Participants:
Peter Arnold, national practice leader, investment and CAP consulting, Buck Consultants
Roger J. Beauchemin, president and CEO, McLean Budden
Martin Bélanger, director, investments, The University of Western Ontario
Robert Chepelsky, principal, asset consulting, Morneau Sobeco
Peter Chiappinelli, senior vice-president, asset allocation strategies, Pyramis Global Advisors, a Fidelity Investments Company
Zaheed Jiwani, senior investment consultant, Hewitt Associates
Paul Lorimer, vice-president, finance and operations, The Christian and Missionary Alliance in Canada
Len Racioppo, president and director, Jarislowsky Fraser Ltd.
Brent Smith, senior vice-president, chief investment officer, Franklin Templeton Managed Investment Solutions
Bruce Winch, senior vice-president, institutional investments, Invesco
What changes have plan sponsors been making to their investment strategies and asset allocation as a result of the market activity?
Beauchemin: From our perspective we have witnessed two themes coming from sponsors. The first is that there is significantly more sponsor interest in liability driven investment (LDI) strategies, and our sense is that adoption of some LDI solutions will change the defined benefit (DB) landscape as plan funding levels reach a certain level. The second revolves around a more profound appreciation for liquidity risk, from being unable to raise cash to sponsor frustration at their difficulty and, in some cases, inability, in rebalancing their asset mix during prolonged market events.
Smith: As an asset manager, we have not necessarily made any changes to our investment strategy but have certainly been more active within the asset allocation space to capture some of the value that has presented itself. We believe that asset managers must be willing to take a more active approach with asset allocation in the years ahead as another way to add alpha as opposed to relying strictly on their underlying investments to deliver that alpha.
If anything, the last eight years has demonstrated that a passive approach to asset allocation added, unfortunately, very little value. If returns going forward are going to be much more subdued than in decades past as many pundits expect, then a more active approach to asset allocation may be appropriate. I think asset managers will begin to explore areas that they have traditionally not allocated assets to, such as managed futures, in order to further diversify their portfolios with the goal of trying to minimize the downward volatility of their portfolios in times of market stress. Racioppo: There does not appear to have been any significant change in terms of overall equity/fixed income mix, but there has definitely been an increased desire for liquidity as well as a better understanding of the potential lack of liquidity in some of their private or hedge fund investments.
Winch: Every plan is different and in a different situation, so there hasn’t really been one common response or solution. If there were, it would be a heightened focus on risk management. To that end, some sponsors are considering LDI strategies, although the related costs may be high. Many plans have increased the duration and weighting of their fixed income sleeves, while others are focusing on ways to reduce volatility.
Although there is considerable discussion about different ideas or scenarios, changes take place slowly in the institutional world. And, when markets pick up as they have just recently, momentum is lost. The good thing is that there seems to be a realization that there is no perfect solution or magical pill. Plan sponsors—many of them underfunded—need to be as well diversified as possible. They need the extra potential returns of equities and alternatives and can’t afford to be mainly in fixed income.
Chepelsky: Through all of this market turmoil, we have urged clients to stick with their long-term policy asset mix and to ignore recent market movements. For pension plans, that means keeping asset mixes within the constraints detailed in their Statement of Investment Policies and Procedures (SIPP). For the most part, our pension plan clients listened to us and have benefited from the market rebound. Most pension plans did not change their asset mix, although a few chose not to rebalance back to policy targets, which caused a slight drag on performance. We have had a few clients inquire about LDI strategies in an attempt to mitigate some of their plan risk going forward.
Lorimer: The Christian and Missionary Alliance in Canada has not changed our investment strategies or policy asset allocation ranges as a result of market activity. We have added some additional GIC options for plan members so that members have more additional ‘guaranteed’ fixed income term options. (Members have invested only 2% of total defined contribution (DC) assets in GIC products, so these products are not selected often.) In 2008, our Investment Advisory Committee (with board approval and after prior member notification) took action to ‘tweak’ the asset allocation of default plan members. Default members were notified that this action may be taken annually. Plan members choose to default into four funds that provide an overall Canadian Balanced Fund asset allocation.
So we are taking a DB approach to DC default members’ pension plans to manage their asset allocation of fixed income, Canadian equities and global equities within SIPG ranges. Of course, we don’t take this action for plan members who choose to invest differently from the default option. Our committee reviews asset allocation quarterly and will decide whether or not to take 2009 asset allocation action as a part of our Q3 review process for DC default members.
Bélanger: We haven’t made any changes to our investment strategies and asset allocation. We have stuck to our rebalancing policy, so we have increased our equity exposure in the fall/winter 2008/09 and rebalanced down since the spring of 2009.
