The Canadian Source Of Employee Pension Fund Investment And Benefits Plan Management

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Things Looking Up – A Little

While manager performance has turned around in 2003, pension funds are still facing serious underfunding issues. Against this backdrop, Benefits and Pensions Monitor presents its Annual Report on Money Managers for Canadian Pension Plans. Once again, this issue features a Directory of Money Managers providing key contact information at a range of managers offering everything from hedge funds to fund of funds management, and the Statistical Listing, which provides insight into their performance. This year, the annual report features articles from leading industry experts on topics ranging from the merits of active investing to a look at the role of small cap stocks in a pension fund portfolio.

The challenges of being a money manager in Canada have probably never been greater than in 2003.

Forget the down markets of recent years, today’s manager lives in an environment where its pension plan clients are looking for more return than ever before to soften the blow of the underfunded status of their pension.

In that regard, at least, things are looking up – a little.

Recent surveys show that for the first half of 2003, markets were better.

Mercer Investment Consulting’s Canadian Pension Health Index showed that managers of discretionary pooled funds posted a solid return of 7.4 per cent. However, in most of the main asset classes, the median pension fund manager underperformed the leading index.

One of the better performing asset classes was Canadian equities, as shown by the return of the S&P/TSX index of 10.6 per cent. Yet, the median Canadian equity manager underperformed the index with a return of 10 per cent.

RBC Global Services’ BENCHMARK survey shows similar results.

Institutional fund managers posted positive returns for the quarter ending June 30, with even the weakest performing institutional balanced fund manager gaining more than 4.4 per cent. This contrasts with results from April 2002 to March 2003, when the median manager saw its returns shrink by 16.6 per cent.

This survey shows that within the fixed income sector, assets have been shifting into shorter-term instruments. With many managers on the sidelines, the median allocation to cash has swollen to almost five per cent, with some pension portfolios holding up to 10 per cent.

The data also reveals that, over the last five years, relaxing Canadian government restrictions on foreign investment has not helped pension fund performance. Despite a respectable median return of 8.6 per cent in the most recent quarter, non-Canadian stocks have actually been a ‘net drag’ on pension fund returns. In fact, you have to go back to 1997 before the compounded return is positive for this sector.

We are also seeing a compression of valuations among both growth and value stocks as a result of the unwinding of the technology bubble and the current environment of low economic growth.

“Growth and value managers are fishing in each other’s pond of investment ideas to a much greater degree than has been seen in the recent past. A stock is no longer easily identifiable as being a ‘growth stock’ or a ‘value stock’ in this market environment,” says Paul Carter, senior research analyst at Frank Russell Canada.

This greater overlap in the portfolio holdings of value and growth managers means it is becoming increasingly difficult to rely solely on quantitative screens to analyze managers. This, in turn, may lead to poor manager selection.

And, Carter says, “We are continuing to see the importance of stock selection on manager returns. The biggest differentiating factor among manager returns in the second quarter was not exposure to value or growth stocks, but the level of exposure to stock specific events.”

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