MONTREAL - VIA Rail Canada Inc. hired three futures managers to complete its 2% allocation to futures strategies within its C$1.2 billion (U.S.$838 million) pension fund.
After a lengthy review of strategies and managers that began in 1996, VIA Rail executives hired managers for active and passive managed futures and for long-only commodities investment.
Hired for a C$6 million (U.S.$4.2 million) allocation each were: Primus Capital Advisors Inc., Toronto, for a passive approach tied to the Mount Lucas Management Index; Chesapeake Capital Corp., Richmond, Va., for an active managed futures trend-following strategy; and Morgan Stanley Commodities Management Inc., New York, for active long-only commodities management.
A multistyle futures manager approach is unusual in the relatively small world of institutional futures management. (Managed futures and commodities management entails treating futures as an asset class, as opposed to using futures for hedging existing positions, or for equity and bond market indexation.)
VIA Rail's foray into managed futures began in early 1996 with a C$5 million (U.S.$3.5 million) investment in a Bank of Montreal structured note with returns tied to a manager of managers fund run by Bank of Montreal affiliate Nesbitt Burns Managed Futures Corp., Toronto.
The new hirings will give VIA Rail executives experience with different futures investment styles, and will allow for an increase in the allocation if it is deemed successful, said Chris Caswell, director of corporate financial services.
VIA Rail chose a multimanager, multistyle approach for other reasons too, Mr. Caswell said.
The managed futures investments, about three-fourths of the 2% allocation, were chosen for pure diversification with higher expected returns than traditional asset classes, he said.
Meanwhile, the long commodities investments are viewed as an inflation hedge, although strong returns can be captured through long positions even when inflation is not a threat, Mr. Caswell said.
He declined to provide the expected return numbers; he said, however, that he expects the futures strategies to earn more than what equities historically have returned, while reducing overall portfolio volatility.
In using more than one manager for its allocation, manager risk becomes less of an issue, he said.
"There is an issue of survivorship in this area," which intensifies the need for close monitoring, Mr. Caswell said.
Indeed, the San Diego County Employees' Retirement Association took a hit through a managed futures allocation managed by the Hart Bornhoft Group, Denver, when a futures fund managed by Victor Niederhoffer went belly up. (Pensions & Investments, Nov. 10).
Coincidentally, the San Diego County fund had just diversified its futures exposure by adding a $20 million passive allocation to the Mount Lucas Management index to its existing $140 million allocation to active managed futures.
VIA Rail's allocation to the MLM with Primus was funded almost immediately. The Primus Commodities Index Fund is unleveraged and is subadvised by Mount Lucas Management Corp., Princeton, N.J. The MLM index uses a simple computer program to simulate the trend-following style of a managed futures investor.
Between inception in July 1996 and year-end 1997, the fund has returned 5.3% annualized, and has about C$40 million in assets.
Patrick Walsh, chairman of Primus and senior vice president for parent SEI Financial Services, Toronto, said the commodities fund has gained institutional clients, but isn't jumping off the shelf.
Given that futures are not widely accepted, "overall we've seen pretty reasonable institutional acceptance," he said.
VIA Rail's other two futures assignments will be funded after additional details are worked out, Mr. Caswell said.
Like the Primus fund, VIA Rail wants other futures allocations to be considered as Canadian investments, which means collateralizing the futures positions with Canadian treasury securities. Under tax law, international investments by Canadian pension funds are restricted to 20% of investments.
Chesapeake could structure a futures investment a number of ways, including in a enhanced index type of strategy.
Thomas O'Donnell, senior vice president with Chesapeake, said long positions in equity index futures can be combined with the alpha from Chesapeake's long and short futures positions to create enhanced index returns. Mr. O'Donnell worked for the Virginia Retirement System, Richmond, and assisted with VRS' $640 million managed futures allocation.
Mr. Caswell of VIA Rail said the Morgan Stanley assignment is dependent upon the creation of a Canadian version of an existing U.S. commodities fund.