Canadian plans to push more assets in-house, tweak asset allocation

Large Canadian pension funds are rethinking asset-allocation decisions with the onset of the coronavirus pandemic and plan to move more assets in-house, as well as reduce exposure to infrastructure, a report by CIBC Mellon said.

CIBC surveyed senior executives at 50 Canadian pension funds in 2020, half of which had C$600 million ($471 million) to C$1.2 billion ($942 million) under management, while the other half had more than C$1.2 billion under management.

Respondents at the Canadian pension funds said they were preparing over the next year to increase assets managed in-house to 28% from 22%, on average. Additionally, 58% of pension funds said they expected to increase their proportion of real estate assets managed in-house over the next 12 to 24 months, while 48% of respondents said they would increase the proportion of equity assets managed in-house, said the report, released Wednesday.

"This may indicate a desire to bring costs down, with in-house teams often cheaper to manage than external mandates ... but it also reflects the strong record of the Canadian pension fund sector in managing assets in-house," the report said. "Studies have shown that the industry's strong performance compared to international peers is at least partly explained by its greater use of in-house management teams."

Eighty-six percent of the pension funds also expected to reduce their exposure to infrastructure over the one to two-year period.

"This may be surprising given the way many funds have sought such assets out in recent years, with falling interest rates encouraging managers to cast their nets more widely for returns," the report said of fund's planning to reduce exposure to infrastructure investments. "However, while the defensive characteristics of infrastructure remain attractive — including the offer of stable, long-term yields — some have warned of the dangers of over exposure to illiquid assets. The COVID-19 crisis has underlined the importance of diversification as well as the vulnerabilities of illiquid assets and Canadian pension fund managers appear now to be rethinking their appetite for infrastructure," the report said.

In the next year or two, 90% of pension funds said they expected to increase investments in private equity, while 86% said the same of fixed income.

CIBC Mellon had more than C$2.1 trillion of assets under administration as of Dec. 31.