Investment Allocation Trends
Over the last few decades there has been a growing trend from institutional investors, like pension plans, to diversify beyond stocks and bonds into alternative investments.
So, what are the alternative investments that pensions are allocating to?
Some include private equity, private credit, real estate, infrastructure, and hedging strategies. In fact, as of the end of 2022, the 10 largest pension plans in Canada[i] had an average of 46.2%[ii] of their assets invested in alternatives.
This is in stark contrast to wealthy individual investors (those with $1-$5M in investable assets) who hold an average of 5%[iii] in alternative investments.
Why the large divergence in allocation strategies between institutional and individual investors?
One reason is access and high minimums. Alternative investments are more difficult to access for individuals and are often reserved for institutional investors or accredited/qualified investors, typically coming with high minimum investment amounts.
Another reason is liquidity. Alternative investments are often illiquid, meaning your money can be tied up for an extended period. For individuals who may need access to their funds for short-term needs, this lack of liquidity can be a significant drawback.
Another reason could be complexity. Alternative investments are often complex structures that require a level of expertise and due diligence that the average individual investor may not possess. Some structures such as draw-down strategies, may be more complex and cumbersome to purchase, potentially leading to lower adoption rates.
Institutional and pension investors have looked passed some of these challenges and have increased their exposure to alternative investments.
The inclusion of alternative investments in a diversified portfolio can help spread risk across different assets, which may behave differently than stocks and bonds during various stages of an economic cycle. The expanded opportunity set may also offer a range of other benefits, including consistent cash flows, inflation protection and higher risk-adjusted returns[iv].
At Westmount Wealth, our goal is to democratize access to private markets by investing in many of the most common alternative asset classes employed by large North American pension plans. Although alternatives are not appropriate for all investors, we aim to harness the benefits of alternative investments while respecting the liquidity and risk mitigation needs of our clients. Our work lies in finding the right balance for them and embedding it within a planning framework.
This information has been prepared by Matthew Evans, CFP®, CIM® who is the Chief Investment Officer and a Portfolio Manager for Westmount Wealth Management Inc. Westmount Wealth Management Inc. is registered as a Portfolio Manager in British Columbia, Alberta, and Ontario, Canada. Westmount Wealth Planning Inc. is a subsidiary of Westmount Wealth Management Inc.
[i] Source: Pension Plan Investing, Starlight Capital July 27, 2023, White Paper: 10 largest pensions in Canada based on 2022 Annual Reports: CPPIB, Caisse de Depot et Placement du Quebec, OTPP, PSPP, BCI, AIMCO, OMERS, HOOPP, OPB, OP Trust.
[ii] Source: Pension Plan Investing, Starlight Capital July 27, 2023, White Paper: Simple average of alternative exposure of 10 largest pensions in Canada based on 2022 Annual Reports
[iii] Source: Bain & Company: Global Private Equity Report 2023. Sources: Prequin, GlobalData, Bain analysis.
[iv] Source: Guide to Alternatives: 3Q 2023 JP Morgan Asset Management. Based on annualized volatility and returns from 1989 – 1Q23. Alternatives include hedge funds, real estate, and private equity, with each receiving an equal weight. Portfolios are rebalanced at the start of the year.
