Canadian Investment Review

Canada stands out on alternative asset allocation: survey

Written by Yaelle Gang on Monday, May 27th, 2019 at 9:01 am

Night city, vector town, vector lines overpass, bridge, underground, train, vector design © Dmitri Luchinovich /123RF Stock PhotosCanadian investors are keen to increase their allocations to alternatives over the next 12 months, according to a new survey by CIBC Mellon.

Specifically, 58 per cent of Canadian institutional investors surveyed said they expect to increase allocations to this asset class and none said they expect to reduce allocations.

This contrasts global findings in a 2017 BNY Mellon survey, which showed a similar number (53 per cent) of investors globally were seeking to increase their allocations over the next 12 months, while 12 per cent expected to decrease their exposure.

“The biggest takeaway was that none of our respondents from our Canadian survey expect to decrease allocations to alternatives at all,” says Jon Lofto, director of alternatives at CIBC Mellon. “In fact, more than half of them wanted to increase. So this [is a] divergence from [their] global peers, where there is a small cohort that does expect to decrease their allocations, but in Canada it’s the opposite even though we have a higher allocation already to these asset classes.”

Within alternatives, the survey found Canadian investors, on average, were allocated 42 per cent to real estate, 20 per cent to infrastructure, 18.7 per cent to private equity, 17.9 per cent to private debt and 1.4 per cent to hedge funds.

This compares to the BNY Mellon survey, which showed the breakdown was 26 per cent private equity, 25.2 per cent real estate, 23.4 per cent private debt and loans, 18.6 per cent infrastructure and 6.8 per cent hedge funds.

Of note, Canadian investors preferred real estate, versus a global preference for private equity.

“I think it could largely be attributed to the post-crisis 2008 environment,” says Lofto, speaking about why Canadians are more allocated to real estate. “The fact that interest rates were low, valuations were depressed and real estate — having an income orientation and these lower valuations — fueled the growth and the allocation change.”

Although real estate has been dominant since post-crisis, Lofto says this is cooling. “There’s lower growth in China, interest rates are rising in . . . North America and it’s caused a change in outlook and a correction in valuations for real estate.”

When dealing with fund managers over the next 12 months, the survey found three areas Canadian asset owners and private fund managers want to focus on: reducing fees, increasing transparency and elevating sustainability factors.

The survey also found Canadian investors have a large capacity for finding innovative ways to access alternatives.

Seventy per cent of Canadian investors said they use funds of funds to get exposure to alternative assets, followed by partnering with other limited partners to invest in funds (68 per cent), direct investments and/or joint ventures (68 per cent), traditional fund structures (54 per cent), an outsourced alternative investment function (44 per cent), co-investments (36 per cent) and separately managed accounts (16 per cent).

As a result of building in-house talent and expertise on how to manage these assets, Canadian funds are finding creative ways to work with managers to achieve their goals, says Lofto. “Getting into co-investments and structures that are fund of one, or something, gives them not only an opportunity to lower fees, but they’ve found ways to use it to get their [environment, social and governance] requirement taken care of or — if they’re writing big tickets with managers in co-investments — they can also have some control over the investment discretion and also the transparency that they receive.”

The survey also found, overall, Canadians have less of a home bias than their global counterparts when it comes to alternatives.

“I think that Canadian investors are just perhaps more sophisticated in terms of accepting global exposure and they take an opportunistic approach to investing regardless of the jurisdiction,” says Lofto.

 

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