While many global institutions are eyeing higher allocations to Asia, Canada’s heavyweight public pension schemes have been leading the charge. Yet the turmoil roiling global markets this year has given even this group of truly long-term investors pause for thought.
Canada’s three largest retirement funds – Canada Pension Plan Investment Board (CPPIB), La Caisse de Depot et Placement du Quebec (CDPQ) and Ontario Teachers’ Pension Plan – hold at least $70 billion of assets in the region. And they’re looking to add a great deal more.
Indeed, most of the 10 largest Canadian pensions – which manage a combined C$1.5 trillion ($1.14 trillion) – aim to increase their Asian exposure in the coming years, some by adding staff in the region.
But they must do so while coping with uncharted macroeconomic territory and worries over trade and geopolitical tensions.
“At this point in the cycle, we’re looking to reduce risk somewhat. Asia will get bigger for us, but in the short term there are trade and other economic concerns,” said Jeff Wendling, chief investment officer of Healthcare of Ontario Pension Plan (Hoopp).
Certainly, the C$78 billion fund expects to move into new asset classes in the region in the future, such as real estate.
But the current high levels of uncertainty have led Hoopp to reduce public equity investments over the past few months, particularly to US stocks, he told AsianInvestor last month. It is not alone in making such moves; Korea's Public Officials Benefit Association has nearly halved its foreign stock exposure this year.
Wendling noted: “We want to have the dry powder so that when the cycle inevitably does turn, we can cope with that and then move back in [to certain markets, once prices have fallen].”
That said, Toronto-based Hoopp is looking to buy on the dips in emerging market equities. This year’s big selloff would seem a prime opportunity, but the fund hadn’t upped its holdings as of mid-October, believing further falls were likely.
Perhaps understandably. The US Federal Reserve continues to raise interest rates and Europe slowly unwinds unprecedented levels of global stimulus, while protectionism is becoming more prevalent worldwide.
There is widespread consensus that the global economy is late in its growth cycle, with a downturn coming. Those fears have only been reinforced by the plunge in emerging market asset prices this year, and the financial crises that hit Argentina and Turkey in September.
Other Canadian pensions take a similar view to Hoopp. The timing of building emerging market allocations becomes a bigger focus at times like these, said Anita George, Delhi-based executive vice president of strategic partnership for growth markets at CDPQ.
A key question today, she noted, is how much dry powder to keep for investing in these markets when they might be at a lower part of the cycle?
CDPQ has 11% of its AUM in emerging markets and aims to raise that to 16% by 2022, most of which will be in Asia.
But this year’s volatility in emerging market assets has given CDPQ cause to re-assess “what we are doing in each market; what impact the tensions are having on the sectors we are in, and what effect they will have going forward,” George told AsianInvestor.
Of course, long-term investment-minded pension funds have some luxury to place market volatility in context of their strategic plans.
Alain Carrier, CPPIB’s head of international, said the C$367 billion fund is concerned about trade tensions, but that such issues don’t alter its perspective on geographic asset allocation over the long run.
CPPIB has 15% of its portfolio in emerging markets and plans to increase that figure to as much as 33% by 2025, with most of it in Asia's largest countries.
“We think the rise of China and India as economies is going to be hard to disrupt for the long term,” said Carrier. “Both countries will keep on growing and will be a larger share of investable assets around the world.
“Our goal [of having as much as one-third of CPPIB’s assets in emerging markets] makes sense today,” he added. “But we’ll always retain the flexibility to modify our trajectory or to alter our portfolio forward construction based on external events.”
The cover story in the upcoming October/November issue of AsianInvestor magazine will take an in-depth look at how Canada’s public pension funds are ramping up their investment into Asia. The edition will also include an extended interview with Alain Carrier.