Real estate, hedge funds and private equity: alternatives are certainly good investments to help diversify a portfolio, but they’re not without their challenges, say plan sponsors.
The 8,000-member pension plan of the United Church of Canada moved into alternatives in the last three years. “But it’s ‘alternative light,’” said Dan Foster, the plan’s investment manager, at the Société Générale Road Show conference Friday at the Park Hyatt in Toronto. The fund has about 15% allocated to alternative asset classes—which are divided evenly between real estate, private debt and real return bonds—and a more or less even split allocated to fixed income and equities.
One of the plan’s challenges with alternatives, Foster said, was its size. “We’re a small plan, with limited resources,” he said. “It’s time and cost.” Hedge funds, for the time being, are not on the table. “Our investment committee can’t get their heads around that, so we’re staying alternative light.”
Similarly, the Colleges of Applied Arts and Technology (CATT) pension plan has steered clear of hedge funds and commodities, but does have 2% allocated to other alternatives. However, CATT’s biggest challenge is education. “We need an educated lay board so they get comfortable with decisions they have to make,” said Paul Owens, plan manager and chief executive officer.
John Poos, director, global pensions, for Nortel, manages upwards of 50 different plans around the world. Although there are no alternatives in the portfolio at this time, in the United Kingdom, there is a small allocation to an active currency fund.
One reason Nortel is not pursuing alternatives is the operational aspects. “They’re problematic,” Poos said, pointing out that he and one other manager are responsible for those 50-odd plans. “We’re not going to give 80% of staff’s time to get less than 20% of the returns.”
Mr. Fix-it?
But if education is the challenge, what’s the solution? Standards. “We don’t have the standards to sit on those boards,” said Owens. “We’d need to regulate a minimum standard from the employer and employee sides. “Education is a long process. One session doesn’t work; you need to do them on an annual basis.”
“There’s been a movement in the U.K. toward trustee training,” said Poos. “We need to have that here, professional trustees on these boards.
Foster said he was fortunate in that his investment committee and pension board have an array of actuaries and investment professionals—even an economist. Those committee and board members have some exposure to at least one of the asset classes, so that they’re spread over a number of people. As for alternatives, the plan has recruited a private equity professional on the board to help with infrastructure and private equity. But Foster is far from naive. “Even my expert board has some challenges,” he cautioned. “But we get them together as much as we can.”
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