MONTREAL - VIA Rail Canada Inc., with about C$1 billion (U.S. $735 million) in pension assets, will expand a recently established managed futures allocation to C$20 million, from its current C$5 million.
Chris Coswell, director-corporate financial services for VIA Rail, said fund executives haven't made a decision yet as to what type of manager they'll hire.
A decision will be made after seeing what's out there, he said. Mr. Coswell said their options include a passive approach or a manager-of-managers fund.
VIA Rail won't directly hire a group of futures managers, technically called commodity trading advisers, because of the infrastructure needed to monitor them.
VIA Rail's first C$5 million allocation was through a Bank of Montreal structured certificate of deposit, which is being marketed by affiliate Nesbitt Burns Managed Futures Corp., Toronto.
The CD offers a principal guarantee from the bank, a strong selling point for investment committee members, Mr. Coswell said.
Monthly returns so far for the managed futures CD, which had a total issue of C$25 million and matures in February 2001, have been -1% in February, 0.21% in March and 0.92% in April, according to Nesbitt Burns. A second offering is expected in December, with an added feature that offers annual exit windows at net asset value.
VIA Rail pension officials are targeting managed futures for the potentially strong returns, and for diversification. Managed futures, as an asset class, has "little or no correlation with other asset classes," Mr. Coswell said.
VIA Rail's managed futures allocation falls within a newly established alternative investment category called strategic investments, which is geared toward diversifying the fund away from Canadian inflation, he said.
While the fund already invests in Canadian inflation-indexed bonds, officials are looking at additional ways to hedge inflation because VIA Rail's liabilities are partially inflation-indexed, he said.
The fund is taking a look at adding global bonds as well, and making additional changes to its structure; Mr. Coswell declined to elaborate.
Consultants for William M. Mercer Ltd., Toronto, are assisting the fund with managed futures, he said.
Harry Marmer, investment consultant for Mercer, said managed futures is worth looking at for plan sponsors considering alternative asset classes.
"Is it for everyone? No," he said.
He said added diversification works in favor of managed futures, but determining the value of returns on a risk-adjusted basis is difficult because there's no good benchmark.
Fees, he noted, are historically higher than traditional investment management, and liquidity.
In another development, officials for the C$1.7 billion City of Montreal pension fund also are interested in adding a managed futures allocation, said Bertrand Goudreault, pension fund controller.
But the fund is running into resistance from some of its board members, of which there are 72 on six different boards, he said. Board members will continue to consider it, he said.
Consultants at Frank Russell Canada Ltd., Toronto, are less enthusiastic about managed futures. "We're not against them," said John Ilkiw, director of consulting. For pension plans willing to be a little adventuresome and take some risk with their portfolios, the asset class might be appropriate, he said. Managed futures offers statistical diversification, "but you don't know why it's adding value."