April 2009

Asset allocation by Canadian and U.S. pension funds

Although Canadian and U.S. pension fund managers’ asset allocation objectives are largely the same – to generate adequate return and appropriately mitigate risk – there are a few important differences to consider when comparing the various approaches that are used to achieve these goals.  Below is a chart that compares the median fund’s asset allocation across various asset classes for both Canadian and U.S. pension funds in 2007 and 2008.  The following analysis provides a breakdown of what is happening, and in some cases, why.

Pension fund asset allocation: median allocation by asset value (%) as at Dec. 31, 2008

* 2007 alternative assets for Canadian pension funds included in equity totals 

Analysis

• Canadian and U.S. pension fund managers have been moving away from a traditional balanced portfolio approach for many years by adding exposure to alternative asset classes. In 2008, U.S. pension funds dramatically increased their exposure to alternatives.  It is important to note that the valuations of these private market investments lag public market investments, and these may have yet to catch up to the lost valuations in the public markets, which has provided stability to pension returns.  Although an alternative asset allocation comparison between 2007 and 2008 is unavailable for Canadian pension funds, these funds had a median allocation to alternatives of almost four per cent as at Dec. 31, 2008.
• The median U.S. master trust exposure to equities declined by more than 10 per cent between 2007 and 2008 to below 50 per cent of total asset allocation, while exposure to fixed income investments increased by seven per cent.  Most of the changes in exposure are not necessarily a result of a strategic shift away from equities to bonds, but rather the result of dramatic relative performance between equities and bonds. To put this in perspective, the median U.S. fund lost 37 per cent in its equity portfolio in 2008, while fixed income investors gained more than five per cent during the same period.
• Cautious U.S. pension fund managers began building cash reserves throughout 2008, almost doubling their exposure to this asset class.  In contrast, Canadian pension fund managers retracted from cash reserves with a decline of almost two percentage points in 2008 from 2007.
• The allocation to real estate continued to rise as fund managers in the U.S. added more than two percentage points of exposure. Canadian fund managers also increased their exposure, albeit at a more modest level. In general, it was not until the fourth quarter that commercial real estate began to lose value as the recession and credit crisis began to take effect.

By Shawn Menard, first vice president and managing director, BNY Mellon Asset Servicing 

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