Canadian pension plans are repositioning asset allocations and increasing in-house asset management, after the COVID-19 pandemic prompted significant volatility in financial markets, according to a new CIBC Mellon survey.
The survey, ‘In search of new value: how Canadian pension funds are preparing for a post-COVID-19 environment’, explains that most Canadian pension plans have had the time and the space they need to work through the immediate impacts of the pandemic on short-term returns.
But the investment outlook remains clouded due to the uncertainties of Biden administration in the US; evolving pandemic post-Brexit questions in the UK and Europe; and geopolitical tensions concerning China’s relationship with the rest of the world.
Amid the current global challenges, Canadian pension funds are adapting their investment strategies, such as shifting asset management functions in-house — along with associated requirements for investment operations and systems.
The survey indicates that even amid rising focus on in-house management, plan sponsors are also becoming increasingly strategic about the selection of allocations to and oversight on external managers.
CIBC Mellon identifies that pension funds indicating an increased preference for in-house asset management are most likely to focus on those areas best suited to in-house management.
“This may be a matter of recognition that few organisations can be great at everything, and to achieve target investment results takes substantial investment in technology, talent and time,” the survey notes.
The survey shows that pension funds are preparing to bring assets and investment activities back in-house.
Currently, the funds in the CIBC Mellon survey manage an average of 22 per cent of assets in-house, but this is expected to rise to 28 per cent over the next 12 months.
The increase indicates a desire to bring costs down, with in-house teams often cheaper to manage than external mandates but CIBC Mellon highlights it also reflects the strong record of the Canadian pension fund sector in managing assets in-house.
“The investment and risk environment has been rapidly changing. We want better control of decisions and closer involvement will ensure that performance increases each year. We are aiming at a 10 per cent increase in in-house management in the next 12 months, but this depends on how fast teams can adapt and recognise the opportunities and various risks attached to investing,” comments one managing director from a pension fund organisation.
The survey shows that some asset classes such as real estate (58 per cent) and equities (48 per cent) are more obvious candidates for in-house management than others over the next year.
However, in more specialist areas, such as infrastructure and derivative contracts, the dependency on external managers is significantly higher.
“Many Canadian pension funds take a nuanced approach to asset management. Where appropriate, they operate with in-house teams and this appears to be increasing,” says Alistair Almeida, segment lead asset owners, CIBC Mellon.
Almeida notes: “Elsewhere, they are pursuing partnerships and collaborations, as well as full-scale outsourcing arrangements. There is no one-size-fits-all arrangement.”
Additional findings from the survey highlight that pension funds have significant plans to alter the mix of their portfolio, as 86 per cent of funds expect to reduce their exposure to infrastructure over the next 12 to 24 months.
The asset class most likely to see a rise in allocations is private equity, where 90 per cent of respondents say they intend to increase allocations over the next year. Meanwhile, almost half of funds (42 per cent) expect to raise their exposures to real estate.
Elsewhere, almost nine in 10 pension funds (86 per cent) expect to invest more in fixed-income assets in the short term.
But not all funds are taking a defensive stance as the survey reveals 36 per cent plan to increase their allocations to equities, almost twice as many as plan to trim allocations, while 20 per cent anticipate a reduction in the size of their cash holdings.
Commenting on the survey results, Ash Tahbazian, chief client officer, CIBC Mellon, says: “As the Canadian investment industry works through the market turbulence, early indications are that investors may see this as an inflection point to secure increased transparency.”
“From gathering information to assist in various risk and performance scenarios, to launching separately-managed accounts with trusted asset managers, initial feedback is that investors are keen to further the gains they have made in enhancing control in recent years. The months ahead will be a test for asset owners and asset managers alike.”
Tahbazian concludes: “Recent market pressures will undoubtedly change the relationship between asset owners and asset managers. Although the exact evolution of those relationships is unclear, initial feedback indicates that the desire for increased transparency and control will help define some of the changes ahead."
The survey gathered responses from 50 leading Canadian pension managers and was completed in 2020.
Half of the respondents had between approximately $600 million and $1.2 billion under management, and half had more than $1.2 billion under management.
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