to the standard pension model, he explains. Earlier this year, the university completed an asset/liability study. The results show that if interest rates were to increase, it would present a challenge to generate sufficient returns. “With that in mind, we’re allowing the fixed income allocation to decrease down to 30%,” he says.
While the majority of the plan’s equity portfolio is outside of Canada, the bond portfolio is mostly located here. It shifted some assets into the corporate credit market. Spinney says the plan also allocated more to a duration strategy where bond durations can be shifted in response to interest rate moves. There’s also an allocation to floating-rate private debt (in which the interest rate is variable), where the plan is able to pick up a little bit of extra yield right now. Should interest rates rise, the variable rates are reset on a quarterly basis so they protect the plan a bit from that downside risk. The plan has also taken part of its traditional bond portfolio and put an alpha overlay (using active management to generate excess returns) on it by deploying a global macro strategy.
Parking Assets in New Spaces
To make up for a lower allocation to fixed income, the plan has made allocations to real assets, which make up about 15% of its portfolio. The plan’s real estate assets are primarily located in Canada, while the infrastructure assets are in both Canada and the U.S. In private real estate, it participates through funds—not funds of funds—that are responsible for acquiring properties. The plan’s infrastructure exposure is through a single fund as well, which looks for opportunities in the space. It supplements those private investments with global stocks in the same sectors. On the real estate side, the plan owns equities such as real estate investment trusts and real estate operating companies.
It also has stakes in publicly listed infrastructure companies, such as toll roads and water utilities. Spinney notes that a lot of the infrastructure stocks that the plan owns are based in Europe because there are more companies listed on overseas markets than there are here.
Private equity makes up about 10% of the portfolio, and the plan participates through funds of funds to make the allocation more diversified. “When we got into this space, we had searched for opportunities out there and selected three different relationships that we can use to mix up and diversify our vintage-year, geographic and sector allocations,” says Spinney. “We allocate some to venture capital, and we do look at some natural resource and clean energy types of investments as well.”
And the smallest allocation of its portfolio is allocated to an absolute return strategy, which makes up the remaining 5% of the overall plan. The plan invests in a hedge fund of funds and uses two global macro multi-strategies. Market-neutral strategies are also in place within the plan’s equity allocation. “Where we use it as part of our equity allocation, we’re looking at it as being a complementary set where it’s going to help mitigate the downside volatility risk while, at the same time, stabilizing returns for that particular equity allocation,” Spinney explains.
Driving Forward
The plan has performed well since the shift, and the new investment strategy has helped the plan to achieve the actuarial target on a more consistent basis with less downside. In fact, four of the last five fiscal years have met or exceeded the target. A lot of that’s been propelled by the markets bouncing back, and where significant changes were made in some asset classes, the performance has been beyond expectations.
However, Spinney doesn’t want to get overly excited because performance will likely average out over time. He expects the targets and objectives that were set will be reached.
While the strategy to shift into new allocations is now in place, there are opportunities for change. Spinney says the plan is always looking at altering its overreliance on any particular area.
Where the plan has certain larger exposures, it aims to reduce those and to diversify even within the asset class. For example, Spinney says the plan could diversify its portfolio of U.S. equities and have a more optimal blend of large-, mid- and small-cap stocks.
Change will always be a constant. “We’re still in transition,” Spinney says. “This is a long-term game here, so there’s still more work to be done.”
Craig Sebastiano is associate editor of BenefitsCanada.com.
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