PIAC Asset Allocation – 2013 Update
The PIAC Canadian pension plan composite average asset allocation for 2013 changed very little from previous years.
One of the arguments this blog makes is that for individual investors who need a starting point to construct their own investment portfolio, the PIAC composite average asset allocation can be a useful benchmark.
Blog readers who do use PIAC as a guide for their own personal pension portfolio will note that, once again, the PIAC average asset allocation changed very little in 2013 from previous years.
PIAC is The Pension Investment Association of Canada. It represents over 130 pension funds that together manage pension assets of $1.27 trillion. PIAC members report year-end asset allocations and the composite asset mix is representative of the collective average Canadian pension plan asset allocation. If an individual investor were looking for an institutional benchmark for their retirement assets, their personal pension plan, they would be hard pressed to find one more representative of the average pension asset allocation than PIAC. Here’s what others say:
Pension & Investments charts show Global and U.S. pension plans (see Feb 3, 2014. Aggregate Asset Mixes) have similar asset allocations to PIAC. Again, note the (roughly) 1/3rd bond allocations. (This blog referred to charts here and here).
Broad and global diversification The PIAC composite average asset allocation shows exposure across asset classes, regions and currencies (and very likely, sectors and styles as well). Broad, global exposure means some volatility offset and opportunity for returns from many corners.
Further, asset allocation moves are measured steps (on average) rather than abrupt swaths. Investors ought to keep this in mind the next time they see a headline that shouts great rotation out of bonds, for example.
Total bond allocation for 2013 was 29%. Recall that the average bond allocation has been roughly 1/3rd since 2000.
Domestic bond allocation dropped to 23% from 25%. Relative outperformance of stocks rather than a reduced bond allocation may be a factor here. Clearly, bonds remain one of the best ways to match long-term pension liabilities.
Foreign bond and real bond allocations both dropped. Pension plans may be saying why assume both interest rate and or currency risk?
Even before markets corrected circa 2007 – 2009, but especially as stock markets are since recovering, pensions have been rebalancing out of stocks and into Alternatives thus maintaining the average stock allocation at a stable 41%. Clearly (see chart) over time the funding for Alternatives has come from Canadian Equities. This makes sense. Recall that the foreign content restrictions were relaxed. Until 1994, foreign content was capped at 10%. In 1995 it moved to 20%. 30% in 2001. And 100% in 2005. Since 2005, the Canadian stock allocation has dropped by ½ in attempt to diversify, enhance income and return and reduce volatility. Canadian stocks contribute disproportionately to pension portfolio volatility (or any portfolio volatility for that matter).
Emerging markets allocation stayed at 4%. Some pension plans will have increased their actual EM exposure by relaxing constraints in their Global and EAFE mandates thereby allowing those managers to stretch in to the EM space. 10% to 15% per Global or EAFE mandate, say. Up at the plan level however, the aggregate EM allocation on a look-through basis is much larger than the designation 4% allocation. Relaxing constraints is an easy and inexpensive way to extend EM exposure. It’s a problem if it’s unintended and a cause for concern if the majority of performance is generated from EM and not from the actual Global or EAFE mandate. An Investment Committee might say, I’ll take additional exposure to faster growing EM’s while enjoying the downside protection of large cap EAFE multi-nationals. Individual investors, through an EAFE ETF, say, also have additional EM exposure as multi-nationals obtain significant sales from EM.
Other assets grew to 6%. As pension plans reach for yield, they stretch into more exotic markets. According to CPP and OTPP, other assets can include mezzanine debt, asset-backed-securities, intellectual property, royalties, natural resources, repurchase agreements, absolute return strategies, tactical or foreign exchange strategies and derivatives. Just a thought for now, but the further the reach into exotics the less clear the overall risk profile and the more watered-down traditional risk tools become. Then again, the fruit is always far out on the branch. … but that’s for another blog-day.
PAIC does not publish average plan returns, so we can use proxy. RBC Investor and Treasury Services Pooled Fund Survey for the period ended Dec 31, 2013 indicates the average balanced pooled fund in Canada delivered 15.8% to end 2013. Note how, with time, the returns approach longer-term averages.
click chart for larger view
Individual investors who don’t have a strategy for their personal retirement investment portfolio might use the PIAC composite average asset allocation as a starting point. Simply mimic the PIAC allocations, replicate the risk characteristics and anticipate similar returns.
_____________________________________________________________________________________Next time? More Risk Management Doug Cronk CFA PRM is a Pension Investment & Risk Management Officer