Canadian pension funds most pessimistic about future market upheavals: global survey

Canadian pension funds are the most pessimistic in the world about coming market upheavals, reporting in a new global pension survey they anticipate market bubbles and crashes will become more frequent in the future.

A survey of 811 pension fund managers by Pyramis Global Advisors, the pension asset management division of financial giant Fidelity Investments, shows Canadians are concerned about future market volatility, while fund managers in Europe and Asia strongly believe market volatility will decrease in the long term.

“It really is polar opposite,” said Derek Young, the U.S.-based vice-chairman of Pyramis.

The survey, conducted in June and July, found 60 percent of Canadian pension fund managers believe that over the long term, “volatility is increasing and market bubbles/crashes will become more frequent,” while 42 percent in the U.S. agreed with the statement. However, only 4 percent of pension managers in Europe and 5 percent in Asia agreed volatility is increasing.

In Asia, by contrast, 91 percent said they believe volatility is decreasing and market crashes will become less frequent, while 79 percent in Europe supported that statement. Just 10 percent in Canada and 7 percent in the U.S. said they believe volatility is decreasing.

The survey included 90 Canadian pension funds representing about 25 percent of all pension plan assets in Canada, Pyramis said.

Mr. Young said he believes the findings reflect the broader global focus of Canadian pension funds, saying funds in other regions are often more inward-looking and focus more on their regional markets. They may have responded based on a consideration of their own local economies, while Canadian pension funds may have been assessing the volatility more broadly in all major markets, he said.

“I do believe that Canada has a very unique and global perspective compared to most countries,” Mr. Young said.

Bill Hatanaka, chief executive officer of OPTrust, which manages pension assets for Ontario government workers who are members of the OPSEU union, said the relatively small size of Canada’s markets on a global scale means pension funds are forced to take a global investing approach and are “sensitized” to the potential for a variety of scenarios to create volatility.

“Our resource-based economy and its inherently cyclical nature has helped us to become more comfortable with anticipating volatility from economic cycles and events,” he said.

Leo de Bever, chief executive officer of Alberta Investment Management Corp., which manages $75-billion of pension and other assets for the Alberta government, said he finds the views of European and Asian fund managers surprising, because “it seems reasonable to assume – as the Canadians did – that historically low volatility could not last.”

“We had not seen a correction in a while, so it was bound to happen some time,” De Bever said.

The fact equity markets have been so volatile this fall suggests the Canadian respondents may have had an accurate view in June about the likelihood of future boom and bust cycles, Mr. Young said.

“The Canadians were definitely positioned the appropriate way in terms of their thought processes, and certainly that expectation matched up with reality,” he said.

The survey also found that fund managers around the world are more optimistic about the chances of meeting investment return goals over the next five years compared with two years ago when the survey was last conducted.

In 2014, 91 percent of fund managers globally said they are comfortable they will achieve their annualized returns over the next five years, an increase from 65 percent. In Canada, 96 percent believe they can meet their goals, up from 60 percent in 2012.

Although the survey was conducted before equity markets declined sharply this fall, Mr. Young said he believes the greater confidence is still likely prevailing because “these are long-term investors and we are asking about five-year views.”

Julie Cays, chief investment officer at the Colleges of Applied Arts and Technology (CAAT) Pension Plan in Ontario, said many pension plans have lowered their return assumptions in recent years because interest rates remain low, which helps build confidence the targets can be met.

She said a major reason for concern about future volatility is the huge amount of liquidity the U.S. Federal Reserve has provided in recent years to stimulate the U.S. economy, which she said is an experiment that’s never been tried on such a scale before.

“We don’t really know what the effect of all this liquidity and all these low rates is really going to be over the long term, and I think people are nervous about that,” Ms. Cays said.

De Bever sees reasons for optimism about returns in future years, saying while many assets are now fully valued, companies are still finding productivity gains and maintaining strong profit margins.

“That’s likely to be true longer term, although one can make a case that the easy gains have been made for now,” he said.

Pension Funds To Put More Cash In Long Bonds, Fidelity Poll Says

OCTOBER 27, 2014 • BLOOMBERG NEWS

Pension funds will deploy more cash to long-term bonds as a global economic recovery is forecast to push yields higher in developed nations, according to a Fidelity Investments survey of retirement managers.

Pension funds that oversee $9 trillion of assets in North America, Europe and Asia will slow what Bank of America Corp. in 2011 called the great rotation of capital moving into equities and away from bonds, according to the poll conducted by Pyramis Global Advisors, a Fidelity unit.

The investors, who cited shifting interest rates as the biggest risk, will seek out long-dated debt to match liabilities, said Derek Young, president of Fidelity’s global asset-allocation group. Two-thirds of respondents said they’ve used liability-driven investing successfully, are currently using it or are considering it, according to the survey.

“At a time when people least expect investment in bonds, you may see it because of a move toward liability-driven investing,” Boston-based Young said by phone Oct. 24. “Long- dated bonds are really critical in immunizing these portfolios against interest-rate risk. You want to pair off the assets with the liability.”

Growth in Group-of-10 nations is forecast to rebound to 2.2 percent in 2015, on average, from 1.7 percent in 2014. U.S. 30- year bonds will yield 3.85 percent by the middle of next year, and 10-year notes will yield 3.1 percent, according to the median estimates of economists surveyed by Bloomberg. Thirty- year Treasuries yielded 3.05 percent and 10-year securities 2.27 percent on Oct. 24.

Asia Concern

Fidelity is scaling back investments in Asia in favor of Europe and the U.S., Young said. The firm is betting European Central Bank stimulus will jump-start economic growth and that the U.S. recovery will gain momentum. China’s economy is at risk from a boom-to-bust housing trajectory, he said.

“We see Europe at a mid-cycle. If the ECB steps in with more stimulus measures, that will create more opportunities,” Young said. “We’re less constructive on Asia, China and Japan. Our biggest concern is that growth in China is credit-driven as opposed to being productivity-driven. That type of growth typically doesn’t survive.”

Pyramis, based in Smithfield, Rhode Island, conducted the survey in June and July, polling 811 investors from 22 countries, including 191 U.S. corporate pension plans, 71 U.S. government pension plans and 90 Canadian pension plans.

Fidelity, based in Boston, oversees $290 billion in assets, including the Fidelity Advisor Asset Allocation Fund.

AMERICAN INSTITUTIONAL INVESTORS 

SHY AWAY FROM HEDGE FUNDS

American institutional investors aren’t investing in hedge funds to the degree of their global peers, finds a survey by Pyramis Global Advisors.

While the use of alternative investments is still rising rapidly in the rest of the world, use of liquid and illiquid alternatives appears to be slowing among U.S. institutions.

Pyramis surveyed 811 respondents in 22 countries representing more than US$9 trillion in assets.

Among respondents planning an allocation increase to illiquid alternatives over the next one to two years, Asia leads the way with 79%, followed by Europe (57%) and the U.S. (22%).

Read: Details on derivatives

When asked which investment approaches are most likely to underperform over the long term, 31% of U.S. respondents cite hedge funds as least likely to meet expectations. Risk factor investing is expected to be the biggest disappointment among Canadian, European and Asian plans.

When asked specifically about the fees associated with alternative investments, only 19% of U.S. plans surveyed say hedge funds and private equity are worth the fees, as compared to 91% in Asia and 72% in Europe.

“U.S. plans are currently reevaluating the complexity, risks and fees associated with hedge funds,” said Derek Young, vice chairman of Pyramis Global Advisors.  “Our survey suggests that U.S. institutions are preparing to move back to a more traditional, back-to-basics portfolio.”

As Advisor’s Kaite Keir reports:

“As such, most major institutional funds have turned to alternatives such as real estate and private equity to beef up their yields.”

Institutions embrace stocks and bonds to meet goals -Pyramis

NEW YORK Mon Oct 27, 2014 11:31am IST

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Oct 27 (Reuters) - Most pension funds and other institutional investors worldwide expect to meet their five-year investment goals and are increasingly confident they can get there using traditional stocks and bonds, a survey showed on Monday.

Among those surveyed, 91 percent of institutional investors said they expected to hit their targets in five years, up from 65 percent in 2012, according to the 2014 Pyramis Global Institutional Investor Survey.

The survey also showed that institutions globally are embracing stocks and bonds, while alternatives such as hedge funds are losing their luster for U.S. investors. The confidence in stocks and bonds came even as market volatility remained the top concern for institutions, with 22 percent citing it as such.

Many view alternatives as favorable in a volatile market on the premise they offer returns that are "uncorrelated" to traditional stock and bond markets.

The survey covered 811 institutional investors in 22 countries overseeing more than $9 trillion in assets.

Institutional investors "are looking for more simplicity, and they're finding that they're able to generate the types of returns that they need for their plan participants with this more traditional asset allocation," said Pam Holding, chief investment officer at Pyramis.

The greatest percentage of U.S. respondents, 44 percent, said alternatives such as hedge funds were not worth the fees.

The Pyramis findings come after Calpers, the largest U.S. pension fund, said in September it would pull out all of the $4 billion it had invested in hedge funds because they were too costly and complicated.

Faith in stocks and bonds was strong enough that 43 percent of global respondents said they would increase their stock exposure if equity markets plunged 20 percent or more. A dominant portion of respondents, 25 percent, said a traditional mix of stocks and bonds would prevail in the next 10 years.

While a spike in interest rates was viewed as the top risk for 23 percent of global respondents, 30 percent said they would maintain the same exposure to bonds if rates rose 1 percent or more, but would further diversify their bond investments.

Worries about a correction in stock markets worldwide and a spike in U.S. interest rates have loomed over financial markets this year. The Federal Reserve is expected to raise interest rates from rock-bottom levels next year.

The survey also showed that current funded status was the top concern among U.S. institutions in particular, and 51 percent of the U.S. respondents expect volatility and the frequency of financial crashes and market bubbles to stay the same.

Asset manager Pyramis conducts the survey of institutional investors once every two years. The survey included 281 private-sector pensions, 173 public pensions and 126 financial institutions. (Reporting by Sam Forgione. Editing by Andre Grenon)

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In this BLOG we will look at pensions and their impact on what are called Public Private Partnerships or P3’s.  IT will also deal with other pension matters, such as Defined Contribution Plans (DC) vs Defined Benefit (DB) PLANS, the weakness in private plans, the need for pension reform in public pensions to have shareholder rights, directorships and ethical investment directives and policies.