Move beyond 60/40 mix brings new attention from managers
Canadian multiemployer pension funds are expanding into more alternative investments, and that is bringing the C$88 billion ($70.8 billion) market new attention from consultants and money managers.
The expansion into infrastructure, private equity and real estate is the latest result of a two-year shift by multiemployer plans — ranging in size from C$250 million to C$1 billion — away from traditional 60% equity/40% fixed-income allocations or even, in some cases, a single balanced fund, sources said. These plans are following the lead of larger multiemployer plans that made the move earlier.
The interest in alternatives — particularly infrastructure — from multiemployer plans reflects broader institutional investor attitudes in Canada. A Greenwich Associates study late last month of Canadian public and corporate pension funds, endowments and foundations showed that over the next three years, 36% planned to increase their infrastructure investments.
Among larger multiemployer plans, the 7% allocation to infrastructure at the C$8.6 billion Colleges of Applied Arts and Technology Pension Plan, Toronto, helped deliver an 8.1% return in 2015, while the C$6 billion Laborers' Pension Fund of Central and Eastern Canada, Oakville, Ontario, returned just over 10% in 2015 on the strength of its 25.1% allocation to alternatives, which includes an 8.1% allocation to infrastructure, the funds' data show.
But most Canadian multiemployer plans — those with C$1 billion or less — historically have had minimal investment diversity, said Martin Leclair, principal at consulting firm Proteus Performance Management, Toronto. Mr. Leclair said a C$600 million multiemployer target benefit plan that signed on with Proteus two years ago had all of its assets in two balanced funds run by one money manager. The plan now has its 40% fixed-income allocation with suballocations to foreign fixed income, high yield and credit. The plan also has 10% allocations each to infrastructure and emerging markets equity, and 6% to real estate. He would not identify the pension fund.
Janet Rabovsky, Toronto-based principal at investment and benefits consulting firm Ellement, said multiemployer investing in alternatives “is coming along. ... They don't want to have to raise contributions or cut benefits, so they're building an asset mix with alternatives that allows them to do that, and not require equity risk premiums alone.”
The evolution of multiemployer plan investing began with a move away from a single money manager overseeing all plan assets, Mr. Leclair said. “I don't think anyone flicked a switch,” he said. “This market had been sourced directly by portfolio managers. They were acting as consultants as well. There were no asset/liability studies, no manager selection. Willis Towers Watson, Mercer, Aon Hewitt weren't in this space. But now it's starting. (Multiemployer plan executives) aren't stupid. They're open to changes. They've never worked with a consultant before.”
Proteus has gained C$2 billion in multiemployer assets under advisement in the past two years, bringing total multiemployer assets advised by Proteus to C$5 billion, Mr. Leclair said.
Ms. Rabovsky said asset growth is coming from changes in pension funding formulas that allow many Canadian multiemployer plans to smooth liabilities over 20 years, also known as funding on a going-concern basis, as opposed to accounting methods in which liabilities were based on short-term solvency. “With the risk spread out over a longer time horizon, multiemployer plans are better able to raise their funded status because they have more time to do it,” Ms. Rabovsky said.
While most multiemployer plans were slow to add alternatives until recently, Bruce Geddes, president at Phillips, Hager & North Investment Management, Vancouver, said those plans were ahead of the curve in Canada in their use of liability-driven strategies — and the success of LDI has led them to be more adventurous with their return-seeking portfolios.
Many plans "rerisking'
“Many multiemployer plans are rerisking, not derisking,” Mr. Geddes said. “They derisked 20 years ago. They're now taking a look at other asset classes to increase returns in their return-seeking allocations, but they're still rooted in their fundamental asset-liability focus. More recently, they've changed how they look at asset classes. That's specific to each plan, but generally they've been looking at their risk allocation and risk budgeting to look more at infrastructure, either equity or debt, private equity and real estate. ... It's not as discrete as liability hedge or return-seeking. With some strategies, they can accomplish both, mitigate the interest-rate risk and getting added investment return.”
That's the case at the Colleges of Applied Arts and Technology Pension Plan, where infrastructure and real estate, both with 10% targets, are categorized under the pension plan's liability hedging portfolio but returned 15.1% and 8.1%, respectively, in 2015, according to its annual report released May 12.
At CAAT, the focus on assets and liabilities has proved successful and put the plan in position to expand its alternative allocation, particularly in infrastructure. “Funding policy serves as the main focus of our investment strategy,” said Derek Dobson, CEO and plan manager at CAAT. “While some of our counterparts may focus on investment return, we're governed by our funding policy goals. Funding ratio is important to us.”
CAAT has a 10% target to infrastructure and a 7% actual allocation, said Julie Cays, chief investment officer at CAAT, so executives are looking to build that portfolio, potentially with Canada-based public-private partnerships that some of the giant Canadian pension funds shy away from because of their lack of equity. She said multiemployer plans like CAAT are better prepared to participate in such investments. “Those smaller equity checks move our needle,” Ms. Cays said.
At the C$100 million United Steelworkers Local 1976 Pension Trust Fund, Montreal, adding 10% target allocations to real estate and core-plus fixed income in 2014 have helped the trustee-directed defined contribution plan return 7.45% in 2015 after an 11.4% return in 2014, said David Neale, vice president and financial secretary treasurer. Greystone Real Estate Advisers manages the real estate allocation, while TD Asset Management runs-core plus fixed income. Jarislowsky Fraser Ltd., which previously managed the entire plan's assets in equities and fixed income, continues to run the pension fund's remaining assets in those classes.
“Plan trustees knew the way things were going, we had to diversify,” Mr. Neale said. “The results have been very good. ... We're conservative with a bit of risk.” He added that plan executives have decided that “now's not the time” to move into infrastructure because of its cost, but would consider it in the future.
At Central and Eastern Laborers, the 10% return for 2015 was driven in large part by infrastructure as well as its overall alternatives allocation, said Todd Nelson, Toronto-based senior investment consultant at Willis Towers Watson PLC, the pension fund's consultant. The plan had an 8.3% combined allocation to private equity and private debt and 8.7% in real estate as of Dec. 31, 2014, according to the plan's latest annual report.
Managers like Fengate Capital Management Ltd., Toronto, are actively seeking infrastructure investment from multiemployer plans, said Marco DiCarlantonio, executive director at Fengate. The firm manages C$1.1 billion in infrastructure, of which about C$750 million is for multiemployer plans. “That's our niche in the Canadian market.” Mr. DiCarlantonio said, with typical first-time commitments of C$25 million to C$30 million.
Mr. DiCarlantonio said most multiemployer plans fund their infrastructure investments through reductions in fixed income. “The market is in desperate search of yield,” he said. “These assets are a way of getting that over fixed income.”
Also, as union pension funds, Mr. DiCarlantonio said investing in Canadian infrastructure serves a dual purpose — as a return generator and as a jobs creator. “For sure, a lot of multiemployer plans recognize the benefit of getting return and also getting their members to work at the same time,” he said. “It comes full circle in that regard.” n
This article originally appeared in the May 16, 2016 print issue as, "Canada multiemployer plans dishing up more alternatives".