Five Characteristics of Large Pension Managers

June 10, 2011

In a recent internal study, PWL reviewed the latest annual reports of six of the largest Canadian pension managers*. This allowed us to identify the following five common characteristics:

  1. Five of the six use indexing: Among them, Quebec’s Caisse de Dépôt et Placement appears to be the boldest user: almost 40% of its public equities are indexed.
  2. Very little or no hedge funds: Only the Ontario Teachers’ Pension Plan seems to have a solid commitment to hedge funds, with an 11% allocation.
  3. 60% to 80% of public equities are foreign: These large institutions apparently believe in the benefits of international diversification. All of them allocate less than half their equities to the Canadian market.
  4. Significant real estate and infrastructure investments: Allocations to this asset class in all cases exceed 10% of portfolio assets. The overall leader, at 28%, is the Ontario Municipal Employee Retirement System. This asset class has the reputation of producing regular cash flows that grow roughly at the same pace as inflation, which is a highly useful feature for covering monthly pension payments.
  5. Half the managers reviewed have a currency-hedging program: Although currency fluctuations are reputedly offset over very long periods, three of the managers reviewed seem to believe that hedging is worth the cost. Since all six managers have a large currency exposure as a result of high allocations to foreign equity and other foreign investments, the hedging decision is critical for them.

A reader who is familiar with PWL will realize that our portfolio strategy has been aligned with these characteristics for a decade.

Indexing portfolios and basically ignoring hedge funds has allowed us to capture the market’s returns, avoid negative surprises (large losses) and keep investment costs low.

In general, we allocate more than half of our equities to foreign markets, a strategy that produces more stable returns than one of concentrating on Canadian equity.

Investing in Real Estate Investment Trusts (“REITs”) and other similar securities helps produce a higher cash flow.
And finally, hedging currency risks (in part or in full) has also helped stabilize returns.

As a result, PWL portfolios have delivered steady returns relative to the market and have avoided extreme losses. Portfolios have also recovered well from the 2007–2008 financial crisis.

* Canada Pension Plan Investment Board, Caisse de Dépôt et Placement du Québec, Ontario Teachers’ Pension Plan, Ontario Municipal Employee Retirement System, Alberta Investment Management Company, British Columbia Investment Management Corporation.

Raymond Kerzérho

Chairman of the Investment Committee
and Director of Research
PWL Capital Inc.