38% of Canadian Pension Funds Are Investing in Alternatives

Driven by a desire to diversify their portfolios at a time synonyms with low returns, it appears that more Canadian pension plans have been choosing alternative investments. Preliminary figures from an ongoing Mercer survey reveal that (so far) in 2013, 38 percent of Canadian pension funds are investing in alternatives, up from 25 percent of investment funds in 2010. Also, the percentage of the portfolio that pension funds' allocate to alternative investments has increased to 18 percent in 2013, up from 15 percent in 2010 (Mercer survey).

Although there is an obvious rise in the popularity of alternative assets, the figures from the survey also revealed that there is not much diversification within the plans’ alternative allocations. It would seem that at the moment, Canadian pension funds limit themselves mainly to real estate and infrastructure. Without much surprise, many investment analysts feel that this is a mistake. Challengers say that pension plans would benefit from venturing into hedge funds, private equity and hard assets. The fact of the matter is that Canadian plans still do not have sufficient knowledge of alternative investments or how to introduce them.

“Alternatives can be complex, so it’s pretty hard to convince people that they need to advance on that front ... A pension fund doesn't want to be the first one investing in a certain alternative so plans look around to see if others are doing it."- Mercer's Investment Management Business Leader for Canada and Latin America

Identifying and implementing are two very common barriers to investing in alternatives, especially for smaller pension funds. Difficulties with implementation range from finding the right money manager, to detailed planning and voluminous paperwork. In this case, the best recourse for smaller pension funds is to delegate the implementation to a third party, to ensure a smooth transition. As for identifying the best alternatives, take the time to do the proper research and learn about investment offerings before making any sort of commitment.