It’s been a hard few years for defined benefit(DB) plan sponsors. Low interest rates, poor equity market performance and a host of regulatory challenges have led to major shifts in their approach to asset management. And money managers have had to keep up with the changes, developing new and better approaches. It’s been challenging, but some, including those in our Top 40, have experienced growth and success amidst all the change. What’s been driving growth in recent years? And what big changes do managers see on the road ahead?

Randall O’Leary, senior vice-president with Baring Asset Management Inc. in Toronto says plan sponsors are looking for new and better ways to fund their mounting liabilities. That has driven a lot of the growth for managers as they build their businesses. But it’s also meant that those same managers need to keep on the lookout for new opportunities as more plan sponsors opt out of the DB option.

“Institutionally, from my perspective, a big concern is diversifying revenue sources,” says O’Leary. “The next stage of evolution is the defined contribution(DC)market.” He notes that pension funding problems in the corporate sector has led to a global pension crisis. While Canada has not had the sweeping accounting reforms experienced in other jurisdictions, O’Leary says that the country has been “falling into step with other accounting bodies around the unfunded status issue.” As that has happened, plan sponsors have been shifting to DC models or at least considering their options. “In the corporate sector, we’ve seen IBM, GM closing their DB plans and looking at DC. That money is now going into the DC market,” explains O’Leary, adding that firms with an eye for the longer-term now have to be responsive to the needs of DC plans.

When it comes to the shrinking pool of DB assets, O’Leary chooses to see the proverbial glass as “half full, rather than half empty.” There are many opportunities to be had in the new space, he says. Along with the challenges facing DB plans, there are other trends that are likely to shape the industry in the coming years. According to Clive Morgan, principal, York Investment Strategies Inc. in Toronto, Canadian money managers who don’t offer global products will start to lose money in the years ahead. As the effects of the elimination of the foreign property rule take hold, Canadians will start to look globally for opportunities.

“I think the entire Canadian [money management] business is under threat,” says Morgan, particularly when looking 10 years into the future. New approaches such as portable alpha represent a challenge to the way Canadian managers have traditionally done business. “There’s going to be an upsurge in new products such as portable alpha,” says Morgan. “That will destroy the money management world. Investors will essentially have a synthetic index fund and will no longer rely on buying traditional products. Tactical asset allocation, currency hedging—this range of products is transforming traditional management as we know it.”

Morgan says that the Canadian market needs more innovators down the road, not just followers. And while he recognizes the important role of big public plans like Ontario Teachers’ Pension Plan as an innovative leader, Morgan would like to see more of that leadership among corporate sponsors.

Baring’s O’Leary agrees that alpha is a big part of the future and he also says that Canadian pension funds are going to be moving out of Canada in order to “tap into as many opportunities as possible, across markets.”

Warren Stoddart, managing partner, Connor, Clark & Lunn Financial Group, LLP in Toronto says that the major growth in his firm is happening across client types, not just in the pension side of the business. “Our most rapidly growing part of the business in percentage terms has been high net worth clients,” he says. “For us, less than half our assets under management are DB plans.”

For his part, Stoddart hasn’t yet seen a huge shift to DC plans and says the market is still quite small in Canada. But Stoddart has seen a transformation among pension funds, mainly fuelled by the shift from balanced mandates to specialty mandates. “We’re seeing clients become even more specialized in terms of their style categories, not just looking for a Canadian equity manager, but a specific type of Canadian equity manager.” Even on the fixed income side, he says, the horizons are opening up to new styles as investors seek to construct portfolios where complementary styles are combined to help mitigate risk and enhance returns.

Whether or not money managers see these challenges and changes as a half full or half empty glass, the future of the pension industry is likely to be interesting. And it looks as if out Top 40 money managers are on the lookout to meet the needs of their pension clients.

Caroline Cakebread is the editor of Canadian Investment Review.


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