In light of the market turmoil, how confident are plan sponsors about their investments and advisors?
Lorimer: We are confident of the quality in our investments and our fund managers and advisors, and we monitor this area closely relative to industry benchmarks. In the past, we have changed fund managers who underperformed over a market cycle. We would carefully review any fund manager in an underperforming situation so that plan members can have confidence in the quality of our managers, their investments and their return-on-investment results.
Though we have confidence relative to industry benchmarks, that confidence, of course, can’t guarantee positive short-term absolute returns for members who are in a Canadian balanced fund risk/return profile. For members who need positive short-term absolute returns, there are a variety of GIC investment options, so those members can sleep at night with the confidence of low, but positive, absolute returns.
Chepelsky: The market turmoil has caused most plan sponsors to lose some confidence and to second-guess not only their particular investment strategy but also the returns they should expect from the market in general. As advisors to pension plans, it was our job to calm the waters by putting perspective on the situation so that plans did not stray away from their long-term investment policy.
Winch: After the turmoil of the last year, confidence seems to be an elusive emotion for plan sponsors—whether that’s confidence in their own investment strategies or in those who advise them. A few plan sponsors came out with out-of-the box strategies that involved different-looking asset mixes and investment policies (more variety and more alternatives) rather than the prevailing 60% equities and 40% bonds. During this period of intensive plan and asset mix review, plan sponsors and consultants were so busy that the choice of managers and specific investments is not yet top of mind. It is tough to find the opportunity to discuss a good potential alpha product or risk-reducing products.
Racioppo: Sponsors have been disappointed in the performance of some of their investments and investment managers. There are products that did not perform as ‘advertised,’ i.e., not market neutral, not liquid, not as high quality as disclosed or simply much more volatile than expected. In some cases, sponsors have completely retrenched. They have, for example, exited hedge fund products or sold off higher-yielding fixed income portfolios that got caught in asset-backed securities or in bankrupt financials. Indexing the proceeds was a common reaction earlier this year, but in recent months, we are seeing some redeployment to active strategies.
Smith: Many, if not all, investors and advisors are reassessing their true risk tolerance. I would say many had focused only on the return part of the equation and had lost sight of the risk part. 2008 has changed that.
In the ‘go long equity’ environment of the 1980s and 1990s, investors’ appetite for return was done at the expense of risk management. ‘Stocks will always come back’ was the mantra of the day. As long as your time horizon was relatively long enough, you had nothing to worry about. Are we now going to experience an environment similar to the ’80s and ’90s but in reverse? Where investors become overly concerned about the downside of their investments at the expense of returns? At present, it does not seem as if there is an enormous amount of conviction in the recent rally. Once we see a sustained recovery in global economic growth, maybe then investors will become more confident in their investments.
Beauchemin: The rebound since the March lows has helped restore some confidence, but our sense is that from a sponsor perspective, this will eventually lead to profound and lasting change in plan risk, design and implementation. There will be more emphasis on de-risking plans, better liquidity provisions and more investment transparency.
Having lived through two ‘once-in-a-century’ corrections, sponsors are deeply shaken. The rebound since the March lows has helped restore some confidence, but our sense is that from a sponsor perspective, this will eventually lead to profound and lasting change in plan risk, design and implementation. There will be more emphasis on de-risking plans, better liquidity provisions and more investment transparency.
Bélanger: We have the same level of confidence about our investments and our investment consultant.
