Canadian Funds Dive Deeper Into Alternatives

Pensions, insurers, and foundations surveyed by CIBC Mellon indicate plans to up allocations to private equity, private debt, infrastructure, and hedge funds.

Brent Lewin/Bloomberg

Brent Lewin/Bloomberg

Canada’s institutional investors — widely considered to run some of world’s most sophisticated investment programs — are shifting more money into alternative asset classes.

A CIBC Mellon survey of 50 pension funds, insurance companies, endowments, foundations, and fund managers found that 58 percent planned to increase their allocation to alternative investments — including infrastructure, private equity, private debt, and hedge funds — over the next 12 months, while the remainder planned to maintain their current allocations to the asset class.

The survey’s respondents managed an average of C$79.8 billion (59.2 billion USD). A majority of them were pension plan executives or trustees.

Canadian pensions — which have been described by the World Bank as “some of the world’s most admired and successful public pension organizations” — have long been heavy investors in alternatives, with funds like the Canadian Pension Plan Investment Board and the Ontario Teachers’ Pension Plan emphasizing direct and co-investments in private assets such as real estate and private equity.

[II Deep Dive: U.S. Pensions Aim to Be More Like Canadian Funds]

According to CIBC Mellon, these and other Canadian institutional investors are now planning to invest more in alternatives in order to safeguard their portfolios from public market volatility.

“Alternatives continue to gain momentum among Canada’s institutional investors as they seek investments that can shelter their capital form short-term risks and market movements while also generating strong returns, though we are seeing Canadian investors becoming more particular about how they deploy their capital,” said Jon Lofto, director of alternatives at CIBC Mellon, in a statement.

The survey showed that Canada’s institutional investors are targeting the biggest increase in private equity, which all 50 respondents said has either matched or exceed their expectations for performance over the last year. Currently, private equity makes up 18.7 percent of the average Canadian investor’s alternatives portfolio, but survey respondents said they planned to increase their allocation to 20.9 percent on average.

Another popular asset class was private debt and loans, which currently account for 17.9 percent of the average alternatives portfolio, but which respondents planned to increase to 18.5 percent.

In addition, respondents said they also planned to make marginal increases to their infrastructure and hedge fund investments, which accounted for an average of 20 percent and 1.4 percent of their alternatives portfolios, respectively.

The only private asset class which respondents expressed negative views toward was real estate. Unfortunately, this is the asset class which has made up the largest portion of their alternatives portfolios, with an average allocation of 42 percent at the time of the survey. Although 12 percent of respondents said their real estate investments performed better than expected over the last year, 30 percent said their real estate portfolios underperformed expectations.

As a result, the surveyed investors were targeting an average real estate allocation of 38.8 percent of their alternatives portfolios.