Top 40: To boldly go

BIG GLOBAL GAINERS
At the top of the list, international asset manager, Janus Capital Group grew a whopping 313.3% up to more than $1 billion from $253 million in 2005. And, in the fifth spot, Montreal-based Hexavest Inc. came out with a healthy 74% gain over last year, rocketing up to $750 million from 2005’s total pension assets of $431.1 million. This international equity shop is a newbie on the Canadian pension scene—only founded in April 2004. Most of last year’s success came from big gains in the last two quarters as more and more plan sponsors have begun shifting into global equity mandates, according to firm vice-president, Robert Brunelle. “We can finally see pension funds reducing their Canadian equity content and raising their global equity allocation,” he explains, noting that, in the months following the elimination of the foreign property rule, there was a lot of talk but little action on the part of plan sponsors eyeing global markets.

International assets were behind the performance of another big gainer this year. Mellon Institutional Asset Management (15th on the Top 40)experienced a 30.5% jump in total pension assets under management, up to $11.3 billion from $8.7 billion in 2005. Richard Terres, senior vice-president and director of marketing with Mellon in Toronto says the U.S.-based firm saw a lot of growth in international core and value as well as in its currency overlay strategies.

“With the elimination of the foreign content rule, Canadian clients are looking outside of Canada,” he says, noting plan sponsors are seeking out providers with strong performing international strategies. As that happens, he says, currency strategies and global fixed income are also gaining a lot of attention from plan sponsors.

While plan sponsors appear to be turning talk into action in terms of their global assets, some Canadian-based money management firms are also looking to take their show on the road, looking south of the border and beyond to increase their client base. Top 40 veteran, McLean Budden Ltd. (7th)has been proactive in pitching for business south of the border. “”Some Canadians have an inferiority complex,” says McLean Budden’s executive vice-president, Alan Daxner in Toronto. “They think if you go down to Texas that they won’t want to hear from some group in Toronto. But a lot of people don’t care—in fact, they think you’re exotic.”

LIABILITY-DRIVEN FUTURE?
While Canadian plan sponsors—and their managers—get used to the global opportunities around them, there are still other trends on the horizon that are set to change the shape of the pension industry in Canada. Wendy Brodkin, industry authority in Toronto, notes that the liability-driven investment(LDI)approach that is taking hold around the world still hasn’t made it into the mainstream in Canada—but it will. “Funds are bigger now,” she explains. “People are more worried not just about investment but about funding as a whole.” The new investment paradigm is based on risk allocation rather than asset allocation she explains, noting that related concepts such as risk budgeting and alpha strategies are slow in coming to fruition among many Canadian pension funds: “They’re asking but they’re not doing.”

Bill Chinery, managing director with Barclays Global Investors Canada Limited in Toronto agrees that LDI is where it’s at globally, but that Canada is starting to get with the program.

“Plan sponsors are realizing they need to get closer to their liabilities,” he says, explaining that while Canadian plan sponsors are not moving as fast as their counterparts in countries such as the UK, “they know it’s coming down the pipe.” As he explains, “They know that, with yields where they are, they can’t achieve what they need in returns. So they need something that gives them return with some added value and reasonable volatility.”

Brodkin also believes that the shift to risk allocation versus asset allocation will likely take some of the heat off managers in terms of having to constantly explain over—or underperformance—and that could create a different relationship between money managers and plan sponsors. “Plan sponsors are now spending more time looking at tracking error around the index—and they’ve come to realize that it’s not a very fruitful exercise,” she explains.

As LDI takes hold in the mainstream, Brodkin believes, investment committees might just become a thing of the past. “I don’t think there will be any more investment committees,” she says, looking ahead five years. “Managing a pension fund with its liabilities has more to do with constructing a portfolio and doing surplus management than hiring and firing managers,” she says. At that point, Brodkin says, managers will be able to “do more useful things in the office rather than doing beauty pageants, having to go in and explain why they’re 50 basis points below the index.”

INTO THE MAINSTREAM
In addition to a more managerfriendly pension landscape, the future appears to be looking good for alternative managers as they move into the mainstream for many pension funds. While Northwater Capital Management Inc.’s (29th)assets dipped slightly(7%)this year, it still holds onto its place in the Top 40. At the same time, real estate firm Bentall Capital(23rd)managed to grow its assets by 21.8% last year in an area once considered alternative by all but a few plans. “Real estate is no longer an alternative asset class,” says Malcolm Leitch, Bentall’s, chief operating officer in Vancouver. “It is one of the more established asset classes—it’s taken a long time to get accepted as mainstream, however,” he explains, noting that the early 1990s meltdown in the real estate market scared many investors away. Leitch says that business has been very good for Bentall and its competitors as more plan sponsors turn to real estate to supplement the returns they expect to be receiving from their fixed income portfolio in the future.

At the same time, he says, pension funds have evolved—as plan sponsors’ fiduciary duties change and become more detailed, they are becoming more open to moving out of the bond and stock box. “Pension funds are becoming more accepting of real estate,” he explains. “Some funds still think of it as alterative and they put it in with private equity and hedge funds. But many more and how separating it out as an asset class.”

SMALLER PLANS AND ALTERNATIVES
And alternatives are no longer the domain of the very big public funds. Funds of funds help mid-sized and smaller plans get into hedge funds. And for real estate, there are now more options for plan sponsors. “Smaller plans can’t go downtown and buy an office building,” says Leitch, noting that small- and medium-sized plans are going to closed and open pooled funds. There are not a lot of options in Canada, he says: “There aren’t many here—that’s one of the challenges for pension funds.” However, he doesn’t see plan sponsor interest in real estate slowing down any time soon—in fact, it is probably going to become greater. “I think there will be increased focus on real estate in the future,” he says. “We are getting a lot more interest from consultants. They are educating themselves so they can educate their clients.”

One other key trend that’s evolving, according to some, is the continued shift from defined benefit(DB) plans to defined contribution(DC)and money purchase offerings. McLean Budden’s Daxner notes that his firm has seen a major shift in the nature of their business— back in 1998, DC clients accounted for 2% of the firm’s total book business whereas today it’s grown to 25%. That’s a big jump—and it’s meant changing the way they sell their products.

“The lines are in many ways being blurred between retail and institutional clients,” he says, noting that DC clients mean managers are reaching individuals, not just plan sponsors. “There’s a lot of work involved in pushing your products through the insurance and recordkeeping channels,” he says. “You’ve got to tell your story a bit differently. You’ve got to be flexible—how you might describe what you do with a private client is quite a bit different than how you would explain it to a $500 million DB institutional client.” Add to that employee education and, says Daxner, the institutional side of the business is starting to look a lot like the retail side. This is likely to evolve, as DC plans become a bigger and bigger part of the pension pie in Canada.

And that might just happen as DB plans become more and more costly for sponsors to provide. “It’s going to be interesting times,” says Chinery. “Even if [plan assets] start to perform very well, the problem those plans have is that contributions are going out of sight. That’s going to be a problem because the sponsors of those programs, either governments or companies, will be wondering if they can afford some of these DB plans in the future.” Whether or not that means the end of DB plans down the road, only time will tell.

Either way, while plan sponsors may still be kicking tires when it comes to some new and burgeoning investment opportunities, many experts believe that they’ll soon be snapping them up. Which could mean that money management in Canada will look a lot different five years from now—and so could many pension funds. Will there really be no investment committees in the future? And if so, how will plan governance look? Certainly LDI has a long way to go before it becomes mainstream for the average DB pension fund—and if DC plans are the wave of the future, will it matter? The only thing that seems to be certain is that nothing remains constant, and the needs and wants of today’s plan sponsors will continue to shape the money management industry in the years to come.

Caroline Cakebread is the editor of Canadian Investment Review. Caroline.cakebread@rogers.com

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