Canadian institutional investors \"vary in enthusiasm for alternatives\"

Date: Monday, February 16, 2009
Author: Hedgeweek.com

Canadian pension plan sponsors, endowments and foundations are going back to basics and revisiting the fundamental principles by which they run their portfolios, according to a survey by research and consulting firm Greenwich Associates.

Provincial Canadian governments, in particular, report that they are looking carefully at how they might modify best practices to ensure the continued integrity of funds for their participants going forward.

Investment losses incurred in 2008 have left Canadian institutions concerned about their ability to meet their funding requirements, and in some cases questioning the very strategies they had been employing in their portfolios.

Prior to the events of the fourth quarter of 2008, the proportion of Canadian institutions planning major revisions to their portfolios was actually on the downswing.

Of 277 Canadian pension funds, endowments and foundations interviewed by Greenwich Associates, 57 per cent said they planned to make 'significant' changes to their asset allocation over the next three years, down from 70 per cent in 2007.

Rather than changing course, Canadian institutions were proceeding with plans to continue reducing allocations to domestic equities and to shift assets from passive and core strategies to active managers and specialists with the potential to generate alpha.

Domestic equity allocations among all Canadian institutions fell to 18.7 per cent of total assets in 2008 from 21.0 per cent in 2007.

'Institutions went into the fourth quarter of last year planning to continue their move out of domestic equities,' says Greenwich consultant Dev Clifford. 'But the fact that virtually every asset class got hit last year - including international investments and alternative asset classes - has called into question the benefits of the diversification push that has driven institutional allocation strategies for the past several years.'

Institutions in Canada last year continued to add to alternative allocations that were already larger than those reported in Europe or the US. Canada's public and provincial pension funds are among the world's most active investors in alternatives.

As of the start of the fourth quarter of 2008, these funds had allocated more than a quarter of their overall assets to alternative asset classes, including 12.5 per cent to real estate, 6.9 per cent to private equity and 3.6 per cent to hedge funds. They allocated an additional 2.3 per cent of assets to infrastructure and 0.6 per cent to commodities.

Canadian public and provincial funds have also been the leaders in the recent movement of assets out of domestic stocks and bonds. Heading into October 2008, allocations to domestic stocks averaged 16.0 per cent among these funds, compared with 23.8 per cent among Canadian corporate plans and 19.1 per cent among Canadian subsidiaries of US companies.

At 28.2 per cent, public/provincial allocations to domestic fixed income were also the lowest among Canadian institutions.

Canadian companies remain committed to their defined benefit pension plans. As of the start of the fourth quarter of 2008, defined benefit plans held 91 per cent of Canadian pension assets and companies expected that share to remain above 85 per cent for at least the next decade.

Although 27 per cent of corporate defined benefit plans in Canada had been closed to new employees as of that period, only two per cent of corporate plan sponsors said they intend to close their plans in the next two to three years. Canadian companies in 2008 reported an average funding ratio of 102 per cent on their defined benefit pension plans.

At the start of the fourth quarter of 2008, Canadian endowments and foundations had allocated half of their total assets to domestic fixed income. Meanwhile, their 23.5 per cent allocation to foreign investments trailed that of both corporate and public/provincial pension funds.

While public/provincial plans allocated more than 12 per cent of assets to real estate, Canadian endowments and foundations allocated 1.8 per cent. The average 2.0 per cent private equity allocation among endowments and foundations was a full three percentage points lower than that of corporate pension funds and nearly five percentage points lower than that of public and provincial funds.

In hedge funds, the 2.8 per cent endowment and foundation allocation topped that of corporate funds, but fell well short of the 3.6 per cent allocation among publics and provincials. Canadian endowments and foundations on average did not allocate any assets to infrastructure or commodities last year.