Tuesday, 10 May 2011

Canadian Pension Fund Asset Mix Evolution - Ideas for the Individual?

The Pension Investment Association of Canada has a fascinating pull-down on its Publications page here that brings up the composite asset mix of its Canadian pension fund members for any year from 1990 to 2010. I've used it to compare the evolution from 1990 to 2000 to 2010. It tells an interesting story.

The Table
An asset class that wasn't there at all in the previous ten-years-ago period, or which has gone up, is shown in green while those going down are in yellow.

Fixed Income & Cash Down
  • from over 60% of the total mix, these two asset classes together now occupy less than a third of the portfolio; in fact, with a negative cash balance, it looks like pension funds are actually using borrowed funds aka leverage
  • is this because the pressure is on to gain higher returns now that the 20-year stock market boom of the 1980s and 1990s is long gone?
  • mortgages are passé, real return bonds and foreign bonds have replaced them
Equities Up, then Down with the Ascendancy of Non-Traditional Assets
  • hedge funds, private equity, infrastructure investments and other esoteric stuff are the new direction (fad?)
Real Estate Love-in Keeps Growing
  • the pension funds are now almost 10% in real estate; we can be comforted when we go shopping knowing that we are helping fund someone's pension, quite likely our own (even when in Scotland as I am a lot, where the CPPIB has half ownership of Silverburn near Glasgow ... note to fellow Canadians, it seems to busy all the time!)
Inflation-Protection Assets (Real Estate, Infrastructure, Real Return Bonds) Growing Too
  • we've had 15 years of 2% inflation so why would pension keep moving in that direction? ... I would guess because increasing longevity makes the long-term cumulative ravages of "low" 2% inflation a big factor for funds that aim to maintain their member retirees' standard of living
Foreign Equities Almost Double Canadian
  • probably that's due to the small overall size of the Canadian investing pond and the vast amounts of capital the pension funds need to deploy, along with the goal of diversification and the possible attractive returns in new markets, plus perhaps the fact that it is easier and easier to be a global investor
Ways to Apply this to an Individual Portfolio
  • Doug Cronk of the Institutional Investing for Individual Investors blog, who works for a pension fund and on whose site I found the link to the PIAC site, recommends an example portfolio, show here. It's missing real return bonds, available in ETFs such as ZRR and XRR or directly as individual bonds, also doesn't have any extra infrastructure per se (it is already within equities to some extent) and is much heavier on equities, but it is a good start.
  • Another view, from my other blog HowToInvestOnline, is How to Invest for Retirement Like a Pension Fund by Using ETFs, which suggests an ETF line-up modeled on the three biggest pension funds in Canada - the CPPIB, Ontario Teachers' Pension Plan and Ontario Municipal Employees Pension System.

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