Small Canadian pensions to increase alternatives

A survey from RBC Investor Services revealed a majority of small, mostly private Canadian pensions plan to increase – or even add – allocations to alternatives, though they have concerns about costs and lack of expertise.

Small to mid-size Canadian pension funds plan to rely more on alternative investments, including private equity, real estate and infrastructure, to boost their returns in the sluggish growth environment.

That’s according to a survey from RBC Investor Services that included responses from 56 Canadian pension plans, both public and private, ranging in size from C$100 million in total assets to more than C$1 billion in total assets. The majority of the funds in the survey were private, and ranged in size from less than C$100m to C$500m.

“Plans are shifting away from developed market equities while alternatives are set to take their place in pension portfolios,” according to Scott MacDonald, head, pensions, insurance and sovereign wealth fund strategy at RBC Investor Services. “While [pension plans] may want to get into this space, they are concerned that they don’t have sufficient scale or the expertise necessary.”

Plans are shifting away from developed market equities while alternatives are set to take their place in pension portfolios.

Scott MacDonald

According to the survey, 48 percent of respondents planned to increase their allocation to alternative assets, which is more than double the amount from last year. Additionally, 43 percent of respondents said they would decrease their allocation to developed market equities. The number for increasing alternatives jumped to 88 percent for respondents with more than C$1 billion in total assets.

Specifically, 45 percent of respondents planned to add real estate allocations over the next 12 months, and 34 percent planned to add infrastructure. Private equity met with less enthusiasm, with 14 percent of respondents planning to add the asset class over the next 12 months, only a 1 percent increase from last year, according to the survey.

“The continued trend towards investing in alternatives, primarily illiquid alternatives such as real estate and infrastructure, by Canadian pension plans is unsurprising,” Mark Chow, associate partner in investment consulting and investment manager research with Aon Hewitt, said in the survey. “These asset classes have historically provided relatively competitive and stable returns over the long run without the volatility seen in some of the other asset categories.”

While planning on adding more alternatives exposure in their portfolios, the pension plans did have concerns about the asset class, namely the cost and expertise needed to run an alternatives programmes. According to the survey, 18 percent of respondents were concerned with cost, while 17 percent were worried about lack of expertise.

“While the headline players, such as CPPIB and other elite plans have the capital and internal expertise to efficiently manage and monitor a wide range of alternative investments, smaller players do have access … As a low volatility option, alternatives are the asset class to watch,” according to the survey.