Investing Lessons From Big Pension Funds

Pension funds are an essential part of many Canadian retirement plans. These major funds have to be wise with the money they invest to ensure they can provide retirement income to all those people. These big funds must consider the long-term outlook for the fund and numerous moving pieces, including return rates, management fees, and inflation. 

Big pension funds do a great job of investing so that their returns sit between 4 and 5%. This makes them a great place to look for ideas on how we, as individual investors, can balance our own portfolios to have better returns. 

Here is what we can learn from the Big Pension Funds:

Reduce your fees.

Some managers of major funds have requested that the fund managers reduce their fees so that the fund’s overall management expense ratio (MER) is lower. This means more money in the pockets of the investors and the individuals relying on that pension fund. As an individual investor, you may not be able to request lower fees, but you can shop around for investments with lower fees. 

Inflation Protection

The average inflation rate within Canada in 2022 was 6.8%. When we look at traditionally “safe” investment vehicles such as savings bonds or GICs, the expected rate of return is between 1-3%. For many investors, this means their money is losing value over time. For someone hoping to retire, having their money be worth less upon retirement is enough to make them look for investment opportunities with higher returns that can compete against inflation.

Big pension funds recognize this and have looked for asset types that typically rise with inflation. Some examples are inflation-adjusted bonds, currencies, and real estate. Finding the balance between inflation protection and risk is something that big pension funds do very well. For example, investing in currencies may help with inflation protection, but it is far more volatile. For this reason, currencies aren’t a typical investment option for big pension funds as this method goes against the patience approach and is too high risk. 

Diversification

One of the most significant lessons that can be learned from large pension funds is the importance of diversification in investments. Pension funds must ensure that their investments are diverse enough to spread risk and protect against market fluctuations. One way they can do this is by investing in various assets, including stocks, bonds, and real estate.

Take a look at how your portfolio is split between different investment types. Re-evaluate the portion of your portfolio that is in low-risk investments, as these could be providing lower returns than the current rate of inflation. Conventional, big pension funds held around 40% bonds and secure investments at one time. Due to price erosion and inflation, this is no longer the case. Modern big pension funds have reduced bond exposure to 20-30%. Many contemporary pension funds are allocating a more significant percentage to private investments such as real estate. 

When it comes to real estate investing, in particular, pension funds have always been interested in this alternative asset type. In 2019, Canadian pension funds held around $278 billion in property. This essentially makes Canadian pension funds the largest real estate owner in Canada. Real estate investing makes sense for these large funds as, generally speaking, real estate grows in value over time and outperforms inflation rates. 

Pension funds have typically found that investing in commercial properties, such as office buildings and shopping centers, can be a good way to generate steady income over the long term. This is because these properties are often leased to tenants committed to long-term leases, providing a predictable income for the pension fund. However, in the past few years, many Canadian pension funds have started buying up multi-family homes and rental housing developments, suggesting a shift in market trends. The pandemic led to an all-time high in office vacancy, which could have contributed to the shift away from commercial office buildings towards residential real estate ventures.  

Real estate can be more complex and demanding to navigate than other asset classes, so it’s essential to have the right expertise and resources to properly evaluate and manage the assets. A dedicated real estate team or partnering with experienced real estate investment managers can provide the necessary knowledge and skills for success. Our team at Cooper Pacific is dedicated to helping you save for your future goals through diversified real estate investing in a pooled fund. To learn more, get in touch with Jordan on our team. 

Overall, large pension funds serve as a reminder of the importance of diversifying investments, being patient, and making well-informed decisions when investing in real estate. Take these tips and apply them to your personal portfolio.