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Canadian institutions add foreign exposure, real estate, PE while hedge fund exposure shrinks to 1.2

Date: Tuesday, March 11, 2008
Author: Opalesque.com

Freed from past regulatory constraints on foreign investments and driven by a desire for diversification and higher returns, Canadian pension plans, endowments and foundations are adding international assets to their investment portfolios at a rapid rate. But growing holdings of non-Canadian dollar assets are bringing with them a new set of currency risks — as some Canadian funds learned the hard way last year.

As recently as 2003 — when institutions were still limited by the Foreign Property Rule — international equity represented slightly less than half of institutional equity portfolios in Canada. According to the newly released results of Greenwich Associates’ 2008 Canadian Investment Management Research Study, that share rose to 51% in 2004, to 56% in 2006 and surged to 58% in 2007. “Since Canada represents roughly 3% of the MSCI World Index, we would contend that foreign exposure is still under-represented in Canadian equity portfolios and we expect those percentages to continue to rise,” says Greenwich Associates consultant Rodger Smith.

All told, foreign securities represent about 30% of institutional assets in Canada, with non-domestic equities making up more than 29% and international bonds accounting for slightly more than 0.5%. Those average foreign allocations are skewed upward by the 42.3% of total assets invested in foreign securities by the Canadian subsidiaries of U.S. companies. Among Canadian corporate funds, foreign investments represent 32.8% of total assets, while Canadian provincial government funds have invested slightly less than 28% of assets in foreign securities. Canadian endowments and foundations have just more than 37% of their assets in foreign investments.