Research sheds light on how Canada stands apart, as well as calls for change in three areas
Given the moderating growth outlook for the markets along with rising trade tensions and geopolitical turbulence, institutional investors are increasingly on the hunt for market-movement insulation along with strong returns — features offered by alternative assets. And according to research by CIBC Mellon, Canadian institutions are standing at the forefront of that shift.
Referring to a survey from BNY Mellon, CIBC Mellon Director of Alternatives Jon Lofto noted that 53% of investors were seeking to increase their allocations to alternative assets over the coming 12 months, while just 12% expected to dial down their exposure.
“The Race for Assets: Canada survey highlights an even stronger appetite among Canadian investors,” Lofto said. It found that 58% expected to increase their alternative allocations over the next 12 months, and the rest expected to simply maintain their exposure levels.
Examining the nature of Canadian investors’ exposure, the survey found that a large proportion (70%) invest through funds of funds. More remarkably, a similar proportion of Canadian institutions (68%) are partnering with other investors to invest in funds as well as direct investments, both of which can lead to improved economics in alternatives. “These routes are far more common among Canadian investors than the well-trodden path of investing in traditional fund structures,” the report said, adding that 55% of investors in the BNY Mellon survey said they were looking to increase their direct investment activity.
The survey also uncovered broadly high satisfaction with the returns from alternatives, with private equity leading the way (47% said that performance exceeded their expectations over the past 12 months, and the rest said it was in line). Results were also largely positive for hedge funds (36% reported outperformance and 64% said returns were in line with expectations) and private debt (25% cited better-than-anticipated returns and just 4% were disappointed).
But the report added that hedge funds “currently account for just 1.4% of respondents’ alternatives allocation, rising to just 1.6% in the next 12 months.” While such funds have become less popular following high-profile governance failures and poor performance compared to historical levels and other alternatives, the report theorized that Canadian investors are satisfied due to being “highly selective in their investment choices.”
With regard to coming changes expected by private fund managers and asset owners, the poll uncovered three themes:
- Reduced fees to investment managers (30%);
- More transparency through technological innovation (28%); and
- Increased focus on ESG (22%)
And when asked how they distinguish themselves from global investors, Canadian institutions cited a higher priority on co-investment and direct investment (50%), greater tolerance of investments with long holding periods (40%), and greater emphasis on the use of technology to contain costs (38%).
“The sustained growth in Canadian investors' allocations to alternative assets will continue to be supported by new products and strategies,” said Ronald C. Landry, head of Product and Canadian ETF Services, CIBC Mellon. “Accessing alternatives can be complex and challenging, and demand continues to grow for solutions that provide exposure to alternatives for investors across the spectrum of size and sophistication.”