We spend a lot of time with clients and prospects educating them on the stability of our organization and the control processes we have in place to manage risk. This includes at the portfolio level as well as at the operations level. Much of the focus on the manager is at the corporate level. A money manager needs a strong stable organization with efficient risk control processes to complement a strong performing product. Having a hot product is no longer enough.
Chepelsky: Most of the plan sponsors we talk to are still attempting to get comfortable with changing traditional long-term investment policy in favour of a more risk-based approach.
Arnold: In some cases yes, some cases no. This is really a sponsor-dependent question based on their risk appetite versus cash flow/richness. We still see many sponsors that want to reduce their pension expense understanding that the expectation of lower expense over the longer term will come with increased variability. There does not appear to be any low, stable cost solutions with low variability that will meet most mature DB plan obligations. On this basis, the pursuit of excellence is much better than the pursuit of perfection—most sponsors understand that investing comes with some set of unpreventable risks. Some risks can be managed and even mitigated, but some will just be unpreventable. This question is also applicable to the DC side. In particular, most CAP programs in Canada have simplified over the past several years in terms of the numbers and overlap of investment options. Member ‘choice confusion’ is a legitimate risk that all sponsors face and can mitigate.
Bélanger: We have put more emphasis on risk management, i.e., reviewing our risk management processes, clearly identifying and quantifying the risks faced by our retirement plans.
What investment trends do you expect over the coming months? Are there any near-term investment opportunities?
Arnold: I am picking up on Peter Chiappinelli’s comments regarding the ability, speed of pension committees and the investment discretion latitude given to managers. I agree that this is an important issue for many sponsors and managers. It is also an issue that can work both ways. [For] example, when working with a client that wanted to move to an absolute return objective rather than a passive benchmark plus premium for active management, every manager in the program asked, But what is the benchmark? as the proposed draft SIPP provided only asset class ranges and no normal target allocation. My point is offered to expand on honest debate. When considering more latitude for managers, the fundamental issues we try to ascertain are a) does the manager possess the skill-set credibility to implement the solution and b) will they actually use the latitude given (for example, why give a manager asset class ranges of ±10% if they will never go more than ±3%)? I do fully support the notion that, going forward, effective partnership (speed, stakeholders, decision-making) can and needs to be improved. In a way, plan governance can suffer its own systemic risk.
Racioppo: You cannot forecast short-term opportunities any better than you can forecast whether the stock market will go up or down tomorrow. Perhaps the question should be, Are there any near-term risks given the significant and quick rise in the equity markets?
Winch: We suggest there will be a continued focus on risk management. As well, we foresee a continued interest in investment transparency at both the corporate and mandate levels. Risk aversion is still high, with clients re-evaluating their risk profiles. As a result, demand for fixed interest mandates remains high as clients concentrate on risk management and seek to lower the volatility in their portfolios.
Within fixed interest, preferences have moved back toward sovereign and broad-based credit markets, rather than core-plus strategies. There has also been an increase in interest in long-only equity mandates. Passive management strategies are also popular, often in reaction to underperformance of active managers, with exchange-traded funds and quantitative strategies seeing greater levels of interest.
Chepelsky: Our focus is on helping plan sponsors attain their long-term performance objectives. To this end, we discount most short-term market movements as noise that should, for the most part, be ignored. This keeps our clients from being derailed from their long-term perspectives.
Chiappinelli: Any trends, opportunities, ‘oncoming trains’ in the short term have historically been difficult for any large pension plan either to take advantage of or to avoid. Pensions are slowly coming to grips with this reality. And this is what plans around Canada are wrestling with—should we give, and how much more latitude should we be giving, to our investment management teams? It’s called many things—dynamic asset allocation, strategic partnerships, etc.—but the trend we see again and again is to give their roster of investment managers more latitude, especially during crucial dislocations in the markets.
Lorimer: In our role as a plan sponsor, we would not be taking action over our anticipation of near-term opportunities. Fund managers would take any appropriate near-term action, while keeping focused on the long-term nature of pension plan investing.
Bélanger: De-risking of the portfolio and increasing of corporate bond exposure—although the opportunity is almost gone for this last one.
