USA/CANADA - Canadian pension funds are hiring and firing investment managers at an unprecedented pace in an effort to combat the solvency problem, according to a Greenwich Associates report.
The international research-based consulting firm said research showed Canadian funds were taking aggressive steps to address widespread pension under-funding, including increasing their investments in foreign stocks and alternative investments and extensively hiring and firing investment managers.
“While almost half of Canadian institutions hired a new manager in the last year, more than 40% say they’ve terminated a manager in the same period,” said Greenwich consultant Rodger Smith.
“While high manager turnover can sometimes be seen as problematic, in this case it appears that Canadian institutional investors are responding to the solvency problem by raising their standards for investment.”
The Greenwich report analyses the actions taken by Canadian pension plan sponsors to improve solvency ratios.
“Corporate and public pension plan sponsors in Canada are looking to ensure their ability to generate enough asset growth to raise their solvency ratios to more comfortable levels,” said Greenwich Toronto-based consultant Lea Hansen (pictured).
“To that effect, they are working to generate incremental returns from core asset classes, they are investing in alternatives and in both cases, they are bringing in new specialty managers to carry out these strategies.”
Greenwich says solvency ratios have been falling steadily among Canadian funds over the last four years. As many as 17% of 70 Canadian funds with assets of more than C$1bn (e629.5m) are less than 90% funded and 9% of these jumbo funds are below 75%.
According to the report, in an effort to bolster portfolio returns, institutions are focussing on asset classes where rate of return expectations are relatively strong, like international equities and alternative investments.
Despite a 30% limitation on foreign securities, Hansen notes funds still have leeway to further increase foreign investment.
“The ‘global’ total in EAFE, US stocks and international bonds, is still only 26.1% of total assets this year, so they could invest another C$30bn in foreign securities if they believe they can get better returns that way,” she said.
“Twenty percent of Canadian funds allow their outside managers to achieve foreign exposure above the regulatory limit by using derivatives and the same proportion of funds expect to continue to do this.”
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