Session Explored Discovering Opportunity
Authored By: Stian Andersen | Publish Date: November 9, 2017
Authored By: Stian Andersen | Publish Date: November 9, 2017
Leo de Bever provided a thought provoking presentation on geopolitics and what implications it has on pension plan investments focusing on the importance of innovation at the CPBI Southern Alberta Region ‘Embracing Change And Discovering Opportunity’ session.
He pointed out technological change is inevitable and one will get left behind if one does not adapt highlighting an example of cloud based medical efficiencies as a way to think outside the box. Most geopolitical shocks are interesting (Brexit and NAFTA), but not actionable.
He offered up some concluding advice; Focus on keeping investment horizons long (10 years or longer) despite pressures to look shorter term and be willing to accept illiquidity in your investment strategies. Pool investments for access for smaller pension plans to illiquid/alternative assets classes. Complex problems rarely have simple solutions and when considering where to place capital or invest in the future the environment and innovation needs to be top of mind.
The next session centred around fixed income investing in low interest rate environment. The presenters began by highlighting the expected investment returns in fixed income going forward and how they will certainly disappoint if compared to fixed income returns in more recent five or 10-year periods. Furthermore, they illustrated how the duration of the broad Canadian bond index has increased significantly over the past 15 years while yields have continued to come down. This results in returns of the index being much more sensitive to interest rate movements.
Ben Homsy, portfolio manager at Leith Wheeler Investment council, showed we are in an unprecedented interest rate environment and as a result we can only expect 2.5 per cent average return (+/- 1 per cent) over the next 10 years. This is partly due to structural factors like productivity challenges and the participation rate which impact growth.
Kathrin Forrest and Randall Malcolm, both portfolio managers for the different investment arms of Sun Life, looked at the role of fixed income in an investors’ portfolio. Forrest showed how fixed income (T-bills) in a portfolio can have large capital protection properties in a crisis environment and suggested this is due to perhaps more behavioural factors caused by investors.
Malcolm touched on opportunities and the market and agreed with the other presenters that you would need to take more risk (credit and illiquidity) to get more return, but also highlighted the need to pick a manger that has skill and breadth in their capabilities including the ability to diversify and pick the right fixed income securities. Opportunities for higher yields are out there but understand that there is no free lunch and with more returns comes more volatility.
Sean Maxwell, a partner at Blake, Cassels & Graydon LLP, entertained the group in the hour before lunch presenting on the evolving fiduciary landscape and the emerging challenges for pension plan fiduciaries. He covered the law on fiduciary duty highlighting the obligation to uphold the standard of care. He touched on environmental, social, and governance (ESG)/socially responsible investments (SRI) considerations which are continuing to become more and more prevalent and, according to State Street Global Advisors, 80 per cent of institutional investors include an ESG component in their investments strategies. ESG factors are increasingly viewed as a financial criterion for investors.
Maxwell also recommended having a good process for selecting investment managers as central to fulfilling your fiduciary duty as a plan administrator. Incorporating consultant advice, rating agencies recommendations, and offering choice to members are all examples of prudent process if aiming to uphold your fiduciary duty as a plan administrator.
Reducing Carbon Emissions
Reducing carbon emissions and the challenges we are facing in that respect was the topic of Jean Michaud, managing director and senior commodity strategist at Core Commodity Management. We are using more and more energy and CO2 emissions are consistently rising. Approximately 45 per cent of emissions from fossil fuels comes from coal with 35 per cent from oil and 20 per cent from natural gas. Replacing coal with gas would reduce CO2 emissions by 45 to 50 per cent, but Michaud argued even further reduction could be achieved by combining gas turbines and wind and solar. Wind and solar sources alone will not produce a stable enough or efficient power supply (mainly due to cost of storage and input in producing batteries). but operating these sources in tandem with hydroelectric power plants or gas turbines will help and is sustainable.
Michaud finally pointed out that nuclear power may well be a necessary source for stable and efficient power supply in the future despite although it is not the most popular option ‒ at the very least until we make some technological leaps forward.
Next, we heard about emerging alternative investments from Tim Cayen, managing director, business development, at Hancock Natural Resource Group who focused his presentation on farmland and timberland. Both asset classes have similar investment characteristics such as low correlation with other asset classes, inflation protection, and an ability to contribute to ESG investment goals. Cayen also showed performance over the long term has been similar for farmland and timber with 10 to 12 per cent annualized return and a standard deviation of six to 12 per cent between 1992 and 2016.
For timber, the main risk is represented by technology which could affect the generally prevailing stable prices for the asset class. For farmland risks include weather and water supply. Finally, these asset classes typically represent one to five per cent of client portfolios and with regards to liquidity investors need to stay invested for at least 10 years (typically 12 to 15 years duration).
Tale Of DC
Wrapping up the day was a tale of two DC plans. We heard case studies from two very different plan sponsors with two different approaches although there were similarities as well. Paul Walker, manager, pension investments, ATCO Group of Companies; and Cheryl Shea, leader, pension investments, at NOVA Chemical; inspired many questions from the audience on selection, governance, and process that lead to their outcomes. Cost was key to both plan sponsors and simplicity was another theme that kept repeating itself in their presentations.
After review and research, both plan sponsors had selected target date funds as part of their solution partly due to factors above but also factors such as DC plan members rarely change their investment allocation over their lifetime after initial selection. The biggest difference between the two approaches was the use of a combination of active and passive management in ATCO’s solutions and passive funds in Nova Chemical’s fund selections.
Stian Andersen is with the CPBI Southern Alberta Region.