Pension funds urged to invest in emerging markets

MONTREAL — The Globe and Mail

Don Drummond, the chair of the Commission on the Reform of Ontario’s Public Services, says Canada’s economy is too dependent on the United States. (Fred Lum/Fred Lum/The Globe and Mail)

Canadian pension funds are being urged to invest more heavily in emerging markets to sidestep ongoing financial turmoil in Europe and the United States.

The need to aggressively seek out higher returns is even more crucial given that low interest rates, slow economic growth and an aging population are also putting pension plans under pressure. To compensate, fund managers must devise more innovative investment strategies, institutional investors were told at a presentation Wednesday.

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One of those strategies should be taking a closer look at emerging markets, Don Drummond, the chair of the Commission on the Reform of Ontario’s Public Services and former chief economist at Toronto-Dominion Bank, said at the annual Canadian Pension & Benefits Institute.

“We better get used to two-thirds of the world’s growth coming from those economies,” he told the luncheon audience. “We don’t, unfortunately, have a large weighting in the emerging countries.”

Canada’s economy is too dependent on the United States, which is still experiencing serious economic problems and slow growth, Mr. Drummond said.

Markets such as China, India and Latin America are growing four times as fast as the developed countries’ economies, said George Hoguet, senior portfolio manager at State Street Global Advisors.

At the same time, managers must keep in mind the potential negative impact on developing countries of financial troubles in the developed world. “We clearly have to acknowledge that the risks to the global economy are to the downside,” Mr. Hoguet said.

For instance, George Attali, special adviser to the President of France and founder of the European Bank for Reconstruction and Development, said the European Union risks falling apart unless a single strong state with decision-making powers is added to the single currency.

Mr. Hoguet said market players have increased the odds to slightly above 50 per cent that Greece – facing new elections this month – will end up leaving the 17-member euro zone.

“I believe the euro zone will survive but some countries will exit,” he said.

Mr. Drummond said pension fund managers face a big challenge trying to produce decent returns while low rates, slow growth and an aging population are resulting in underfunded plans.

As a result, pension fund managers are looking more and more to non-traditional assets such as infrastructure investments, private equity and hedge funds, he said. “Increasingly you see pension funds becoming more innovative and further out on the risk curve.

“You’re going to have to work extremely hard to be inventive” to maintain decent rates of return, he told the audience.