Some of Canada’s most influential pension plans shared their views on the issues they’ll face this year at CPBI Ontario’s Pension Investment Forecast 2008 at the Fairmont Royal York in Toronto today.
Rodger F. Smith, managing director of Greenwich Associates, discussed a few key trends in the Canadian market. These trends are a reflection of Greenwich’s 2007 survey of 257 tax-exempt funds and 14 leading investment consulting firms in Canada.
First and foremost, Smith said that the total number of assets is increasing and have strong funding. Canada is actually the fifth-largest institutional market on a global basis, with $1.1 trillion in assets in 2007.
But while assets increase, they won’t all be allocated domestically. Canadian investments are decreasing, Smith said. Total domestic equities decreased to 21% in 2007 from 27% in 2002, whereas non-domestic equities increased to 30% last year from 24% in 2002.
Rate of return expectations are increasing for most asset classes, particularly hedge funds and private equity. Funds are expecting to generate significant alpha in their portfolios, with 25% of those surveyed expecting an annual outperformance of 61 to 100 basis points over the next five years. Philip Falls, president and chief executive officer of UBC IMANT (University of British Columbia Investment Management Trust), said expectations of return would be a key issue facing his fund this year. “People need returns,” Falls said, “and they think they need the products that produce those returns.”
More plan sponsors are using what Smith called a “portfolio-wide” strategy, one that cuts across all asset classes. And to help provide solutions for that strategy, plan sponsors are using both outside consultants and traditional investment managers. Sixty-six percent of plan sponsors have met with or use a traditional investment manager, and 65% have met with or use an outside consultant. “Plan sponsors are turning to managers in concert with consultants,” Smith said, “not instead of consultants.”
But to get that star manager, plan sponsors indicated that they’ll base their hiring decision on investment philosophy, process, performance and people. John L.W. Lyon, managing director, investment strategy, at the University of Toronto Asset Management Corporation, said one of the issues he will face this year is manager selection. He’s looking for a manager to bring skill instead of luck.
However, the change in assets and allocation in pension funds over the last few years is really atypical. A pension fund portfolio is usually 60% equities and 40% fixed income. Wendy Brodkin, moderator and director of T. Rowe Price (Canada), asked if that’s still the best approach. “I’m not sure it ever was the best approach,” answered John Poos, director, global pension, Nortel Networks. “Understand what you want and pursue it with the best asset mix.”
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