With Canadian inflation accelerating to 4.1% year-on-year in August, we have analyzed some of the top Canadian pension funds. A couple of reasons that analyzing pension funds may help us in making our own investment decisions. They invest in the long-term and their allocations typically do not change every year drastically. The major concern they have is their ability to fund their retirees throughout retirement. Pension funds have three major risks that individuals share with pensions: equity return risk, interest rate risk, inflation risk.
Some of the top investor concerns during 2020 still remain as concerns. Namely, how we exit the covid crisis and any inflation concerns that come about from it. We continue to be in a low rate environment with QE – although “talks” of tapering coming in the future.
Looking at a high level, the average allocation that top Canadian pension funds have show nothing that is too surprising.
Detailed Allocations
After the global financial crisis in 2008, a lot of pension funds saw first hand how much a large public equity exposure can adversely affect their plans ability to payout future retirees. Since then many have made massive portfolio reallocation decisions to reduce their equity exposures. It gets particularly interesting if we analyze the detailed equity allocations and how they have changed since 2016. Reminder that major re-allocations occurred prior to 2016 after the global financial crisis.
Of note is just how little exposure they have to Canadian equities, considering we are analyzing Canadian pensions. The exposure is only slightly higher than emerging markets exposure and lower than the allocation to private equity!
Also evident is an overall reduction in public equity and an increase in private equity exposure. Due to the low rate environment, pension funds are seeking alternative investments which exhibit higher returns and often times have a lock-up period and lower liquidity. This trend is not solely isolated to private equity as we can see more appetite for real asset investments. Pensions have substantially increased their allocations to real assets with a significant portion going to real estate and infrastructure.
Real estate and infrastructure continue to dominate the real assets allocation. With all the talk about inflation, you may be asking about commodities and especially gold. Only one fund analyzed listed gold as an investment and was a recent allocation adjustment in 2020. If we assume a capped weight of gold of 30% within a commodity fund, then that means that the average pension fund has a measly allocation of 0.3% to gold!
Summary
In summary the top 3 interesting points from this analysis are:
- Low Canadian equity exposure (7%) considering these are Canadian pension funds
- Reduced public equity exposure offset somewhat by increasing private equity exposure
- With all the talk and concern of inflation, a low allocation to commodities (1%) and even lower allocation to gold
This analysis probably brings more questions than answers as I look how to position my long-term portfolio for the future. However, I think that it contains useful insights as individuals share the three main risks of pension funds: equity return risk, interest risk and inflation risk.