Investment grade bonds have been a key risk management tool for pension plan sponsors, and low interest rates have reduced potential returns, but there are alternatives.
Speaking at Benefits Canada’s 2013 Benefits & Pension Summit on Monday, Peter Muldowney, senior vice-president of institutional strategy at Connor, Clark & Lunn Financial Group, discussed four alternatives: real estate, defensive equity, high-yield bonds and overlay solutions.
Of all the types of investments, overlay solutions are “the most challenging because they’re the most misunderstood,” he said, adding that it didn’t help when Warren Buffett referred to derivatives as financial weapons of mass destruction.
While the past performance of the investment choices discussed is not a guarantee of future returns, Muldowney guaranteed that fees will be higher.
But he added that if fees are 0.3% and a plan’s return increases by 200 basis points, then it’s worth making that choice.
Look for additional coverage of the summit in the June issue of Benefits Canada.