An increasing correlation between different equity markets, coupled with a forecast for lower returns in Towers Watson’s Annual Survey of Economic Expectations, have Canada’s DB pension plan sponsors seeking other ways to diversify their investment portfolios.
This suggests that while many continue to look to alternative asset categories for diversification, there is renewed focus on more efficient and cost-effective implementation strategies, such as smart beta.
“These strategies have been around for more than 10 years and are now really getting some serious attention from pension funds given the expected low-return environment and desire to only pay for manager skill or alpha where it truly exists,” explains Janet Rabovsky, director of investment consulting at Towers Watson in Toronto.
“Over the past few years, investment characteristics that had once been thought to be alpha have been identified and segregated and can now be quasi indexed or systematized,” Rabovsky adds.
And smart beta strategies aren’t just for DB plans anymore.
They’re increasingly being added to DC record keeper platforms, either as part of a portfolio solution or as a standalone option, says Towers Watson’s Canadian DC business leader, Michelle Loder.
“As benefit adequacy issues come into focus, the trend to institutionalize DC investment structures will continue,” she adds. “In line with this, we will see more smart beta strategies in DC portfolios, such as listed infrastructure and REITs, as sponsors look to more sophisticated diversified solutions to target risk-adjusted return expectations and focus members on achieving retirement income goals.”
The survey also shows that despite rising long-term interest rates, economic activity in Canada remains fragile and reliant on improvement in the United States and Europe and continuing strength in China.
In the near term, survey respondents expect Canadian GDP growth to remain around 2%, rising to 2.4% over the longer term.
Survey respondents are not overly bullish about equity market returns over any time period. The majority expect the S&P/TSX Composite Index to return between 6% and 10% over the short, mid and long term.
The most surprising forecast is for emerging market equities, which the majority of survey respondents expect to return below 5% in 2014 and between 6% and 10% over the medium and longer term.
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