Although the markets are changing quickly due to the impacts of coronavirus, the OPSEU Pension Trust is a long-term investor and its overall investment strategy hasn’t changed, says James Davis, the fund’s chief investment officer.
The plan’s portfolio was constructed to be resilient and withstand events similar to what’s happening in today’s markets, he says, noting the portfolio is broken down into three sections: risk mitigation, return seeking and liability hedging.
“The liability-hedge portfolio, which is comprised mostly of bonds is doing very well. The risk-mitigation portfolio is doing even better because there we’ve got exposure not only to bonds but to [trend strategies] and also to defensive currencies and we have some gold in that portfolio as well. . . . The return-seeking portfolio, on the other hand, of course, has more exposure to risk. You need to take that exposure to risk in order to earn the returns to pay pensions. And that is the part of the portfolio that is experiencing drawdown at the moment.”
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That said, since the OPTrust is a relatively mature pension plan, its portfolio has been designed with the objective of earning the return required to pay pensions at the lowest risk possible, so its risk exposure is low.
However, while the plan is in a good position, some worrisome things are playing out in the market, adds Davis, referring to correlations that are a reflection of illiquidity. “The markets, at this point in time, are experiencing something not dissimilar to 2008, and central bankers are doing what they can to unclog the plumbing. But I think that, coupled with a lot of quantitative strategies that are essentially position-sized on the basis of volatility, as volatility has risen, they’ve had to unwind some of those positions and that has added to the illiquidity in the market because there’s simply not enough buyers and too many sellers.”
The OPTrust, in particular, is quite flush with liquidity because it set its investment strategy up with this in mind. “Now, with markets in the state that they’re in, opportunities are presenting themselves on a daily basis and we have the ability to provide liquidity to the markets and take advantage of some of those opportunities.”
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But Davis does acknowledge that the plan isn’t a market-timer, adding he doesn’t know when the bottom will be hit. “We’ve looked at bear markets since 1900 and what we’ve seen now is not as bad as it can be and it’s certainly too short to call an end to it. So we have to be mindful that this can get worse before it gets better.”
At times like this, it’s important for plan sponsors to stay focused on the amount of risk they’re taking and avoid excessive risk, he says, though with interest rates falling over the last several years, central banks have been pushing investors out on the risk curve.
As a result, investors have used leverage to achieve higher rates of return because risk premia have been relatively low. “I think that’s what’s causing some of the stress in the markets, but I believe being a long-term investor puts us in a really good position,” he says. “And being able to think long term like pension plans can and being able to provide liquidity to the market is a real advantage. That’s really what the Canadian model has been able to do over the past couple of decades.”
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