With several reasons for both optimism and pessimism about the economy this year, the world appears to be in a state of “stable instability,” an institutional portfolio manager said at an event in Toronto on Wednesday.
“I am happy. I’m worried. . . . But I’m nonetheless hopeful,” Blair Reid, an institutional portfolio manager at BlueBay Asset Management LLP, said of the nuanced sentiment that seems to be common at the moment.
Speaking at the Canadian Pension & Benefits Institute’s 2018 pension investment forecast event in Toronto, Reid noted that on the positive side, the world is seeing synchronized growth, healthy labour markets and buoyant asset prices. Of concern, however, are factors such as sluggish wages, low labour participation rates and poor productivity growth.
And while high valuations amid low volatility have been a concern, Reid suggested the world is in a period of “stable instability,” in part due the effect of passive, algorithm-based trading. The result, he said, is that low volatility is likely to continue, although he acknowledged the potential for pro-cyclical behaviour caused by a possible change in sentiment as most regions of the world are doing well economically.
Modest inflation, Reid noted, should keep the pressure of central banks, although he predicted the U.S. Federal Reserve would hike interest rates several times in the next while, a trend Canada is likely to follow.
When it comes to the implications for pension fund investors, another speaker, David Walmsley, managing director for investment management at Greenwich Associates, noted Canadian plans have generally done well when it comes to solvency and funding levels. “Canada is in a much more favourable position relative to other markets around the world,” he said. But again, echoing the potential downside, Walmsley noted the dampened expectations for investment returns and other pressures on pension plans. “The liabilities are growing at an increasing rate, so plans are very concerned,” he said.
When it comes to investors’ priorities, they’re focusing more on investment returns than on actions such as cutting benefits or boosting contributions, said Walmsley. “The nature of risk within pension plans has really shifted over the last 10 years,” he said, noting Canadian plans have significantly shifted their allocations away from domestic equities over the last decade or so. In their place, they’ve shifted more towards international equities and alternatives such as real estate, private equity and infrastructure, he noted.
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For one Canadian plan sponsor who spoke at the event on Wednesday, worries about volatility were a key factor behind a recent shift away from equities. Christine Tessier, vice-president of investment and treasury at CAA Club Group, said the closed defined benefit plan’s high allocation to equities had been a concern for her. “I felt that there was a lot of opportunity to take a look at the assets,” she said, noting the plan decided to put a greater focus on its liabilities, with a modest increase in fixed income as well as alternatives. In particular, it looked to diversified growth funds and modified its real estate strategy. While it has remained in Canadian direct real estate, it has also diversified its approach through private real estate debt.
“We thought it was a very safe way to approach it,” said Tessier, noting the biggest challenge when it comes to making a strategic shift is often how to go about doing it rather than some of the specifics of what it entails.