Under unprecedented economic volatility, institutional investors are leaning on diversified asset mixes that are less reliant on public markets, says Claude St-Laurent, principal of pension and savings at Normandin Beaudry.
He notes institutional investors are more frequently pushing beyond traditional equities and bonds to incorporate real estate, infrastructure and other alternative assets. Indeed, in the fixed income category, he notes investment organizations are diversifying through private debt or commercial mortgages.
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“Not only [are we] in a better position but maybe certain ingredients help [institutional investors] be less vulnerable for a downturn,” he says.
Short-term volatility has been significantly impacted by strict tariff policy from U.S. President Donald Trump, including trading partners such as Mexico and Canada. At the start of May, the S&P 500 index declined in value nearly five per cent.
St-Laurent says Canadian pension plans are better positioned and have a certain amount of resilience to face these investment volatility swings. In a recent report, Normandin Beaudry said a number of Canadian pension funds have established resilient strategies including leveraging diversified portfolios, reducing the risks associated with the maturity of their plans and incorporating margins for adverse deviations into their funding.
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John Wilson, founding principal, co-chief executive officer and managing partner at Ninepoint Partners LP, says institutional investors are facing the impact of tariffs in exposure to U.S. treasuries, an asset class that can be impacted by a “shakiness” on the fundamental trust of the U.S. government.
“I think it’s a pretty fundamental change in the world of investing. If you’re a large institution, those are fundamental assumptions that you have. Traditionally, the U.S. dollar is a place you go for safety and U.S. treasuries is your ultimate risk-free bond.”
As part of a larger public message on pension performance amid geopolitical tension from the U.S. tariff policy, Gary Yee, chair at the British Columbia Municipal Pension Board of Trustees, says a strong liquidity position allows the organization to navigate volatility without needing to sell assets under pressure. Despite the economic volatility, he says the board is confident in their current strategy and doesn’t anticipate changes needed to respond the short-term uncertainty.
“Thanks to long-term planning, sound risk management and a diversified investment strategy, the plan and [the British Columbia Investment Management Corp.] are well positioned to manage through this period without compromising pension security.”
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Xavier Nadeau, senior principal of Investment Consulting at Normandin Beaudry, says its important for pension funds to plan for a long-term period and hold firm in their investment strategy.
“I think it’s very difficult to make the distinction between the long term and being influenced by the short term. . . . It’s very important to keep your procedure that you already have in place.”
In a recent report, Manulife Investment Management said this period of volatility and uncertainty is likely to continue until “conciliatory tariff conversations” take place between the U.S. and other countries. However, the report noted these negotiations historically take significant time to clarify.
“We do expect even after negotiations that tariff rates will be materially higher than recent history, therefore requiring other offsetting growth policies to minimize the economic pain such as tax reductions, deregulation and fiscal spending,” the report said.
Wilson says he has noticed increased interest in diversification investment techniques as a method to combat volatility. This pursuit, he adds, follows a period of significant growth for the U.S. equity market, which offered some leeway to investors.
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“The equity market in the U.S. was just barreling along far outpacing any other asset class. People got a little complacent, I think, on riding that and feeling like you didn’t need as much diversification. I think that clearly has changed.”
He expects institutional investors to face tough questions about how much active management they depend on to manage these periods of volatility compared to a standardized passive ownership approach.
“Is the equity market going to be more splintered by who’s impacted by tariffs? That calls into demand more active management . . . . [Institutional investors aren’t] going to get rid of passive [management], it’s just there’s just a little more interest than you would have seen before in active.”