With moderate growth predicted over the coming year, a volatile geopolitical climate, and rising trade tensions in many economies, institutional investors are increasingly seeking investments that shelter their capital from short-term risks and market movements while also generating strong returns.
In the years since the financial crisis, alternative assets, such as private equity, real estate, infrastructure, private debt and, to a lesser extent, hedge funds, have largely offered this kind of shelter as investors have allocated increasing proportions of their assets under management to this area of the investment market.
Against this backdrop, we surveyed some of the most sophisticated investors on the planet – Canadian institutional investors – to gain insights into their current alternatives exposure and future plans. Taking an active approach to managing their portfolios, Canadian investors have been at the forefront of the shift towards alternatives: some of them have been in alternatives for decades, while others have moved up the experience curve rapidly by building dedicated professional alternative asset management teams.
An earlier global survey of institutions investing in alternatives, The Race for Assets, undertaken by BNY Mellon, provides a counterpoint for the results of our Canadian survey. It found that just over half of investors (53%) were seeking to increase their allocations to alternative assets over the coming 12 months and 12% expecting to decrease their exposure. The Race for Assets: Canada survey highlights an even stronger appetite among Canadian investors, with a higher proportion (58%) expecting increased allocations to alternatives over the next 12 months, and no respondents expecting to reduce their exposure. Real estate currently accounts for the largest proportion of Canadian investors’ exposure (versus private equity globally). As we move through 2019, greater diversification across alternative asset classes and by region are trends to watch out for.
Our report demonstrates that Canada’s investors have a tremendous capacity for innovation. A large proportion invest via funds of funds – often an entry point to new investment areas and a means of pooling smaller resources. Yet a similar proportion have also taken a different tack: partnering with other investors to invest in funds and making direct investments, both of which can improve the economics of investing in alternatives. These routes are far more common among Canadian investors than the well-trodden path of investing in traditional fund structures. The move towards direct investing is also evident among investors globally – the BNY Mellon survey found that 55% of respondents are looking to increase their direct investment activity.
Perhaps unsurprisingly, we also reveal that satisfaction with returns from alternatives remains high, although Canadian investors continue to agitate for change. Throughout our conversations across the alternatives industry – with Asset Owners and private fund managers – we hear the same three themes: reducing fees, increasing transparency and elevating sustainability factors are the three key areas where Canada’s institutions will focus their efforts over the next 12 months in their dealings with fund managers.
Nevertheless, Canada’s investors, with their long-term focus and strong in-house resources, look increasingly set to forge their own alternatives paths. Two-thirds already invest directly into portfolio companies and infrastructure assets and over half are looking to increase their direct investment activity, giving them greater control over their investment allocations.
Canadian institutions are already among the world’s most admired and influential. As our report shows, they look set to retain that status in the years to come.
This article is provided for general information purposes only and CIBC Mellon and its affiliates make no representations or warranties as to its accuracy or completeness, nor do any of them take any responsibility for third parties to which reference may be made. This article should not be regarded as legal, accounting, investment, financial or other professional advice nor is it intended for such use.
About CIBC Mellon
CIBC Mellon is a Canadian company exclusively focused on the investment servicing needs of Canadian institutional investors and international institutional investors into Canada. Founded in 1996, CIBC Mellon is 50-50 jointly owned by The Bank of New York Mellon (BNY Mellon) and Canadian Imperial Bank of Commerce (CIBC). CIBC Mellon's investment servicing solutions for institutions and corporations are provided in close collaboration with our parent companies, and include custody, multicurrency accounting, fund administration, recordkeeping, pension services, exchange-traded fund services, securities lending services, foreign exchange processing and settlement, and treasury services.
As at March 31, 2019, CIBC Mellon had more than C$1.9 trillion of assets under administration on behalf of banks, pension funds, investment funds, corporations, governments, insurance companies, foreign insurance trusts, foundations and global financial institutions whose clients invest in Canada. CIBC Mellon is part of the BNY Mellon network, which as at March 31, 2019 had US$34.5 trillion in assets under custody and/or administration. CIBC Mellon is a licensed user of the CIBC trade-mark and certain BNY Mellon trade-marks, is the corporate brand of CIBC Mellon Global Securities Services Company and CIBC Mellon Trust Company, and may be used as a generic term to refer to either or both companies.
For more information – including CIBC Mellon's latest knowledge leadership on issues relevant to institutional investors active in Canada – visit www.cibcmellon.com or follow us on Twitter @CIBCMellon.