From value to growth, Canadian pension funds have looked to different investment styles over the years to help them meet their returns and manage risk. In examining style trends among Canadian plan sponsors, one need not look further than some of the fastest-growing money managers on our Top 40 list for their thoughts. Which investment styles have been the most prevalent in the last couple of decades? And how is alpha expanding the traditional style boxes?

Two of the key styles in investment management are value and growth. Bill Chinery, managing director with Barclays Global Investors Canada in Toronto says that, today, Canadian pension funds are still looking for value. “My view is that there’s still a big value bias in pension plans in general. It makes sense to buy things cheap to sell when they get more expensive.” When it comes to growth, however, there’s been less long-term focus among funds. “Growth comes into vogue from time to time,” he points out. “But the long-term trend is to see that value is preeminent.”

For Rob Vanderhooft, however, growth is all about creating returns over the long term. Vanderhooft, who is chief executive officer and chief investment officer with growth-oriented Greystone Managed Investments Inc. in Regina notes, “growth and value are not mutually exclusive.”

Instead, he says, it’s all about how you define it. “Growth tends to involve strong quarter-over-quarter earnings and other factors that correlate well with earnings growth and, more importantly, with stock price performance.” And, he says, it is possible to add growth without taking more risks in the area of valuation.

While value and growth continue to be resilient styles in pension investment, the landscape is beginning to change. According to David Cameron, chief investment officer of Boston-based Mellon Institutional Asset Management’s affiliate The Boston Company, the advent of alpha onto the investment scene has challenged the traditional notions of style, such as large-cap, small-cap, mid-cap, value, core and growth.

Those “style boxes” says Cameron can be very limiting for managers working to tightly wrap performance around a specific benchmark—and the result is getting a bit too close to beta for the comfort of investors. “The buyers of investment management services are getting smarter and smarter,” Cameron explains. “If managers stick too closely to the style boxes, then they’re too close to the market and the indexes. That’s beta—it’s cheap to produce and it doesn’t take much skill. No one wants to pay big fees for beta.”

Cameron says that portable alpha is unshackling managers from the style boxing issue. Mixing and matching alpha and beta exposure, he notes, “frees up managers to be true to a style that is based on their core competencies and to move away from the box. You can create alpha and port it on top of any beta portfolio you want.” Cameron says that alpha is a “genie that’s not going back into the bottle” and that this is changing the investment style landscape.

Looking into the future, it looks as if investment styles will continue to evolve and change in order to meet the changing needs of Canadian pension funds. Chinery sees the current move toward liability driven investing as having an influence on styles in the future.

At the same time, he sees more and more pension funds moving into fixed income. “There will be a lot of focus on this in the next five to 10 years due to accounting changes and the fact that many plans have converted to defined contribution,” says Chinery. Indeed, according to him, British drugstore chain, Boots PLC’s move into a 100% fixed income portfolio in 2000 just might be something that will become a lot more prevalent in Canada.

Porting alternative strategies onto other strategies such as fixed income is likely what more and more pension funds will be doing in the years to come. Chinery says they might also “get forced into value” as the equities pendulum continues to shift away from the strong returns of the 1980s and ‘90s along with the equity risk premium.

Whatever happens, it looks as if investment styles are set to get a boost from the alpha-beta split that is happening within many pension funds in Canada and around the world. The investment style landscape is set to get even more interesting in the years ahead.

Caroline Cakebread is the editor of Canadian Investment Review.

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