As we approach the 2020s, what have we learned about pension investing in the last 20 years?

Record low interest rates and a poor return outlook are making it hard for the overseers and sponsors of large traditional retirement capital pools to meet their defined benefit promises. And this is despite the funnelling of billions into pension fund contributions over the years. 

The first two decades of this century have seen a great diversification away from traditional asset classes. Initially this was framed with intermediaries in mind – funds of funds in private equity and hedge funds were widely promoted. The Yale Endowment was touted as a model to follow. 

After the financial crisis of the end of the last decade, attention shifted away from expensive alpha generation, which had proved largely elusive, and towards illiquid and alternative real assets. 

Canadian pension funds and some of their global counterparts got into private market assets well ahead of the crowd and have consolidated a strategic advantage over the last 10 years or so. 

Others have sought to play catch up. But how is it to emulate the Canadian model? 

liam ipe dec 2019

Keith Ambachtsheer’s original recommendations in the late 1980s, for autonomous, sizeable Canadian public pension institutions with good governance and the freedom to attract talent, remain essential.

With time and the right budget, any well-governed investor with the right scale should be able to recruit and retain the right talent and build up a decent private assets portfolio.  But that’s not the whole story.

Some of the largest Canadian funds can even afford to acquire highly specialist sector-focused resources, putting them at an advantage when they bid for specific assets as they can show they demonstrably add value. 

Together with a longer investment horizon than the traditional private equity fund – potentially even indefinite – this is a strong strategic advantage that multiplies over time. Such patient investors also create a network effect of contacts and privileged access to deals and vendors, not to mention willing co-investors. It is no surprise that large Canadian funds rub shoulders with some of the world’s largest privately owned family conglomerates.

Of course there are downsides. Even the largest Canadian funds may have relatively concentrated private asset portfolios. But it is still the more remarkable that they benefit ordinary Canadians – public sector workers or citizens at large.

As new pools of individual or collective DC retirement capital grow worldwide and new institutions emerge, demand for private assets is only likely to grow. As these new investors emerge, the early mover advantages in private capital will certainly have vanished.

Liam Kennedy, Editor