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Fixed Income Forum – June 2012
Alternatives to Traditional Canadian Fixed Income
Jamie Colliver
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Traditional Fixed Income
• 40% of a typical plan – largely ignored
• Liabilities - benchmarked to DEX-Universe
• Liabilities in Canadian dollar - home bias
• Volatility reducing anchor in a traditional portfolio
• Most active managers unable to outperform the DEX-Universe - portfolios more passive
• Yield curve dynamics – more return expected from a positive slope
• Limited exposure to corporate credit – index weight
• Slow to embrace structured debt including MBS – mostly policy related issues
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Post 2008 Fixed Income Realities
• Risk adjusted returns
– Move away from asset returns to understanding and quantifying “liabilities”
– Identify sectors
– Willing to take foreign currency exposure
– What is “risk free”
– Liquidity
• Bonds can generate alpha
• Investment policy changes needed
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Fixed Income Today
• Increasing exposure to bonds – liability benchmarks emerging
• Non-Canadian exposure
• More “out of benchmark” allocations
• Total returns – more income
• Proxy for equity
• Sector allocations – “disaggregate the agg”
• Return of the active manager
“Many DB plans have moved to long bonds in order to better align assets and liabilities. If the liability duration is significantly different than that of long bonds and/or as the allocation to bonds increases, it becomes more important to provide liability cash flows to the managers to develop tailored benchmarks”.
From: Benefits Canada, Risk Adjustment, Richard Brown, Towers Watson – April 2012
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Our Philosophy and Beliefs
• Proactive de-risking – dynamic (see chart on page 6)
• Continued volatility – sovereign risks increasing
• Expected return risk premiums – horizon, default, liquidity
• Corporate balance sheets improving – focus on capital structure
• More emphasis on diversification – non Canadian markets
• Alternative Credit Strategies
• Idiosyncratic, security selection key to unlocking relative value opportunities
• Research based platforms supported by experienced sector/industry analysts
Source: Benefits Canada, Risk Adjustment, Richard Brown, Towers Watson – April 2012
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The De-Risking Process
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“The New York City fixed-income allocation also signifies an increasing awareness by public pension plans and other institutional investors of the range and diversity of credit strategies. No longer are pension plans just investing in Treasuries.
Credit managers have shown they can be just as different — and in some cases just as risky — as their equity management counterparts. As a result, institutional investors are starting to look at more creative ways to invest in the asset class”.
From: Pension and Investments, The scarcity of income – May 17, 2012
Industry Views
“Aviva Investors, owned by insurer Aviva PLC, is slashing traditional equity strategies in favor of focusing on fixed income, real estate and multi-asset solutions”.
From: Pension and Investments, Money managers at risk retool, shutter some investment strategies – May 14, 2012
“ Where the governance budget allows, active bond managers with strong credit research capabilities (to anticipate upgrades, downgrades or defaults ) may provide opportunities to enhance returns”.
From: Benefits Canada, Risk Adjustment, Richard Brown, Towers Watson – April 2012
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Canadian Government Bond 10 Year Note ALT
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U.S. Treasury 10 Year Note ALT
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Opportunity Remains
Source: Principal Global Investors
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Opportunity Remains
Source: Principal Global Investors
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Integra Bond Fund ALT
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Integra Canadian Fixed Income Plus Fund ALT
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Principal High Quality Canadian Fixed Income Plus Fund ALT
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Notes
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General Disclaimer
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