Investment Portfolio check-up

PIAC Composite Average Asset Allocation – 1990 to 2019
_____________________________________________________________________________________

IN SUM

The Pension Investment Association of Canada (PIAC) composite average asset allocation can be a useful reference for individual investors who wish to mimic institutional investors when constructing and managing their own portfolio.

PIAC’s year-end 2019 allocations continued the long-term trend out of Equities and into Alternatives. While the fixed income allocation has been reduced over time, it increased to 32% of total assets as at year-end 2019. The allocation to equities was also 32% down from 42% 10 years ago and 55% 20 years ago. Alternatives allocations increased from 7% in 2000 to 22% in 2010 to 39% at year-end 2019.

(Click on charts for larger image)

PIAC average asset allocation 1990 – 2019

 

 

 

While this data seems outdated given the market gyrations so far in 2020, individual investors can see the value of diversification as evidenced by balanced portfolio returns of 15% for 2019.

RBC Pooled Fund survey – Balanced Fund 2019

 

 

 

DETAILS

Why PIAC?

The PIAC’s membership is comprised of over 140 Canadian pension plans representing over $2 Trillion in retirement assets. “About two-thirds of pension assets are managed by the eight largest public pension funds in Canada.” Because the largest eight Canadian pension funds and PIAC are broadly representative of this $2 Trillion in institutional retirement monies, individual investors could piggyback off of institutional pension strategies and replicate this institutional asset allocation for their own investment portfolio.

Diversification

Asset allocation when markets are calm seems mundane.

Individual investors may be tempted to let low bond yields drive asset allocation decisions and compromise their long-term strategy thereby assuming more risk than they would normally take. Low yields do not mean investors should abandon their long-term asset allocation strategy. If the intention is to build a portfolio that can survive a range of outcomes, it needs diversification.

Note that bonds still make up ~1/3rd of institutional portfolios.

Wharton professor of finance and author of best seller ‘Stocks for the long run’, Jeremy Siegel, has said ‘the old 60/40 model just won’t be able to cut it anymore’. But he didn’t recommend investors abandon bonds. No, he then said ‘we recommend 75/25 as the equity/fixed-income allocation’. Note 75/25 is still (roughly) consistent with the PIAC composite asset allocation of fixed income ~1/3rd.

Vanguard persists, however, writing that the conventional 60/40 asset mix is still THE asset allocation. See the article in CIO magazine here.

Bonds

Each time we think the 40-year bond bull market in bonds is over, the markets correct and we are reminded of what bonds contribute to a portfolio.

One way institutions use bonds is for liability matching. Pension plans need to pay beneficiaries and bonds provide recurring income. Bond income is the mirror image of pension liabilities. For institutions that have regular spending requirements, bonds can provide a stable source of cash flow. This is a tough sell for the individual investor.
Bonds are also used in risk mitigation strategies. During the first quarter of 2020, investors saw how this can pay off. When markets correct, bonds are a buffer. They can act as a safe place during periods of market turmoil. They hedge the risk of owning shares and importantly can also act as a reserve to take advantage of market dislocation opportunities. Think ‘dry powder’. This is an easier sell for the individual investor.

Mawer has said ‘Bonds are boring. They’re supposed to be.’

Ian McGugan has written ‘Bonds are there for the rare, brutal occasions when the economy sours, dividends fall and stocks tumble. Bonds can shield your wealth during those rough patches and prevent you from having to liquidate your stocks at their lowest point. Better yet, bonds can provide you with the wherewithal to take advantage of any stock market bargains that emerge. Wise investors aim to protect themselves against whatever scenario might come. The easiest way to do that is by holding both stocks and bonds’. See ‘Why Bonds Aren’t Dead Yet’.

Read ‘Low Bond Yields Test Investor Patience’.

Also revisit the Vanguard article. ‘If bond yields can’t go much lower, then their prices (which move in the opposite direction) can’t move much higher. But bonds still can fulfill their mission as a balancing influence for ever-volatile equity’.

Stocks

The PIAC allocation to equities was 32% at the end of 2019. That’s a drop from 42% 10 years ago and 55% 20 years ago. Significantly, Canadian equities have declined from 28% (2000) to 16% (2010) to 4% at year-end 2019.
Recall that in 2000 the RRSP foreign content limit was increased from 20% to 25% and it was further increased in 2001 to 30% and removed entirely in 2005. Investors continue to pursue a Global opportunity market set.

Alternatives

Also significant is the increase in Alternatives allocations from 7% (2000) to 22% (2010) to 42% a year end 2019. Alternatives are mainly Real Estate, Private Equity and Infrastructure. It’s easy to add a REIT ETF for Real Estate exposure and there are more and more options for individual investors looking to add Infrastructure and or Private Equity.

Cash

Have cash. To meet spending needs. To take advantage of opportunity. Reread this.

Returns

Returns for 2019 were healthy. The RBC pooled fund report indicates the average balanced fund produced a 15% return for 2019. For the individual investor whose portfolio looked similar to the PIAC composite average portfolio, their returns may have approximated 15% and longer-term returns of 5% to 8% on average.

The message is to have some bonds. Have some cash. Have some real estate. Prepare your portfolio for a range of outcomes. Individual investors can replicate institutional strategies by approximating the PIAC allocations for their own portfolio.

_____________________________________________________________________________________
Doug Cronk CFA, PRM