It’s not just individual investors like you who are fed up with the stock market’s unpredictability.
Managers of pension fund investment portfolios are also trying to do something about volatile stock markets. They’re looking more and more at alternative investments, they’re increasingly diversifying away from a Canadian market that is dominated by just three sectors and in some cases they’re taking a Warren Buffett-like approach of focusing on high-quality companies.
Pension funds are among the most careful of investors because they’re stewards of money that current and future retirees are counting on for retirement income. Their mission: Seek consistent returns, minimize volatility and keep up with inflation. If that’s what you’re trying to do in your registered retirement savings plan, then you’ll want to hear more about the latest trends in pension fund management.
According to David Service, director of investment consulting at global professional services firm Towers Watson, the average pension fund holds about 40 per cent of its assets in bonds and 60 per cent in stocks, real estate, infrastructure, private equity and other assets. But there’s no longer the same unanimity in the industry that this is the ideal mix of assets.
“Within the pension fund space, there is clearly a lot wider variation now than we used to have,” he said. “I have one client where it’s 60-per-cent bonds at this point and 40-per-cent equities. We’ve been de-risking it now for close to 10 years. Others are saying they have an intent to move that way.”
One of the trends in pension fund bond investing is to diversify by adding global content. The “more sophisticated” plans are moving some money out of Canadian corporate bonds and into their U.S. or international equivalents, Mr. Service said.
High-yield bonds have attracted a lot of money from retail investors in recent years, but Mr. Service said pension funds have added only a small amount. Typically, they’re focusing on U.S. high-yield bonds because of the vastly larger selection when compared with Canada.
With stocks, Canadian pension funds have for the past five or so years been moving a significant amount of money out of Canada and into global markets. “The main issue people have is that if you look at the Canadian market profile, 77 or 78 per cent of it is in three sectors [financials, energy and materials],” Mr. Service said. “So it’s a highly risky market.”
An example of how a pension fund breaks down stock market investments in Canada and abroad can be found in the most recent annual report of the British Columbia Investment Management Corp., which runs public sector pension plans with total assets under management of $91-billion. Almost 17 per cent of the portfolio is in Canadian stocks, 20.7 per cent is in global stocks and 6.3 per cent is in emerging market stocks.
Mr. Service said there’s a split among pension funds about whether to get their stock market exposure through low-cost index investing or active selection of stocks. “A number of pension funds are kind of taking the Buffett approach to investing,” he said. “You want to buy great companies, and you don’t want to overpay for them.”
The rationale here is that quality companies will be less volatile than the stock market as a whole. That’s how things played out in the Canadian market last year, with many blue chip dividend stocks delivering positive returns while the S&P/TSX composite index fell 11 per cent.
