It’s getting a lot more interesting for the top foreign money managers in Canada. With the elimination of the Foreign Property Rule last year, many believe the road ahead is paved with global opportunities as
Canadian plan sponsors look abroad for new sources of returns.

Global equities, real estate, commodities, infrastructure—the universe now seems endless and plan sponsors appear to be going global at a faster pace that anyone had at first anticipated. Moreover, many are letting their managers take the lead in making global decisions. How fast are plan sponsors moving? And what’s changing for their global money managers?

“At just over a year of digesting [the elimination of the rule], we’re seeing a lot of interest in non-domestic asset classes,” says Stuart Graham, executive vice-president, retirement services with Fidelity Investments Canada Limited in Toronto(8th in the Top 20 Foreign Money Mangers ranking, see page 32). While most thought Canadian plan sponsors would take their time before making changes in the wake of the Ottawa’s decision, the trend, say managers like Graham, appears to be going the other way.

Bruce Winch, vice-president, institutional investments, with Aim Trimark Investments in Toronto(6th in the Top 20), has also seen a growing trend towards non-Canadian assets among plan sponsors. However, he believes the industry still needs time to grow into the new global space. More mportantly, additional knowledge is needed to help sponsors on the way. In his view, “there is not yet enough expertise among plan sponsors and even some consulting firms to be able to determine what the proper allocation is from a top-down perspective.” That kind of knowledge takes time to develop.

What Winch does see evolving is a shift to a more global approach to asset allocation and a move away from some of the traditional, regional constraints that plan sponsors have placed on their foreign money managers. “In the past, there was always the belief that one should dictate to the professional money managers the allocation by U.S., EAFE, etc.” That’s changing, says Winch, who also notes that many plan sponsors are looking to their money managers to determine what the best opportunities are.

Chris Cockburn, vice-president with Capital Guardian Trust Co. in Toronto(10th in the Top 20), agrees that plan sponsors are taking a more global view when it comes to asset allocation. “Plan sponsors are broadening their mandates rather than keeping them as constrained as they once were,” says Cockburn. “Pension plans are now choosing global managers to pick the best of the best and moving tactically away from overweights in certain areas of the world.”

That’s a big change, says Carl Bang, managing director of State Street Global Advisors Canada in Toronto(15th in the Top 20). “Ten, 20 years ago, global investing for the Canadian investor meant buying a few U.S. stocks,” he says. “Now, people are looking in all different places—emerging markets, hedge funds, global real estate, commodities.” That free flow of knowledge, says Bang, couldn’t come at a better time for plan sponsors, many of whom are faced with mounting deficits and solvency issues. Opening their universe up to global opportunities could be a big help, he notes.

Although the timing might be good for plan sponsors in need of good ideas and new sources of alpha, it couldn’t have come at a worse time from a currency point of view. The soaring Canadian dollar presents major challenges for anyone investing outside Canada and plan sponsors need to keep a close eye on currency risk. So, as Canadian plan sponsors search around the world for returns, the home court is now quite good, particularly due to the strong performance of Canadian markets in recent times. Fidelity’s Graham has done some global number crunching to show just how good it looks from a domestic standpoint. “If you look over the last five years in Canadian dollar terms,” he says, “in the Canadian stock market you would have had a return of about 54.2%. Compare that to the U.S. market during the same time in Canadian dollar terms—you’d have a negative 21.4% return.” Graham points out the U.K. and France don’t fare much better in Canadian dollar terns—negative 2.1% and negative 5.4% respectively. Even Japan would have produced a lowly negative 8.4% on a Canadian dollar basis. All this means that plan sponsors with their sights set on global markets have to deal with currency hedging.

Going forward, says Bang, global money managers in Canada are well positioned to help plan sponsors meeting the challenges of a brave new world of foreign investing. “I think we have a tremendous talent pool in Canada,” he says. “We’re very advanced in terms of how we approach global investing.” The challenges that institutional investors have faced in Canada, he says, have made its global money managers “best in breed” compared to their global counterparts. So while plan sponsors look around the world for new investments, Canada’s top 25 managers represent a strong local presence to help them in their search.

Caroline Cakebread is the editor of Canadian Investment Review.