Attentive to Alternatives

Industry trends for alternatives in Canada

Alternative Investments by Plan Sponsors are Becoming Mainstream in Canada

Attentive to Alternatives

May 2016

Executive Summary

Plan sponsors face a challenging investment environment and many are turning to alternatives, which come with their own unique challenges and opportunities. Given the need by pension funds for returns, diversification, and risk management, alternatives are becoming a more mainstream investment choice as they look to generate ROI.

Sustained low-interest rate environment

There are an array of challenges in today’s complex investment environment, including sustained low-interest rates in Canada and globally, rising price to earnings ratio (P/E) multiples, and economic headwinds from ongoing investment market volatility. As a result, many plan sponsors looking to add more diversity to stock and bond-dominated portfolios are increasingly considering alternatives. Plan administrators are setting asset allocation targets to include such diverse asset classes as over-the-counter (OTC) derivatives, real estate, swaps, private equity, infrastructure and hedging strategies, spanning both regional and global jurisdictions. According to PricewaterhouseCoopers,1 fund performance, investment strategy and managerial track record rank among the leading investment criteria for those considering alternative opportunities. While the desire for increased yield ranks high, so does the stability that can possibly be attained through hedging and other non-traditional approaches. Plan sponsors around the world face pressures such as meeting necessary funding ratios and the search for returns. In this market environment, the alternatives space is trending up. According to Canadian Institutional Investment Network data,2 Canadian plans’ alternative assets have grown to $341.9 billion in 2014 from $186.7 billion in 2010. In terms of asset class rankings, real estate equity represents the highest allocation and the paper reports that real estate equity reached $139.6 billion in 2014, which was up by 14.9 per cent since 2013. Infrastructure saw the largest five-year growth at 112.8 per cent and the paper notes it reached $76.8 billion in 2014. It is also mentioned that commodities grew the most yet in a one year period at 42.8 per cent from 2013 to 2014, reaching $18.4 billion in 2014. The chart on page two shows overall growth of pension holdings in alternatives from 2010 to 2014.

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