Plan sponsors are boosting their assets and slowly turning to alternative investments.

Assets under management at Canada’s top pension funds are on the rise, and so are their allocations to alternative investments. Results reported in the 2007 Canadian Pension Fund Overview show that the top 1,020 Canadian pension funds grew their assets to $997.5 billion in 2006, a year-over-year increase of 12.5%. Although bonds and equities continue to dominate the investment landscape, alternative asset classes are becoming more prevalent as plan sponsors seek new and innovative tactics to keep the growth going.

In terms of overall asset allocation, according to the Canadian Pension Fund (CPF) data, Canadian defined benefit (DB) pension plans show a strong preference for bonds and equities, both Canadian and non-domestic. However, nearly one-quarter of plans list other investment types among their assets. While the “other” category includes non-alternative investments such as balanced funds, alternatives such as real estate equity, hedge funds, private equity and infrastructure also appear on the list.

Size Matters

Looking at alternatives on their own, the biggest plans (those with assets under management greater than $5 billion) hold the most alternatives by far, with an average allocation of 10.71%. Trailing behind these giants, at 5.25% allocated to alternatives, are the funds with $1.0 billion to $4.9 billion.

Choices, Choices

Real estate equity is the most widely held alternative investment type. Again, the biggest funds lead the pack, with an average allocation of 5.86%. Although the biggest players have scaled back their allocations slightly from the previous year, they still hold more real estate than the combined total increases of the five smaller groups.

Hedge funds, which have attracted a great deal of attention in recent years, are still relatively low on the scale. However, they seem to be gaining in popularity. The largest plans show an average allocation of 1.11% to hedge funds, and plans with assets of $1.0 billion to $4.9 billion and $500 million to $999.9 million are also investing in this area (allocating 0.84% and 0.97%, respectively). Private equity and infrastructure are also important to the largest funds, with allocations of 2.03% and 1.30%, respectively.

Moving Up

Overall, the asset allocation trend for alternatives is on an upward swing. Plans with greater than $5 billion upped their allocation to alternative investments to 10.7% in 2006 from 9.1% in 2005. Those with assets of between $1.0 billion and $4.9 billion upped their exposure to alternative investments to 5.3% from 4.5% in 2005. These two largest groups logged the largest year-over-year increases, at 160 basis points (bps) and 80 bps, respectively. Plans with assets of $500 million to $999.9 million grew their exposure by 80 bps. Plans with assets of less than $50 million and those with assets of $50 million to $99.9 million also increased their exposure (by 42 bps and 50 bps, respectively).

It’s clear that alternatives are on the rise among plans of different sizes, but how have they fared across different plan types? According to the CPF data, all types of pension plans experienced an increase in allocations. DB funds are in the lead at 3.7%, up from 3.1% in 2005. Defined contribution plans are slightly less likely to invest in alternatives, but even these plans experienced a jump in alternatives growth to 1.4% in 2006 from 0.5% in 2005. Hybrid plans also experienced a small increase in alternative allocations during this time period, to 1.6% from 1.1%.

As Canadian plan sponsors continue to boost the value of their assets under management, they are slowly but surely turning to alternative investments. With a whole new generation of institution-friendly products coming to the market, such as 130/30 strategies and hedge fund of funds, pension funds will be looking to alternative investments to help them manage risk and volatility over the long term.

Allocations to Alternative Asset Classes (as of Dec. 31, 2006)

Plan Fund Assets Less than $50M $50M to $99.9M $100M to $249.9M $250M to $499.9M $500M to $999.9M $1B to $4.9B Greater than $5B
Real Estate Equity 1.00% 0.81% 0.36% 0.68% 1.49% 3.31% 5.86%
Private Equity 0.06% 0.00% 0.00% 0.20% 0.80% 0.77% 2.03%
Hedge Funds 0.01% 0.00% 0.00% 0.35% 0.97% 0.84% 1.11%
Managed Futures 0.00% 0.00% 0.00% 0.00% 0.00% 0.04% 0.37%
Infrastructure 0.05% 0.00% 0.00% 0.00% 0.00% 0.09% 0.37%
Income Trust 0.00% 0.14% 0.03% 0.02% 0.35% 0.20% 0.37%
Total 1.12% 0.95% 0.03% 1.25% 3.61% 5.25% 10.71%


Caroline Cakebread is the editor of Canadian Investment Review.

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© Copyright 2008 Rogers Publishing Ltd. This article first appeared in the Spring 2008 edition of INNOVATE magazine, published by BENEFITS CANADA.


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