During a panel at the Canadian Investment Review’s 2024 Global Investment Conference in April, three key thought leaders representing defined benefit pension plan sponsors shared their views on investment trends and challenges in developed and emerging markets.
Investing in emerging markets brings a slate of challenges for investors, said Jean-Christophe Lermusiaux, (pictured centre) managing director of internal, active global emerging market equities at the British Columbia Investment Management Corp., noting many active and passive asset managers don’t surpass three- and five-year benchmarks in this space due in part to increased trading costs, FX losses as well as a taxation process that’s not always efficient.
But he said there are opportunities emerging in the technology space across Asia, particularly Korea and Taiwan. The two markets offer opportunities in cutting-edge technology used in the development of new artificial intelligence applications. He also pointed to infrastructure as another area of opportunity, noting amid the ongoing shift in the supply chain outside of China (the so-called ‘China +1’ model), companies and countries will have to adapt.
“So outside of China, it means you need infrastructure somewhere else . . . whether it’s Asia in Vietnam, Malaysia, Indonesia and in India, and also to some extent, Saudi Arabia, Brazil and South Africa.”
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He added this is the first time in modern history where emerging market players are trading more with each other than with developed markets — a risk that advanced markets should be cognizant of.
Also speaking during the panel, Steve Mahoney (pictured right), chief investment officer at the Nova Scotia Pension Services Corp., said while discussions about emerging markets tend to centre around Mexico and India as recent winners, it’s important to pay attention to lesser-discussed countries such as Poland, Romania and Vietnam.
“We’re just trying to understand what’s happening in those markets. . . . We do want to understand how the supply chains work as it helps us better understand what’s happening in our portfolios as well.”
In terms of fixed income, the CIBC Pension Plan doesn’t hold any emerging market debt, said James Ash (pictured left), the plan’s chief investment officer and head of pension investment management and treasury, who also spoke during the event. Regarding public credit, it operates an interest rate hedging program through mainly provincial bonds and tactically adds credit through the cycle.
“We do foresee the long end of the yield curve staying up due to a lot of demand from LDI strategies on the public side of fixed income. We really like private debt as it meets our evolving needs for deploying capital in private markets for shorter periods while still generating superior risk-adjusted returns as part of our growth asset portfolio.”
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In the real asset space, Mahoney said the NSPSC is closely looking at opportunities in agriculture and timber. “We have allocations in both of those [sectors] as well. I’d say we’re ‘toe in the water’ at present, but we’re there and our boards have approved it. We’ve built out a little bit of a portfolio and will be slowly building out further over time.”
The timber asset class is one area that rarely produces negative returns, he added. “If housing starts are great, you cut [and] sell trees. If not, then let the trees grow, the portfolio gets bigger and typically valued as worth more. So that’s where we’re putting some of our team’s efforts right now.”
The NSPSC is only invested in real estate in developed markets. “What we do with our portfolio is look to see where we think we’ve got fairly liquid and desirable assets in markets that we understand well.”
Within real estate, Ash said some of the appealing alternative sector opportunities include cold-storage, self-storage, health care, life sciences and data centres.
“Our strategy has typically been more core-plus to value add as this is a growth portfolio asset for us. It’s not coupon clipping, we’re looking for active management for both value creation and risk mitigation. We always look for GPs and funds that offer those opportunities. Within infrastructure, we are generally reducing our commitments in line with our macro pension plan needs, as it’s a longer date asset, but continue to consider attractive opportunities related to supporting AI technology and advancements, as well as associated energy distribution and the broader transition within the sector. “
Read more coverage of the 2024 Global Investment Conference.