PIAC average asset allocation updated.
The average Canadian Pension fund asset allocation for 2012 didn’t change much from the previous year. So much for the great rotation from Bonds to Stocks. _____________________________________________________________________________________
PIAC is the Pension Investment Association of Canada. Membership includes 130 pension funds that manage over $1 trillion of retirement investment assets on behalf of millions of Canadians.
Each year, member Pension Funds provide year-end asset allocation data. The amalgamated result provides a composite asset allocation picture … the average asset allocation for Canadian pension plans. See the PIAC allocation as at year-end 2012 here (updated Friday July 5th). Here are the broad PIAC asset class numbers. (Click picture for larger image).
A recent Pension & Investments online article suggests that the top 10 Pension Plans in Canada represent just over 1/3rd of Canadian retirement assets. It would be difficult to find a better representation of an average asset allocation for retirement assets.
Individual investors who don’t have a strategy for their own investment portfolio might use the PIAC composite as a starting point (simply mimic the PIAC allocations). Individual investors (and readers of this Blog) who do use PIAC as a guide for their own portfolio will notice that the update for year-end 2012 … well, didn’t change much. Some. But not a lot.
So much for the much-advertised great rotation out of bonds and into stocks.
Institutional asset allocations change in steps not leaps. In contrast to what investors may have read, an abrupt rotation from bonds to stocks didn’t really happen. (While dollar amounts are huge, the percentages? Not so much). Using the PIAC average allocation as a guide, Individual investors should note the longer-term perspective and measured steps when managing their own portfolio – their personal pension plan.
Here are the detailed PIAC asset allocations. (Click picture for larger image).
PIAC average asset allocations remain diversified across asset class, region and currency spreading risk while casting a wide net across different sources of potential return.
Canada bonds are constant. Despite headlines that inspire bond panic at the prospect of increased interest rates, the PIAC average bond allocation remains at about 1/3rd of the composite portfolio. Bonds provide a match to or offset against Pension liabilities. (Bond interest payments look like the mirror image of retirement income payments and thus are a good match). Even at low and the prospect of rising interest rates, bonds still provide some certainty of return and give a portfolio stability.
No doubt, there have been changes to the composition of the bond allocation as Pension plans try to squeeze more yield out of this 1/3rd of their portfolio. Many plans have long since moved into the Provincial, Corporate and High-yield bond space to pick up yield premiums over Canada bonds. And surely, durations have been shortened. Perhaps, a bond barbell strategy is in place.
Foreign bonds still make up only 1.5% of the PIAC allocation. Despite the prospect of capital growth and enhanced yield opportunities, foreign bonds may have currency risk in addition to the usual interest rate and credit risk. Foreign bonds, even if hedged to the Loonie, are more likely to remain a tactical bet.
DC (defined contribution) Plan information is new this year.
Note, the foreign bond holdings in DC plans roughly equal the PIAC DB average. A detailed breakdown however shows foreign bond holdings in DC plans at 16%. Stateside, U.S. DC plans also have substantially more foreign bonds. Individual Investors appear to have made bets on foreign bonds where Institutional Investors have not.
The Canadian equity allocation has dropped by ½ in a decade. Recall the foreign content restrictions were relaxed as follows: (Until 1994 only 10% foreign content was allowed. In 1995 it moved to 20%. 30% in 2001. And 100% in 2005). The reduction in Canadian content also reflects the recognition that Canadian equities make up only ~4% of world markets. So Canadian equity has been one source of funding for much of the move into foreign equities and Alternative assets in attempt to diversify, enhance income and return and reduce volatility.
Emerging market equity allocations moved from 2.7% to 4%. While EM’s now represent about ~13% of world markets, the PIAC allocation to EM has changed little. (Well, I guess a move from 2.7% to 4% is over 25% growth).
Alternative assets (anything other than stocks, bonds or cash). Alternative assets continue to grow (with money borrowed at low rates? See the negative cash allocation). The move to the Alternatives space, too, has been measured.
The PIAC Alternatives allocation to Canadian Real Estate was in previous years about ½ and is now closer to 1/3rd of Alternatives. See here for comments regarding real estate valuations. Individual investors can add US REIT exposure with a choice of ETFs.
Other asset is an odd one. For 2012, it’s ~4% of the composite portfolio.
PIAC does not disclose average returns. However, the Mercer Pooled fund survey for 2012 shows the average balanced fund returned ~9% in 2012.
Looking for the U.S. perspective?
The Pension & Investments online aggregate asset allocation for the Top DB pensions (at Sept 30, 2012) show similar characteristics to the PIAC plans with fixed income just under 1/3rd. Note, too, the significant cash balances in the DC plans.
PIAC can serve as an asset allocation guide for Individual investors. An individual investor’s portfolio does not need to look exactly like the PAIC average portfolio. But PIAC can be used for guidance. And that’s likely to be the performance experience.
_____________________________________________________________________________________Next time? More Risk Management. Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan