Canada’s leading public retirement funds are busy ramping up their already-large portfolio exposure to Asia, with the two biggest – Canada Pension Plan Investment Board and La Caisse de Depot et Placement Du Quebec – among the most active movers.

Some of their peers are an an earlier stage in terms of allocating to the region but are planning to do more, among them the Healthcare of Ontario Pension Plan (Hoopp).

Hoopp has a small proportion of its C$78 billion ($59 billion) in assets under management invested in Asia. The region accounts for one-tenth of its 10% private equity allocation (around 1% of its AUM) and it has minimal listed emerging Asian equity exposure, roughly based on the MSCI Emerging Markets Index weighting.

But that allocation is set to grow, principally through passive and private market strategies, Hoopp's chief investment officer, Jeff Wendling, told AsianInvestor last month. The fund's Asian allocation will rise as a result of redeploying assets from other parts of the world, he said during an in-depth interview.

Jeff Wendling, Hoopp CIO

“Our Asia exposure will continue to go up, and we’ve made more Asia commitments this year, but we’re not where we want to be yet,” Wendling remarked. 

Hoopp will obtain beta exposure to the region passively with a view to keeping costs low and does not plan to use actively managed products or direct stock selection to access Asian equities. 

In any case, Wendling added, “we’re doubtful whether we would add value from direct stock selection or by using active managers". 

Exchange-traded funds and futures contracts are also potential methods of access, given that Hoopp uses them to invest in markets elsewhere.

INDIRECT APPROACH

The pension fund manager does not yet have any exposure to Asia through passive or quasi-passive approaches, such as factor strategies, which select securities based on attributes associated with higher returns.

That said, Hoopp has been running factor investment programmes in-house for about three years, focused elsewhere in the world, said Wendling.

While the fund deploys some 90% of its global portfolio directly through its 60-strong in-house investment team, it intends to gain Asia exposure indirectly for now.

“We use external managers when it makes sense to do so and [when] we can’t do something internally – hence we use external managers in Asia,” Wendling said.

This makes sense given that the fund does not have an office in the region and has no current plans to set one up, unlike other Canadian pension funds, such as Ontario Municipal Employees Retirement System (Omers) and PSP Investment. The latter aims to put a presence in Hong Kong or Singapore soon, while Omers opened a Singapore branch this year. 

Hoopp will continue working with external managers when it comes to private equity in Asia and is looking at doing co-investments in the region. It is also likely to enter other private asset classes in Asia, Wendling said. Real estate is the most likely next step but not for some time.

PREVAILING RISKS

Wendling’s motivations for wanting to build Hoopp's Asian exposure are typical. “We’re positive on Asia long term,” he said. “It’s a fast-growing region – we want to participate in that growth, which is stronger than in other markets."

Risk diversification is another element, he added, “but we’ve seen at times that geographical diversification is not as much of a diversifier as we might think".

In that vein, when asked how he viewed the big fall in emerging market equities this year, Wendling said Hoopp was looking to buy on the dips. MSCI's Emerging Markets Index had lost some 23% as of November 27 since peaking at the end of January after a stellar 2017. 

The selloff presented an opportunity to build exposure to emerging markets, Wendling said, even if the fund had not yet taken advantage of that opportunity when speaking to AsianInvestor.

This year, he noted, Hoopp has been more inclined to take portfolio risk off the table, rather than add to it. Indeed, other Canadian funds have indicated they will be careful about adding assets in Asia in the current environment, while stressing their overall bullishness on the region.

Like many other institutions investing in Asia, Hoopp is drawn to the growing consumer play and is allocating funds to smaller companies in the region. “They are domestic plays on the rise of consumer spending – that’s still a powerful story longer-term,” Wendling said.

Recent global trade tensions are a concern, he admitted, “but we take a long-term view – we feel these issues will be worked out over time. There are risks, but we feel global trade in the longer term is not going to be impacted significantly.”

Look out for another article in the coming days, in which Jeff Wendling outlines Hoopp's approach to private equity investing in Asia and beyond. 

AsianInvestor's cover story in the latest (October/November) issue of the magazine is an in-depth feature on Canadian public pension funds' plans and strategy for investing in Asia.