Despite the benefits of in-house asset management, some pension plans are highly motivated to outsource.
By Ed McCarthy
An important element in the success of large Canadian pension plans has been the shift to in-house management to reduce costs. A July 2020 research paper, “The Canadian Pension Fund Model: A Quantitative Portrait,” coauthored by researchers at CEM Benchmarking Inc. and McGill University’s Desautels Faculty of Management, found that “Canadian funds manage on average 52% of their assets in- house, while non-Canadian funds only manage 23% of their assets internally. For the very large funds that manage more than USD 50 billion, the gap is even more pronounced: Canadian funds manage on average 80% of their assets in-house while non-Canadian funds only manage 34% internally.” That approach has paid off for the funds surveyed: The authors estimate that “by managing a high proportion of their assets in-house, Canadian funds reduce costs by approximately one-third.”
The shift to in-house asset management is likely to continue, according to the first chapter of CIBC Mellon’s recent research report, “In Search of New Value.” The study notes that 22% of pension fund assets are currently managed in-house and sponsors anticipate increasing this to 28% in the next 12 months. Real estate (58%) and equities (48%) are the asset classes where the largest portion of pension funds plan to increase in-house management over the next 12 to 24 months.
Partners’ Important Role
Nonetheless, plans continue to rely heavily on outsourced investment managers and partners. This reliance stems partly from internal constraints: The CIBC Mellon study found that 70% of survey respondents said that in-house expertise was a challenge to increasing in-house management. In-house technology capability was the second most frequently cited constraint at 60%.
The CIBC report identified several primary motivations for working with external asset managers. The most frequently cited reasons included better projected returns (58%); broader expertise and specialist services (56%); and complexity of the investment fund (52%). Risk control also influences plans’ thinking: 46% listed transfer of operational risk and 42% listed better risk management among their top three drivers for outsourcing.
Recent activities highlight the ongoing use of external managers and partners. In late November, Alberta Investment Management Corp. (AIMCo) announced that it was partnering with another pension fund and the Montoni Group to acquire a 4.3-million-square-foot property in the Industrial Ecopark in Saint-Bruno-de-Montarville for a total investment of roughly $400 million. In a press release, Tony Vadacchino, Vice President, Real Estate, AIMCo, said, “Logistics remains a high conviction sector for AIMCo, and we look forward to partnering with a best-in-class developer that shares our commitment to environmentally sustainable best practices. We believe the joint venture is well positioned to capitalize on the demand for modern logistics facilities.”
Caisse de dépôt et placement du Québec (CDPQ) is another active participant in forming investment partnerships. In September 2020, CDPQ and S2G Ventures (S2G), a multi-stage investment firm, announced “the creation of a co-investment partnership where CDPQ will invest up to US$125 million over the next three years in ventures that aim to make the food and agriculture industry more sustainable and climate friendly.” In April 2021, CDPQ and Energize Ventures announced a new co-investment partnership under which CDPQ will invest up to US$125 million over the next three years in ventures that aim to accelerate the digital transformation of energy and sustainable industry sectors.
Mario Therrien
Mario Therrien, Head of Investment Funds and External Management with CDPQ in Montreal, notes that while nearly 90% of investments are managed internally, CDPQ uses external management when it wants to benefit from investments in sectors or markets that require a specific expertise. “This is complementary to our direct investment strategy and provides access to market intelligence, diversifies sources of information and offers a pipeline of different investment opportunities,” says Therrien.
Ed McCarthy is a longtime financial writer and author of three books, including “Foundations of Computational Finance with MATLAB.”
