For example, the provincial sector contributes over 60% of spread duration and about half of total duration in the index. Similarly, the Province of Ontario, the largest non-federal issuer, represents over 18% of duration contribution in the index. A manager that has a constructive view of provincials may overweight the sector (or Ontario) meaningfully and, for no other reason than index composition, the portfolio would have a high degree of exposure to the sector, thereby increasing total portfolio risk for the underlying plan sponsor. The corporate side of the index displays the same phenomenon, where there are large sector and issuer concentrations of exposure (e.g., Canadian banks). On the bright side, the Maple market (non-Canadian issuers accessing Canadian-dollar funding) is growing once again. However, it pales in size relative to the $1.6 trillion Canadian bond universe and $427 billion Canadian corporates.1 Aviva Investors is one of the few Canadian fixed-income managers with local and global offices, and is uniquely positioned to adeptly leverage opportunities within both the Maple market and non-Canadian-dollar credit markets. This allows clients to benefit from our best sector and issuer selection ideas inside and outside Canada, while avoiding meaningful concentration in Canadian themes. This is especially important given that traditional Canadian bank debt is poised to disappear and be replaced by debt that is convertible into equity at the discretion of the Office of the Superintendent of Financial Institutions (OSFI).
ARE THERE AREAS OF THE MARKET THAT CANADIAN PLAN SPONSORS TEND TO MISS OUT ON?
RAHUL: Canadian plans have made good progress in broadening their asset mix over the recent years. However, there is arguably further room to diversify further from Canadian core fixed income into areas such as global
fixed income and multi-asset credit and even beyond fixed income into absolute return and other liquid alternative asset classes. Allocations to emerging market equity and emerging market debt are also worth consideration.
SUNIL: Historically, Canadian plans have been averse to increasing out-of-benchmark limitations in fixed-income plan policy guidelines and also to using derivatives to hedge currency or interest rate risk. Unfortunately, overly restrictive barriers may incentivize managers to seek higher risk strategies that may not be commensurate with the opportunity set. Fortunately, plan sponsors are beginning to recognize the limitations of such restrictions and an overall mindset change is creating demand for more Core Plus fixed-income investment options.
ARE THERE LESSONS THAT SMALLER PLANS CAN LEARN FROM LARGER PLANS?
RAHUL: Many smaller plans continue to employ some version of a traditional 60% equity/40% fixed-income balanced portfolio, which has generally served plans well over the last few decades. But will it over the next decade, when equity and fixed-income returns may be challenged? Larger plans are diversifying portfolios by utilizing liquid alternative strategies such as multi-strategy target return. These strategies are now much more accessible to smaller plans and can provide daily liquidity, full transparency and a flat fee structure.
SUNIL: Finding a manager with “boots on the ground” in Canada and globally with the capacity to tap into a broader fixed-income opportunity set is a challenge for all plans, especially smaller ones. Any Canadian investment manager can trade any non-Canadian securities with global counterparties – but it’s important to invest in these securities credibly and construct a portfolio informed by global knowledge, analytical insight and a robust and consistent investment process across the firm. Aviva Investors, with its globally integrated team of portfolio managers and research analysts, offers that rigour.
WHAT IS THE NEXT BIG THING IN INSTITUTIONAL INVESTING?
RAHUL: Our portfolio managers are always thinking about the Next Big Risks and how to manage them. Today, we have a broadly positive outlook on the global economy and growth, but we recognize that there are large risks to this core macroeconomic house view. For example: the U.S. Federal Reserve may increase rates too quickly or too slowly; an acceleration in the nationalist agenda across the globe could create greater trade protection and isolationist measures; China’s growth may experience a hard landing; and there are debt deleveraging vulnerabilities in many countries as global interest rates rise. Our focus is therefore on building portfolios that remain resilient if any of these risk scenarios play out.
