Canadian Pension funds are one of the largest ‘asset managers‘ in the world. Lately low interest rates have made business difficult for these entities and we are seeing a growing shift towards alternative investments. The trend of moving investment targets is vocal both in the US and Canada. Just like hedge funds are criticized for their want of risky assets like, reinsurance, these pension plans get heat from various circles as they move to riskier trades in real estate, bonds and energy facilities. The Canada Pension Plan Investment Board, with more than $157 billion under management have reduced their exposure in public equity from 45.7 percent to 34 percent till the end of Q2 2012. According to Wilshire Trust Universe Comparison Service, public pension plans with more than $1 billion in AUM, have 15 percent of their capital allocated in alternatives which is the highest ever median range.
The change of preference in the investment plans of pension funds is hard to miss, RBC (NYSE:RY) (TSE:RY) Capital Markets’s equity research details a comprehensive survey of how sentiments are changing in public and private pension funds of Canada. The key points to note in the report is the shift in the majority opinion. Out of the 56 pension plans that were polled, only 29 percent said that they did not plan on changing their capital allocation, contrarily 55 percent of the respondents answered in negative in 2011. 71 percent of the total polled said that the biggest challenge they faced the low interest rates.
48 percent of the respondents said that they planned to invest in alternative assets, like real estate, utility companies, mass transit or road infrastructure, in 2012. On the other hand, only 21 percent answered in affirmative in 2011. RBC’s research also found that the 71 percent of the funds are increasingly low on assets which means that funding level is less than their liability for pension payments.
As the sentiment goes, pension plans are not excited about investing in hedge funds and private equities. Their preference is real estate and infrastructure, as illustrated in the below chart.
How does this work out for RBC’s favorite asset manager, Och-Ziff Capital Management Group LLC (NYSE:OZM), a hedge fund actively followed by RBC? The report thinks that companies like Och- Ziff has enough alternative resources at hand which helps them in offsetting the lack of interest from pension plans. The hedge funds with diversified approaches and stable returns will still look attractive to pension funds. Other big hedge funds that have had some troubles in the past quarters are, The Blackstone Group L.P. (NYSE:BX), Man Group Plc (LON:EMG).
While Och Ziff is not doing hugely well as one would assume from RBC’s glowing recommendation, it is not the only analysis that likes the hedge fund. Citigroup also recommends OZM stock, as we discussed in another post.