©  Copyright 2002 Rogers Media. The following article first appeared in the April 2002 edition of BENEFITS CANADA magazine.

The country's Top 40 Money Managers rose to the challenge last year. As a whole, the group grew its pension business by 3.5% or $15.1 billion during the year ended Dec. 31, 2001 as equity markets worldwide were pummelled. Looking more closely, though, the news is mixed across the board. Almost half of the top players (17 out of 40) actually saw a decrease in their pension assets. These losses were offset by 11 firms on the Top 40 list that had double-digit increases, thanks to new pension business.

Montreal-based Addenda Capital Inc. won 26 new clients last year and increased its pension assets by 32.5% year-over-year as a result. One new plan sponsor alone was worth over $500 million to the firm. TD Asset Management Inc.'s pension assets are up 30.3% or $7.5 billion year-over-year. "It speaks to the strength of our style--passive investing with a strong quantitative focus--and its acceptance among pension funds," says Barbara Palk, president of the Toronto-based investment firm. Meanwhile, Sandra Nuttal, president of AllianceBernstein Institutional Investment Management in Toronto, says her company's 13.6% growth came, in part, from the $2 billion in new Canadian equity business it won last year.

The biggest winner in terms of percentage growth is Putnam Investments of Boston, Mass. The firm has reported a staggering increase in pension assets of 76.2%. James Bacon, director of Canadian business, attributes this growth to "a substantial increase in new mandates with the foreign property ceiling being raised to 30%." He adds that Putnam has also benefited from a sub-advisory relationship that it struck with a Canadian firm last year.

Regardless of whether they gained new business or lost assets in the volatile stock markets, the Top 40 agree 2001 was a tough year as pension funds fretted about returns and the markets remained relatively weak.

Against this backdrop, it isn't surprising to hear money managers speak of staking out a position as leading educators and providers in the once-niche market of alternative investments--which can offset risk and offer greater rewards than the single-digit returns expected from traditional asset classes for some time.

CDP Capital of Montreal has managed alternative investment products for the past five years through a partnership with a U.S. investment firm. It currently has $600 million in pension assets invested in hedge funds. The No. 1 firm among the Top 40 is about to see competition heat up in this market. "We will see more Canadian investment firms getting involved in this niche," says Michel Nadeau, president of CDP.

David Wright, managing director with UBS Global Asset Management in Toronto (formerly Brinson Canada), says his firm is establishing itself as a "thought-leader" in this relatively new territory. "Before it was difficult [for money managers] to go out and ask a pension fund what its needs were because [it might] say 'I'm looking at hedge funds and alternative asset classes.' Many money managers, our firm included, would have had to respond, 'that's nice, but I can't service that need,'" says Wright.

Times have changed. Montrusco Bolton of Montreal, which dropped off the Top 40 list this year, launched a new fund-of-fund hedge fund late last year that it is aggressively marketing across Canada. "We are still putting a lot of effort behind it," says Richard Guay, vice-president of client services and marketing. "It is designed for Canadian investors and there is a lot of interest from the street."

Despite the hype around alternative investment strategies, money managers say most pension funds are simply looking for more information in this area. "There is a lot of interest in alternative investments but not a lot of activity yet," says Geri James, manager, client relationships with Barclays Global Investors Canada Ltd. in Toronto. "We are in an education phase right now and money managers are acting as the main educators," she adds. Several investment firms say consultants are struggling with these complex strategies and, like pension funds, relying on the investment community to develop their knowledge.

HOLDING HANDS
Beyond alternative investments, money managers are playing more of a counselling role these days. "Sponsors want comfort. They are concerned about the lack of predictability in the markets and it is difficult for them to feel like they are in control," says Palk of TD Asset Management. "We are having to do more analysis, consultation and explanation with plan sponsors. We are called 'money managers' but we are truly acting as investment counsellors."

Firms are hoping their investments in education and counselling will pay off as they become leading managers of alternative strategies once more pension funds start to invest in them. Several money managers say they expect to see more funds actively establishing mandates in this asset class by the end of the year.

Still, the lack of alternative investment expertise in the pension industry concerns Nadeau. "You can't develop it and learn to control the risk in a month, or even a year. Hedge funds are an entrepreneurial asset class and the selection of a manager is important and the supervision of that manager is extremely important." Nadeau advises money managers seeking alliances with alternative investment boutiques to select firms that have a solid track record of at least three years in the business. "It is not easy to pick the best ones," he adds. "The risk has to be managed or it can be an extremely dangerous game, but we believe it can be a profitable one." This is clearly what most investment managers are counting on.

In addition to dealing with unfavourable market conditions, Canadian money managers are still contending with the threat of global competition. Canada is the fourth largest pension market in the world and foreign money managers that want to be global players know they have to be represented here, says Wright of UBS.

"These firms are pretty aggressive and have strong means to penetrate the domestic market," says Guay of Montrusco Bolton. While foreign competition is not a new issue, Guay, Wright and James say it is a presence to keep in mind, especially in an environment where plan sponsors are looking to reduce pension costs and boost returns. "We will see more deals like RT Capital/Brinson," adds James. "But this will play out over a couple of years, not in the short term." BC

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