The conservative portfolio allocations held by Canadian institutions prior to the onset of the global financial crisis have resulted in largely positive post-crisis reviews of internal investment policies compared to their counterparts in the U.S., a recent survey reveals.
Greenwich Associates Market Pulse Survey of 22 large Canadian institutions suggests only half of the respondents have reviewed or made changes to their investment policies in response to market events of the past 12 months, and have concluded their policies are sound and that the subsequent drop in asset values was due to a systemic breakdown in global markets as opposed to a failure of their internal policies.
“In keeping with that assessment, Canadian institutions appear to be sticking with general allocation frameworks put in place over the past five years and keeping in place some of the strategies that had guided allocation shifts prior to the crisis, including the expansion of foreign holdings and a relatively cautious stance on alternative asset classes,” says Greenwich Associates consultant Dev Clifford.
Prior to the crisis, Greenwich explains, Canadian institutions maintained relatively large allocations to fixed income in comparison to institutions in the United States. It worked in 2007 and 2008, and according to the survey it’s working in 2009 as well. Approximately 15% of respondents have left their fixed income allocations entirely unchanged from 2008 to 2009, while almost 45% have made moderate increases and an equal proportion made moderate decreases. None made significant additions or cuts to their fixed-income allocations over that period.
Canadian institutions are also more conservative than their U.S. counterparts when it comes to investing in alternative asset classes, and some appear to be looking to cut their exposure even further. Just under 30% of respondents have already reduced their allocations to hedge funds, 15% of them describing the cuts as “significant.” None of the institutions increased allocations to either hedge funds or private equity and 14% made moderate cuts to their private equity allocations.
One of the portfolio strategies Canadian institutions appear committed to is allocation to non-Canadian assets since the elimination of the Foreign Property Rule in 2005. More than 70% of respondents say they have left such allocations unchanged from 2008-2009 with only about 15% making moderate increases or decreases. Almost 45% left allocations to domestic equities unchanged over the past 12 months, with 30% making moderate increases and an equal share making moderate reductions.
Catalyst for change
While avoiding dramatic changes to their asset allocations, the survey reveals Canadian institutions have taken several important actions in response to the crisis:
• One-quarter of respondents have already made investments in opportunistic funds, including vehicles looking to exploit historic opportunities in fixed income, secondary private equity and other asset classes, and another 6% say they plan to do so in the next 12 months.
• Almost one-third of Canadian institutions have cut back on their securities lending programs after learning that they were occasionally incurring significant levels of risk for trivial levels. However, any planned changes to such programs have been made and no respondents are planning to curtail them further in the coming year.
• A considerable majority (75%) of respondents plan to hire a new investment manager in the coming year, while almost 55% expect to terminate a manager, while 25% are still pondering a termination.
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