Canadian pension plan sponsors continue to reduce their investment in both domestic equity and fixed income and to diversify their portfolios. The effects include a growing utilization of specialty managers, an inclination toward re-balancing, and salary gains for pension officials. Or so says a 2002 study of the Canadian investment management market by Greenwich Associates.
“The past year has been a challenging one for plan sponsors in Canada, with equity markets down and rising difficulty in meeting actuarial assumptions, and they have worked creatively to meet those challenges,” says Greenwich Associates’ Toronto-based consultant, Lea Hansen.
Among the means of diversification pursued by Canadian plan sponsors: 13% of funds report owning private equity in 2002, up from 8% in 2001. 9% of funds are invested in hedge funds, and an additional 11% plan to invest in hedge funds next year.
International equity and EAFE together account for 27% of total assets under management among Canadian institutions, up from 24% last year. Derivatives use continues to climb as well: More than half of Canadian funds now use derivatives, up from 38% just four years ago.
Canadian funds are using more specialty managers, especially international ones. 34% of Canadian pension funds hired a specialty manager in the past year. By contrast, the proportion of funds hiring balanced managers has fallen steadily, from 12% in 1998 to just 5% this year.
Balanced manager use has been falling steadily since 1998, when 63% of funds were using them. That same year, specialty manager use was at 68%. Those levels have been moving in opposite directions ever since.
Funds continue to expand the number of managers they use as they diversify their instruments and strategies, using an average of 6.3, up from 5.9 a year ago. They expect to be using an average 6.8 managers in three years. Solicitation activity continues to be robust.
Nearly three-quarters of all Canadian plan sponsors rebalanced in the last year, while 61% now have a rebalancing policy as part of their investment policy guidelines.
“The extreme volatility of stocks over the past two years, coupled with sharp declines in most equity valuations, moved many funds away from their intended asset allocations and caused a significant number of them to rebalance,” Lea Hansen notes.
Of the various styles of rebalancing employed by Canadian pension funds, 49% used some form of target “trigger” which when activated rebalance holdings either back to a target range or a fixed percentage. 26% have a tactically-flexible policy that allows more discretion by the fund manager, 15% use a calendar method, and 4% allow the asset mix to drift.
Salaries continue to rise in 2002, with data from a matched sample of 189 fund professionals who provided compensation in both 2001 and 2002 reporting an average salary of C$112,900 in 2002, up from 109,000 in 2001.
The average reported bonus in 2001 was $34,800. Bonus eligibility continues to rise, from 36% of professionals reporting they were eligible for a bonus in 1997 to 50% in 2000 and 57% in 2002. Eligibility remains significantly higher at corporate funds (70%) than in the public sector (38%).
Greenwich Associates conducted interviews with senior fund professionals at 264 corporate pension funds, public pension funds, and endowments in Canada. Interviews were conducted during April and May, 2002. Interview topics included asset allocation, market trends, and compensation.