Why clients are demanding pension-style asset management

Following strategies used by large pension funds could give investors the edge to outperform the market

Why clients are demanding pension-style asset management

The concept of bringing pension style asset management to individual or retail investors may not be new, yet it is still a widely under-utilized strategy. Going forward, finding ways to manage volatility is going to be become increasingly important and investors will be forced to think outside the box to achieve decent returns. Following strategies used by large pension funds could give investors a much-needed edge to outperform the market.

“Retail investors tend to gravitate to the old approach of the 60/40 portfolio balanced portfolio,” says Danny Popescu, President and CEO, Harbourfront Wealth Management. “Unfortunately, that strategy doesn't always work particularly well, especially in a rising interest rate environment.”

For a number of years, pension funds have been continuing to increase exposure to alternative asset classes, like private equity and private debt, in order to mitigate the fluctuations of the public stock markets. “Because such investments aren’t actively traded on an exchange, you don’t get the same level of volatility,” Popescu says.

“If, all of a sudden a worrisome event happens, investors get jittery and start to sell securities and drive down prices in the public market. In a private investment, there is no secondary market so you can’t drive a valuation down. Pension funds also have large investment committees who regularly interview and follow all kinds of portfolio managers and family offices. They also regularly use derivatives in order to minimize risk.”

It’s clear that allocating a portion of a portfolio to investments not correlated to the will of the public market is a key ingredient of success, so why are more advisors and investors not following the lead of pension-style asset managers?

“There is a misconception that alternative investments have a higher degree of risk, but people are starting to realize that is not always the case,” Popescu says. “That’s not just investors but also financial institutions and even the regulatory bodies. Attitudes are changing, but it has been the challenge for a number of years.”

Popescu believes advisors have an important role to play in changing the way risk is perceived among Canadian investors. He thinks advisors first need to become educated on the opportunities available in the alternative market and how they might fit their clients’ risk profiles.

“Investors used to think that investing in different stock markets would help them achieve diversification, but with the rise of globalization it’s becoming more difficult to get true diversification in equities,” Popescu says.

“Alternative investments, particularly private debt, give investors access to products not correlated to public stock markets. They also provide regular and predictable streams of income and increase the odds of a client meeting their objectives, which reduces sleepless nights.”

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