Emerging markets are notable growth drivers for Canadian funds

Canada's largest public pension funds are pushing further into emerging markets, particularly Asia and Latin America, through a range of efforts that include boosting target allocations to the asset class, looking for ways to partner on new deals and bringing in additional staff with expertise in the area.

The C$201.4 billion ($151.6 billion) Ontario Teachers' Pension Plan is "investing significantly" in the asset class, especially in Asia, said Jo Taylor, executive managing director, global development. Its exposure to emerging markets fluctuates between 10% and 20% of the total pension fund, Mr. Taylor said.

"We will be recruiting a number of individuals across the region and also be making sure we continue to have a targeted focus in Latin America," he said. This will include looking for opportunities in equities, infrastructure and real estate in Brazil, Colombia, Peru, Chile and Mexico, he added.

The pension fund's exposure to emerging markets cuts across its fixed income, infra- structure, and public and private equity portfolios, said Mr. Taylor, who will become president and CEO of the Ontario fund on Jan. 1.

Over the next few years, Ontario Teachers, which has its headquarters in Toronto plus offices in Hong Kong and London, plans to double the number of its investment staff in Asia, which is currently about 30, Mr. Taylor said.

"One of the deliberations we are having is will all staff be in one office (in Hong Kong) or is there a need to have offices in other areas?" he said.

Currently, much of the pension fund's Asian portfolio is in equities, both private and publicly listed companies, Mr. Taylor said.

The Ontario fund is not the only megaplan in Canada targeting emerging markets for new investment opportunities. By 2025, the Canada Pension Plan Investment Board, Toronto, which had C$400.6 billion in assets as of June 30, expects to have up to one-third of its fund in emerging markets such as China, India and Latin America, said Alain Carrier, senior managing director and head of international, in an email.

The plan announced the move earlier this year in its annual report.

Looking forward, CPPIB sees emerging markets opportunities in both equity and debt, Mr. Carrier wrote.

CPPIB estimates the share of global gross domestic product represented by emerging markets will reach 47% by 2025 and surpass the GDP of developed economies by 2029.

"Based on this growth trajectory, we feel there are attractive returns available over the long term to those investors who take the time to study the characteristics and fundamentals of these markets and are able to identify trends and opportunities in those markets," Mr. Carrier wrote. There is also the benefit of diversification into different geographies and asset classes for the fund, he added.

Of note, China's share of global GDP is about 16%, but as of the end of 2018, the country accounted for less than 4% of global equity benchmarks and near zero of global fixed-income benchmarks, said a March research report by investment consultant Cambridge Associates LLC, Boston.

"Rather than reflecting the size of China's domestic markets, this gap reflects limits on foreign investor access, as well as issues regarding free float and liquidity," said the report, written by Aaron Costello, managing director, regional head for Asia.

Although ongoing trade disputes between the U.S. and China might give some investors pause, the longer-term view for China presents investment opportunities as "incomes are rising, consumers are upgrading their spending habits and innovation is playing a larger role in China's growth," said a September report by Matthews International Capital Management LLC, San Francisco, an Asia investment specialist with $27.3 billion in assets under management that goes by Matthews Asia.

In the U.S., however, tensions rose last week. Trump administration officials reportedly are considering ways to limit investors' portfolio flows into China, according to a Bloomberg News report on Sept. 27, citing anonymous sources. Some methods being discussed are delisting Chinese companies from U.S. stock exchanges and limiting exposure to China through government pension funds, the report said.

New York-based Christoph Hofmann, the global head of distribution at emerging markets specialist Ashmore Group PLC, believes there is a "huge dislocation" between what emerging markets are contributing in terms of global GDP and where institutional investors are putting their money.

Emerging market bonds in particular might be attractive as an alternative for income-seeking investors, as most developed market bonds are trading at "very low or negative yields," Mr. Hofmann said.

Mr. Hofmann said the biggest challenge some equity investors face is that exposure to emerging markets is not very nuanced.

"Owning Samsung (Electronics Co.), which is a South Korean company and therefore an emerging markets stock, may or may not be a good investment idea, but it will give you significant exposure to U.S. consumer behavior. … You're not really getting exposure to the actual economic activity in Korea," he said.

Additionally, some investors are "leaving a lot of opportunity set on the table by not investing in frontier markets or small-cap names in emerging markets," Mr. Hofmann added.

The C$326.7 billion Caisse de Depot et Placement du Quebec, Montreal, has 14% of total assets in emerging markets through investments in fixed income, listed equities, infrastructure and real estate, according to Anita M. George, executive vice president and head of strategic partnerships, growth markets.

CDPQ has external emerging markets managers and works with partners such as local sponsors and entrepreneurs. But the pension fund also, and has increasingly, managed emerging markets investments in-house, Ms. George noted.

"We continue to do more business," Ms. George said of the fund's overall investments in emerging markets.

"We do plan to do more, but we don't set targets for ourselves. That's not our approach. Our approach is to find the right partners in those sectors that we want to be active in," she said.

Ms. George, who leads the emerging markets team of about 20 dedicated investment staff, said the pension fund also sees opportunities in China and Latin America.

China "has a large number of listed equities, so we are active (there)," she said. In Latin America, there are more opportunities in infrastructure and real estate investments.