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The Alternative Investment Option The Alternative Investment

Alternative investments are attracting more and more attention from pension funds. For the most part, it is understandable. Barely a day has passed in the first quarter of 2003 without some pension fund or another talking about their losses for the past year. Mercer’s Canadian Pension Health Index says Canadian balanced pooled funds posted a median return of -4.6 per cent in 2002, their worst since 1974, and the second year in a row the median balanced fund return has been well below typical long-term expectations. The deterioration in the Pension Health Index is due to equity market declines and the increase in the cost of providing pensions.

For plan sponsors seeking increased diversification of their portfolios and, perhaps more importantly, positive returns, alternative investments have become the topic of the day.

U.S. public and private pension funds, university endowments, and charitable foundations are looking to shift more money into alternative investments such as hedge funds, private equity, and real estate this year, says a survey by Greenwich Associates. Among corporate Defined Benefit plans, 38 per cent expect to make significant increases in the use of hedge funds and 21 per cent expect to do so in private equity, whereas virtually none expect to decrease allocations to either strategy. And, as we all know, what happens south of the border often follows in Canada.

At the forefront of alternative investments is hedge funds. Even giants such as The California Public Employees’ Retirement System (Calpers) have decided to expand their hedge fund programs in a bid to increase returns.

To further fuel the fire is the fact that hedge funds are outperforming most major stock markets. For the first two months of 2003, they had a gain of 1.96 per cent which beat the February losses of 1.7 per cent in the Standard & Poor’s 500 index and 2.02 per cent in the Dow Jones industrial average, says the March CSFB Tremont index of hedge fund.

In fact, in some quarters, hedge funds are considered ideal for pension funds.

Shortly before he left his position as president and chief executive officer of the University of Toronto Asset Management Corporation, Don Lindsey told a Fields Institute seminar that hedge funds, which operate in the world of absolute returns, are ideal for pension funds which must meet a liability stream.

But hedge funds are not alone in the world of alternative investments. Real estate and private equity are also attracting interest.

LaSalle Investment Management, a U.S. manager, says U.S. pension funds have allocated $14 billion to the U.S. real estate equity market this year. And ‘Emerging Trends in Real Estate,’ an annual report prepared by Lend Lease Real Estate Investments and Pricewaterhouse- Coopers LLP, estimates that as of September 2002, pension funds owned $148.7 billion, or about 37 per cent, of the $402.8 billion real estate equities market. Only real estate investment trusts (REITs), which accounted for about 42.5 per cent of the total, command a larger share of the U.S. real estate equity market.

In Canada, the Canada Pension Plan Investment Board has plunged into real estate with an allocation of $300 million and it has made a considerable allocation to private equity with almost $1 billion allocated to this strategy.

Against this back-drop, Benefits and Pensions Monitor presents its first Annual Report and Directory of Alternative Investment Managers. In the Directory, which starts on page 56, we have identified almost 70 managers who offer alternative investment management services to Canadian pension funds.

The report starts with articles on areas such as hedge funds and real estate by industry insiders including Tom Broughton, of Penreal Capital Management, and Ian McKinnon, of Co-operators Investment Counselling Ltd.

This is Monitor’s first foray into this area and we invite you to take some time to review the Report and the Directory. And we would welcome any comments on how we can expand these to meet the needs of plan sponsors.

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