One step up, two steps back: so far it’s been that kind of a year for Canadian pension funds, with the second quarter of 2011 nearly wiping out all of the previous quarter’s gains. Earning just 2.2 per cent so far this year, Canadian plan sponsors sure look as if they’re treading water.
Which is probably why plan sponsors are keeping a really close eye on their cash. With returns like this and interest rates on the rise in most major markets, plan sponsors just can’t afford any drag on performance – especially cash drag.
Right now, cash equitization is the top use for ETFs in the pension space. Plan sponsors can use them to maintain their exposure to equity or fixed income markets during times of transition. It means they don’t have a pile of cash sitting around doing nothing, dragging down earnings even more.
When every basis point counts, that kind of cash drag is a major risk.
Plan sponsors have always solved this problem using futures contracts to equitize cash. Futures contracts are easy to implement in house for many plans and that means they’re cost effective.
More and more, however, ETFs are starting to nudge aside the futures approach to cash equitization, especially when it comes to short-term transition management. Swaps don’t always match up well with short-term needs – and day-only swaps can raise problems on the beneficial ownership front. ETFs also beat futures on the liquidity front.
As plan sponsors move through what looks to be a challenging year, ETFs should start playing even more of a role on the cash equitization front – when every point counts, plan sponsors can’t afford any kind of performance drag.