As the investment landscape gets more complicated, defined contribution pension plan members’ investment options need to keep up, said Chhad Aul at the 2018 Defined Contribution Investment Forum in Toronto in September.
Portfolio managers are currently operating in a unique environment, said Aul, portfolio manager at Sun Life Global Investments. This includes the easing off of many central banks’ active monetary policies, allowing interest rates to rise from a sustained environment of record lows. As well, the trend towards further globalization may have reached its natural peak and is even beginning to be challenged by protectionist policies from several governments, he said.
These and other tipping points are indicating markets are potentially heading to the end of their economic cycle, noted Aul.
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“To be able to adapt to this changing investment environment, we really want to be able to bring as many tools as possible to our management of client portfolios,” he said.
Bringing derivatives into the portfolio is one example of expanding the toolbox. “Being able to use derivatives for risk management, being able to drive better risk-adjusted outcomes would be a real positive that we can bring to help us navigate this sort of environment,” said Aul.
Real assets such as real estate, infrastructure also improve long-term expected outcomes, he added.
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Further, managers should look to have an unconstrained mandate, suggested Aul. “Let’s not be so focused on what the benchmarks look like . . . but can we look to build investment strategies that are more focused on a target outcome?”
Bringing additional complexity into the defined contribution world makes sense but constraints exist, including the need for investments in these funds to be more liquid, he said. “We have to ask ourselves, ‘Have we constrained ourselves too much with this focus on liquidity?’ There is a tradeoff, of course — liquidity for plan members at the one end and what is better for long-term returns on the other. And perhaps that is tilted a little bit towards liquidity.”
However, most plan sponsors keep it simple when deciding what investments to offer members, said Anne Meloche, head of institutional business at Sun Life Global Investments, who also spoke during the session. But the suite of products in the average DC plan aren’t necessarily suited to dealing with the challenging market laid out by Aul, she noted.
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Is adding more sophisticated options to the lineup the answer? It’s not a clear yes for Meloche, who noted a lot of work goes into adding these options.
“At the end of the day, you’ll see very little added to these options,” she said. Just two to six per cent of plans smaller than $10 million offer some more sophisticated options, while six to eight per cent of mid-size plans, between $10 and $100 million, and eight per cent of plans larger than $100 million do so. Normally, that more sophisticated asset is a real estate investment trust, according to Meloche, which isn’t that sophisticated, although they’re not completely standard.
Target-date, target-risk and balanced funds are all great options to increase member exposure to more sophisticated assets, she said. More and more of these funds include alternative assets, but plan members don’t have to manage them actively themselves.
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