Canadian Managers Wait

Terry Flanagan

The new asset allocation for Canadian institutions may be to amplify risk management measures and prepare for the worst.

Although asset allocation models differ amongst portfolio managers, portfolio construction has recently heeded increased attention to risk budgeting—aligning the risk allocation more explicitly with the asset allocation process.

Some Canadian institutional managers, though holistically much less scathed by the global financial crisis in 2008 and 2009, has learned lessons from history to be more “flexible.”

“(Because of our bad years on 2008 and 2009), we knew we needed to become more flexible,” said Maxime Tessier, vice president of tactical portfolio and currencies, overlay strategies, at Caisse de Depot Et Placement du Quebec.

The Canadian firm primarily managed private and public pension plans, and has north of $200 billion under management. The firm also conducts 97 percent of fund management “in house,” which Tessier remarked allows for “economies of scale.”

“We needed a bigger risk budget, be more analytical in-house, and need to have effective overlay execution,” Tesssier noted.

For Tessier, asset allocation today is as much about quietly waiting and preparing for a game-changing event, much like the financial crisis three years ago.

“People that are just focused on delivering alpha see trees, and may not see the forest,” he said. “We tell portfolio managers and we’re going to give them lots of money, whether something happens, or doesn’t happen. But if something happens, and you miss it, you’re fired.”

Risk management has become the forefront of portfolio construction in the post-crisis environment.

“We don’t really care about returns that will happen because of investing on average; we’re focused on the tail end of distribution.”

Managing downside risk has become paramount, especially for public pensions that are closely monitoring their liabilities. Tessier’s aggressive risk management method of watch-and-wait for catastrophe may be more suitable for such public plans.

“We can afford to have ties to people who are seemingly doing nothing; it’s not a big expense. But, it’s not commercially viable to explain that portfolio managers are not doing much,” Tessier remarked.

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