July 2008

Moving from pooled funds to global segregated funds - a global custody primer

When the foreign content limits were removed in 2005, most Canadian pension funds continued with a gradual increase in their holdings of global pooled funds. As investment strategies continue to evolve, an increasing number of plan sponsors are now considering a move into direct investments of segregated global securities. 

When making the move from global pooled funds, plan sponsors must consider a number of variables. Involving your custodian early in these decisions will give you access to a wealth of information and expertise, potentially reducing risks and costs, while increasing revenue opportunities.

The following are a few key areas to consider as you contemplate moving into segregated global securities. 

Timing

One of the most critical decisions when moving out of any pooled fund (global or domestic) into a segregated strategy is timing. You'll need to understand the valuation date that the fund manager will use to liquidate your holdings. Of equal importance is the settlement date (when will you receive the proceeds). Often, funds may be liquidated and available for investment, but the global structure may not be ready to receive funds due to timing and documentation requirements to enter global markets.

If you have significant holdings in a pooled fund, the manager may require that you take your proceeds "in specie," meaning that you will receive your pro rata share of the underlying securities in the pooled fund. This will need to be coordinated with your custodian.

As a plan sponsor, you must ensure your assets stay invested in the market - missing even a day of investment opportunities could create risk for your investment strategy. A transition manager can help you to mitigate this risk.  

Investing in new markets

Working with your global segregated fund manager, your custodian will give you the required documentation for the markets where you choose to invest. A power of attorney in favour of your custodian is required for all markets as well as a certificate of residency from the Canada Revenue Agency to allow the custodian to deal with regulators and tax authorities.

Certain countries, including Germany and the United Kingdom, do not require extensive documentation, so investment can begin as soon as the accounts are opened. However, India is an example of a country where there are multiple filing requirements. 

Monthly statements, taxes and accounting

Previously, your statement would have shown the value and number of pooled fund units held. Your new statement will include:

• Securities held, sorted by market, in both the foreign and base currency
• Tax reclaims shown as interest or dividends receivable
• Foreign exchange transactions

Withholding tax rates vary depending on the country and by the tax treaties in place with Canada. Tax amounts to be reclaimed will be reflected on your statements until they are paid, the timing of which is dependent on the country's tax practices - it may take months or even years. 

Additional considerations

Some additional considerations are as follows:

• Review your pension fund's trust or custodial agreement to ensure that the language allows for investment in global markets.
• Complete documentation and tax forms before entering into specific markets.
• Remember that entering a global securities lending program can provide additional income opportunities to offset some of the costs relating to foreign markets.
• Ensure that you understand the foreign exchange services required by your plan.

Your global custodian will play an important part in the implementation of your segregated global strategy. Early consultation will help ensure that you experience a smooth transition with reduced risks and costs and increased revenue opportunities.

Adapted with permission from an article in the Winter 2008 Pension Investment Association of Canada's Communiqué newsletter.

By Tim Rourke, vice president, relationship management 

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Trade Talk® is provided for general information purposes only and CIBC Mellon Global Securities Services Company, CIBC Mellon Trust Company, CIBC, The Bank of New York Mellon Corporation and their affiliates make no representations or warranties as to its accuracy or completeness. Readers should be aware the content of this publication should not be regarded as legal, tax, accounting, investment, financial or other professional advice nor is it intended for such use.