|
© Copyright 2002
Rogers Media. The following article first appeared in the March 2002 edition of
BENEFITS CANADA magazine.
Tactics for tough times
Diversification and monitoring returns
are the keys to a successful plan.
BY CATHERINE OWENS
 With an amazing 90% accuracy rate, Can-ada's
leading prognosticator, Willie the groundhog, has been predicting when spring
will arrive for 40 years. He simply comes out of his hole and looks for his
shadow. Wouldn't it be great if plan sponsors, providers and money managers had
the same ability (with the same accuracy) to predict the markets and determine
what the hot investment class will be?
A look at various asset classes
from 1999 to 2001 illustrates the difficulty of trying to predict investment
trends. The hot asset class of 1999 became the dog in 2001, and the dog in 1999
became the darling in 2001 (see "Hot assets," below). This market volatility
makes it challenging to manage pension assets effectively.
In the early days of group retirement plans there were
few investment vehicles. A plan sponsor might have offered a five-year
guaranteed interest account and a balanced fund, and decided where members'
savings would be invested with little or no input from employees. The early
1990s signaled one of the biggest changes that the industry had seen in decades.
More organizations moved from defined benefit to DC plans, and there was
increased demand for more investment choices among members.
With this shift, sponsors needed more fund options to
meet members' varying needs for diversification and lifestyle planning. As fund
selection and portfolio composition became more complex, the industry created
portfolio funds or asset allocation funds. These funds are typically diversified
by asset class and investment style. They were designed to give sponsors and
members a simpler investment choice, while optimizing potential returns and
reducing risk.
It is now common for DC members to determine their
investment portfolio. Accordingly, sponsors should select quality investment
options, monitor and manage all of the investments in the plan and ensure funds
are compliant with the plan's investment policy. Now that plans offer a
multitude of funds, this task is much more challenging.
With the increase in both market volatility and fund
choices, sponsors must ensure that there are quality investment options in their
plan that decrease risk while optimizing potential returns. At the same time,
employers must meet their fiduciary duties. The key is to diversify and monitor
the plan's investment options.
U.S. research firm Ibbotson Associates reports that over
90% of investment returns are directly related to an appropriately diversified
asset mix. The other 10% is due to market timing. Sponsors that monitor funds on
an ongoing basis can ensure that the investments are in line with their
particular risk tolerance, and that the manager is true to style and managing to
the set benchmark.
A survey of sponsors by Manulife Financial reveals that:
> 96% feel it is
important to have a professional select investment options and review their
performance on behalf of members.
> 92% say a
documented process of review provides confidence in the quality of investment
offerings within a plan, as well as a vehicle with which to manage the fund.
> 89% believe that a
documented process of review provides an appropriate way to look after members'
interests.
> 75% say that a
documented process would help reduce fiduciary risk.
In the absence of a prognosticating groundhog, sponsors
should ensure that the investments in their DC plan are sufficiently diversified
and well monitored. BC
| Hot assets |
| Asset
class |
1999 |
2000 |
2001 |
| Canadian stocks |
31.7% |
7.4%
|
-12.6% |
| Canadian small- cap
stocks |
20.3% |
7.3% |
2.5% |
| International
stocks |
20.1% |
-10.7% |
-16.4% |
| U.S. stocks |
14.2% |
-5.7% |
-6.5% |
| Canadian bonds |
-1.1% |
10.2% |
8.1% |
| Source: Market
returns from TSE 300, Nesbitt small cap, EAPE MSCI, S&P 500,
SMU. |
Catherine Owens is
the vice-president of marketing and business development with Manulife Financial
in Waterloo, Ont. catherine_owens@manulife.com
|
News
News
