Canadian managers face squeeze from public funds

Canadian institutional equity managers, pinched by client shifts from domestic equities and increased domestic competition for business, could also be facing competition from the country's large public pension funds.

The C$60.8 billion (US$57.8 billion) Ontario Municipal Employees' Retirement System, for one, is poised to manage assets of smaller pension plans, endowments and foundations as well as the system's own money via its investment arm, OMERS Investment Management, Toronto. And the entry of OMERS could spell trouble for Canadian money managers.

“If OMERS starts to make inroads in managing pooled money, it'll be a massive issue for money managers,” said Zainul Ali, Toronto-based director, head of manager research, Americas, at Towers Watson & Co. LLC, adding the pension fund is not in a position yet to begin marketing efforts. “They still have to put some pieces together.”

One of those pieces is approval by Ontario legislators for the pooling of assets. A recommendation to pool as much as $50 billion in public pension and other investment funds, and possibly more in assets from endowments and defined contribution plans that choose to participate, was made in an October 2012 report from William Morneau, pension investment adviser in the Ontario Ministry of Finance. However, such legislation has not yet been introduced.

(All dollar figures in the story, unless otherwise noted, are in Canadian dollars.)

“To the extent that these pools are large and choose to manage money in-house, or that smaller plans choose to work with existing pools (such as OMERS and the $129.5 billion Ontario Teachers Pension Plan, Toronto), this may reduce assets available to be managed by external managers,” said Jaqui Parchment, partner, head of investments, Canada, at Mercer (Canada) Ltd., Toronto.

“It's an increasingly crowded field in Canada, and institutions are more likely today to hire specialists, which often means non-Canadian firms. For a Canadian manager, there's much more competition,” added Ms. Parchment.

In a statement, Toronto-based OMERS said it received legislative authority in 2009 “to provide investment management services and products through an authorized subsidiary” for Canadian public and private pension plans, government agencies, endowments and registered charities. The pension fund has registered to provide such services in eight provinces, according to its website. Officials would not say if OMERS Investment Management is actively marketing to those funds.

Ontario Teachers, however, has no plans to manage external money, said spokeswoman Deborah Allan. “We've made a conscious decision to remain focused on our own clients,” she said.

The move by OMERS, would be another blow to Canadian equity managers, who in recent years have faced a decline in the number of Canadian defined benefit plans, as corporate mergers have forced plan consolidations and companies have closed and frozen plans. Meanwhile, equity managers also have been hit by shifts in client asset mixes to global equities and alternatives — away from their traditional strengths in Canadian equities — and larger public plans that have moved their assets internally.

In response, Towers Watson's Mr. Ali said Canadian equity managers have three options: move into global equity, sell to a foreign company or wind down operations and exit the business.

The issues have led to changes at some of Canada's largest institutional money managers. McLean Budden, with $27.9 billion in total assets under management, was acquired in 2011 by Canadian insurance giant Sun Life Financial Inc., which merged it into its Boston-based MFS Investment Management subsidiary. In 2012, Montreal-based Hexavest Inc., which manages a total of $15.9 billion, sold a 49% stake in the firm to Eaton Vance Inc., Boston.

Earlier this year, Toronto-based Toron Investment Management, a predominantly retail global equity manager, acquired AMI Partners, a Canadian equity and fixed-income manager with most of its $3 billion managed for pension funds. The company is now known as Toron AMI International Asset Management.

Others have positioned themselves through acquisitions in the past several years to grow in the U.S:

• BMO Global Asset Management, which has a U.S. business based in Chicago along with its Toronto offices;


• RBC Global Asset Management, with its Minneapolis-based U.S. business formerly known as Voyageur Asset Management and Phillips, Hager & North Investment Management, its Canadian institutional business based in Vancouver, British Columbia;


• TD Asset Management, which in April acquired Epoch Investment Partners, a New York-based equity manager; and


• CIBC Asset Management, which acquired a 41% stake in American Century Investments, Kansas City, Mo., from J.P. Morgan Chase in 2011.

Four other Canadian managers are now co-owned by Boston-based Affiliated Managers Group — Toronto-based Beutel Goodman & Co. Ltd. and Foyston, Gordon & Payne Inc.; Montrusco Bolton Investments Inc., Montreal; and Deans Knight Capital Management Ltd. Vancouver. AMG bought stakes in all four firms in 2005.

The nature of the domestic institutional market in Canada means “one has to get creative” to build business, said James Porter, partner at Toron AMI. “Don't get me wrong, we're worried,” he said. “It's easy to say there are a lot of headwinds out there. But that's what makes it interesting.”

The ability to offer global equity strategies has been a boon to Toron's business in the U.S., where Mr. Porter said there was “a lot of activity” in the strategy. Toron AMI manages about $450 million in institutional assets for U.S. clients.

The traditional strength of Canadian firms, managing domestic equities, has become their weakness as institutional investors shift their asset allocations more toward real estate, private equity, hedge funds and infrastructure. In 2012, Canadian institutions had 14% in domestic equities, compared with 24% in 2005, when a federal law that required a minimum of 70% investment in Canadian-based securities was rescinded, according to Greenwich Associates LLC, Greenwich, Conn. Investors in 2012 also had 8% in real estate vs. 5% in 2005; 6% in private equity vs. 2%; 4% in infrastructure, from zero in 2005; and 3% in hedge funds, from 2%. Canadian fixed income, at 34% of assets in 2012, and international equities, at 27%, have remained relatively stable since 2005.

That shift in asset mix has been gradual, Ms. Parchment said. “There was a little edging up on pension funds' non-Canadian allocation early on, but now the tilt away from Canadian investments is stronger,” she said.

And while some Canadian managers like Toronto-based Brookfield Asset Management Inc. have a strong foothold in real estate, in general they are lacking in alternative strategies. “It's too tough to shift to those strategies,” Mr. Ali said. “And for those that try, they face very tough competition from established foreign managers.”

An added problem for Canadian equity firms has been the nature of the market, as many companies have been bought by foreign companies and no longer trade on Canadian exchanges, exacerbating an already concentrated market in energy, mining and financial services, which Mr. Ali said constitutes about 80% of the Canadian equity market.

And while that was a good thing during the 2008-"09 financial crisis, when Canadian markets weathered the global stock decline and rebounded faster than most other countries on the strength of their concentration in commodities, such concentration has since kept Canadian stocks relatively stagnant as energy prices have leveled, said Rajiv Silgardo, co-CEO of BMO Global Asset Management, Toronto.

While the asset shift was occurring, larger Canadian pension funds like OMERS, the Ontario Teachers plan and the $188.9 billion Canada Pension Plan, managed by the CPP Investment Board, began managing alternative investments in-house or joined in co-investments with other alternatives firms — usually outside Canada. “Our largest plans in Canada have the scale to hire smart people to manage assets internally, Ms. Parchment said. “That has resulted in less opportunity for external managers.”

But opportunities do exist, particularly for smaller independents, said Toron AMI's Mr. Porter. “In the institutional realm, there are those pension funds, foundations and endowments, and captive insurers in the small to midsize market (the $25 million to $250 million asset range),” he said. Also, there are opportunities to expand the client base outside of Canada; Toron AMI manages about one-third of total assets for non-Canadian clients.