Canada’s Top 40 money managers are helping plan sponsors adapt to the new normal
It’s been five years since Lehman Brothers filed for bankruptcy, which sped up the severity of the financial crisis and sent markets into a tailspin. Canada’s Top 40 money managers are trying to help pension plan sponsors adjust to a new environment.
The financial crisis turned pension plans’ worlds upside down. “Until that time, many plans continued to think that they could operate on a business-asusual basis,” explains David Service, director of investment consulting with Towers Watson.
It’s now become clear that plan sponsors have to rethink how they are managing their plans. However, some are being cautious—maybe a little too cautious.
“If you step back and look at the market, it’s a different world. There has been a shift from the Great Moderation to the Great Uncertainty. With the Great Uncertainty, people are unsure what to do,” explains Timothy Thompson, chief operating officer of TD Asset Management (No. 1 on the Top 40 Money Managers list). “There’s been a lot of waiting, watching, thinking, talking. You may take action because you have to. Sometimes you’re forced to take action. But there is a definite holding pattern in place.”
“The consulting community also took a pause, in terms of aggressively recommending new strategies following the crisis,” says Peter Muldowney, senior vice-president, institutional strategy, with Connor, Clark & Lunn Financial Group (No. 7). “While consultants are once again advising their clients to consider solutions to better meet plans’ needs, recommendations of new approaches receive a ‘tepid’ response, as an air of caution persists within the investment community.”
Invest at Your Own Risk
Following the financial crisis, pension plan sponsors now have a better idea of the risks they face. “I think they truly understand what is meant by the concept of financial risk and how badly they can be hurt by it,” says Service. “This time, I think they will take steps to mitigate that so the next time something like this happens, they won’t be hurt as badly.”
Some are paying greater attention to risk, depending on the plan’s funding status. BlackRock Canada (No. 2) has recently seen that many plans are willing to take on a little more risk by investing in more illiquid assets and also outside of Canada, says Noel Archard, the firm’s managing director and head. “And the ones that might have been in a more conservative stance because of funding, it caused them to look at minimum volatility or risk parity strategies—things that might get them to a place that they want from a return stream but with a little less volatility embedded in the portfolio.”
Gone is the long-held belief that equity investments are the solution to most pension problems. The financial crisis gave plan sponsors a good appreciation of the impact this asset class can have on the plan’s financial health. “They’ve definitely come to the conclusion that they need to be more open to complementary asset classes or strategies beyond ‘plain-vanilla’ equities and fixed income, which have dominated portfolios for decades,” Muldowney explains.
A Kick in the Assets
When stocks and bonds won’t do, there are alternatives—alternative investments, that is. “So much depends on risk appetite, the size of the plan and the flexibility that they have,” Archard explains. “But if time’s on their side and the funding status is in good shape, they’ve got the opportunities to pick off the returns in the alternatives space.”
Infrastructure, for example, is popular with investors. “Because of the low-yield environment, real assets can provide yield and are not too correlated with other traditional asset classes,” says Patrick De Roy, an institutional portfolio manager with Pyramis Global Advisors (No. 17). “In alternative investments, we see more requests for real estate and infrastructure than for hedge funds. We think that real assets are clearly a trend.” Investing in real estate is certainly a growing trend. The Pension Investment Association of Canada says pension fund allocations to real estate reached a record of 10.2% of total Canadian assets at the end of 2012. For plans that can’t afford to purchase properties or don’t want to buy into funds of funds, exchange-traded funds (ETFs) are becoming a more popular option. A recent study from Greenwich Associates finds that approximately one-third of Canadian institutional funds and asset managers use real estate investment trust ETFs. “Canadian institutional investors are hungry for real estate exposure,” explains Greenwich Associates consultant Andrew McCollum. “ETFs offer a relatively efficient means of exposure for smaller funds or for funds concerned about the risk and complexity of investing in real estate directly.”
Some plan sponsors, such as the Halifax Regional Municipality Pension Plan, are making a big push into private investments. “We have private equity, private debt, infrastructure and real estate,” says the plan’s CEO, Terri Troy. “And we put it all in one bucket. We don’t have a separate allocation for each subset. Our overall target for the bucket is between 10% and 40%.”
But when it comes to hedge funds, many plan sponsors aren’t as enthusiastic. Concerns about governance issues, fees, headline risk and lack of transparency have turned some plan sponsors away from these strategies, Service explains. (For more on current and future trends in hedge fund investing, see our virtual roundtable, Return of the hedge fund.)
Hello, World!
And alternative assets aren’t the only way pension plan sponsors are looking to broaden their horizons. Canadian equities represent only about 4% of the total market capitalization in the developed market, so it’s natural for Canadian plan sponsors to seek investment opportunities beyond our borders. While there is a tendency toward home bias in the portfolio, plan sponsors continue to buy up international equities, after the foreign property rule was eliminated in 2005. This move isn’t because Canada is no longer an attractive place to invest, but because it offers a way to reduce risk and find higher-yielding assets.
“I’m not sure I’m ready to proclaim the death of Canadian equity investments,” says Thompson. “Canadian equities will have a place. It’s the continuation of the trend to diversification strategies.”
While moving out of Canadian equities is one way to diversify a portfolio, some plan sponsors are looking elsewhere to cope with a low-yield environment. Interest rates have remained low for the past couple of years, and despite a jump in long-term bond yields over the summer, yields may stay low for some time. On Oct. 23, the Bank of Canada announced that its interest rate will remain at 1%. Plan sponsors are moving to expand their fixed income universe by investing in emerging market or high-yield fixed income, or global bonds, says De Roy.
“They are looking for a way they can add yield in their portfolio without significantly increasing the volatility.” While 10-year Canadian government bonds currently yield less than 3%, government bonds in Chile and Colombia have yields of more than 5% and 6%, respectively.
Even though it’s been years since the financial crisis ended, plan sponsors have maintained their focus on risk and learned to live in the new world of low interest rates. But, as often happens, the pendulum can swing too far in the other direction: plan sponsors may now be too cautious. “Understandably, after the crisis, plan sponsors weren’t prepared to make changes or be open to new investment strategies,” says Muldowney. “But I feel the caution lingers today— and that’s not a good thing, because it suggests a resistance to change.”
At least one plan sponsor agrees. “I just think that moving now to all of the strategies that come with limiting the downside is unfortunate,” says Blair Richards, CEO of Halifax Port ILA/ HEA Pension Plan. “I think a lot of plans are going to regret some of the decisions they’re making in response to what happened in 2008.”
The Numbers
- At the end of June 30, 2013, Canadian pension assets for the Top 40 money managers totalled $616.4 billion compared with $558.9 billion the year prior—an increase of 10.3%.
- Baillie Gifford Overseas had the biggest jump, moving up six places from No. 35 to No. 29.
- Thirty-five managers reported an increase in pension assets, with only five reporting a decrease.
- Twenty-three managers reported double-digit increases in pension assets over the last 12 months, versus 10 managers in last year’s report.
- Mawer Investment Management (No. 34 on the Top 40 Money Managers list and No. 2 on the Top 5 Fastest Growing (%) – $1.0 billion to $10.0 billion list) had the largest percentage increase in assets within the Top 40, rising 81.3%.
- Four managers are new to this year’s list: Hexavest (No. 32), Mawer Investment Management (No. 34), Burgundy Asset Management (No. 37) and Mercer Global Investments Canada (No. 38).
Source: Firms participating in the Canadian Institutional Investment Network Spring 2013 Top 40 Money Managers Survey
Craig Sebastiano is associate editor of BenefitsCanada.com.
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