Pension style investing
Symmetry Portfolios: Optimal returns, risk controlled
Every month millions of people receive a cheque from the Canada Pension Plan (CPP) – a critical source of income for many retirees. And the CPP’s ability to consistently deliver those monthly payments is why the $200-billion fund is ranked among the world’s best. In fact, The Economist calls the CPP Investment Board (CPPIB) and other major Canadian plans like it the Maple Revolutionaries, “who’ve won the attention of Wall Street which considers them rivals, and institutional investors who aspire to be like them.”
The CPPIB, and other Maple Revolutionaries like Caisse de dépôt et placement du Québec and the Ontario Teachers’ Pension Plan, have changed to ensure their long-term sustainability. In fact, in 2000 the CPPIB had assets of $44.5 billion and 95% of the fund was invested in fixed income securities. At the end of March 2013 it had a 50% weighting in equities, 33.1% was in fixed income and 16.9% was in hard assets, such as revenue-generating toll bridges and real estate. It has also reached outside of Canada, with 63.3% of the fund invested internationally, and says CPPIB President Mark Wiseman, “We expect this portion to grow as we capitalize on long-term trends in the global economy.”
At the heart of the CPPIB’s strategy is controlling risk. As part of that process, managers calculate what they call a “risk budget.” This requires them to weigh a number of factors from interest rates to economic growth and rests on the assumption that every security – whether fixed income or equity – carries risk and performs in a unique way. And to reduce risk, the CPPIB’s asset base is broadly diversified across global markets. This is because Canada represents just 4% of world equity markets, and being heavily concentrated in domestic equities would put the CPPIB at risk if Canada or Canadian equities underperform. But by investing broadly in equity markets across a number of countries, some will perform well while others decline. In the final analysis, this diversified investment process is one of the reasons that has allowed the CPPIB to build portfolios that consistently produce positive returns over the long term and pay out billions of dollars annually.
Pension-style investing with Symmetry Portfolios
The Mackenzie Asset Allocation Team, which manages Symmetry Portfolios, is headed by Alain Bergeron, the former Vice President of Global Asset Allocation at the CPPIB. And like the CPPIB the Asset Allocation Team’s goal is twofold: control risk while generating optimal returns. But the level of risk individual investors will accept in their portfolio varies, which is why Mackenzie Investments offers seven Symmetry Portfolios designed to meet different risk/return profiles. Advisors simply have to work with their clients to determine what level of risk they are willing to accept to achieve their financial goals, and then choose the portfolio that is most closely aligned with their risk tolerance.
For example, Symmetry Fixed Income Portfolio has a low risk threshold and targets a 100% weighting in fixed income products, including government bonds, investment grade corporate bonds, high yield bonds, senior secured loans and real return bonds. The remaining six Symmetry Portfolios contain a larger proportion of equities. For example, Symmetry Balanced Portfolio targets a 50% weighting in fixed income and 50% in equities, while at the aggressive end of the spectrum Symmetry Equity Portfolio targets a 100% equity investment.
Asset allocation: the key to lowering risk
To bring Symmetry Portfolios’ pensionstyle investment approach into clearer focus, let’s look at how assets are allocated in Symmetry Moderate Growth Portfolio. It is widely diversified by company, sector, investment style, geography and market cap. As of December 31, 2013, over 31% of Symmetry Moderate Growth Portfolio was invested in foreign equities and 19% in domestic equities for growth potential.
But to control risk, a number of checks and balances are built into the asset mix. For example, it holds 5.5% in smallcap equities which can be volatile. But this is countered by an 11% weighting in low-volatility equities, which tend to produce consistent, stable returns. To further reduce volatility it is invested 33% in fixed income, including government and investment grade corporate bonds, which are expected to deliver consistent returns in the portfolio if equities sell off.
Pooled assets for better return potential
Like the CPPIB, Symmetry Portfolios are built primarily from focused equity and fixed income pools that are customized and fully invested. This approach allows more precise portfolio-based, target allocations that are directly aligned to defined risk tolerances and return needs.
Ongoing, active rebalancing
To make sure current allocations do not stray from their investment targets, CPPIB managers maintain a benchmark, what they refer to as a “reference portfolio.” Similarly, Symmetry Portfolios always strive to maintain their original risk profiles. And to do that, they are constantly monitored and when necessary, rebalanced by the Mackenzie Asset Allocation Team. For example, if the allocation of equities in a Symmetry Portfolio climbed sharply, the team would automatically rebalance equity and fixed income weightings in the portfolio to ensure your clients stay within the level of risk they are comfortable with. And because net cash flows into the portfolios are positive, they can be rebalanced without selling any securities and this avoids triggering a capital gains tax.
Diversifying by management style
To build Symmetry Portfolios, the Mackenzie Asset Allocation Team has access to some of the world’s best portfolio managers from inside and outside of Mackenzie Investments. This adds another layer of diversification and lowers risk by including managers who have contrasting investment strategies, with expertise in different areas of the market. Among a number of other strengths, they are judged on performance and their ability to stick to their investment style. And once they are hired, the team continues to analyze their performance to ensure their approach is consistent with the desired risk/reward profile for that portfolio.
Controlling currency risk
The Mackenzie Asset Allocation Team also takes steps to build return potential while controlling the risk that fluctuating currencies pose to investors. They do this by taking an active approach to currency management, with the flexibility to hedge investments back to the Canadian dollar.
How a pension-style approach works for you
Canadians receiving a CPP cheque never have to worry about how it’s invested – they just know the money will be there at the end of the month. And that’s the way we want you to think about Symmetry Portfolios – you don’t have to worry, because we’re constantly monitoring your clients’ investments while striving to produce optimal returns.
Symmetry also allows you to place clients with smaller amounts to invest in the same portfolio as someone with $800,000 to invest – and both will benefit from the same portfolio oversight and investment strength. And that leaves you more time to build your practice
The use of the term or phrase “pension [or ‘institutional’] style investing” (“phrase”) should not be misconstrued as a claim of compliance with the Pension Benefits Standards Act of Canada. The phrase used in respect of Mackenzie Investments’ Symmetry Portfolios refers to its selective use of pools. Pools are simply separate accounts, or mandates, in which portfolio managers are provided with guidelines that complement other mandates within a larger long-term portfolio. In the case of Symmetry Portfolios, Mackenzie Asset Allocation Team ask portfolio managers to invest within specific guidelines exclusively for Symmetry Portfolios. Examples of Symmetry Portfolio guidelines may be: no cash held in a portfolio; Canadian equity securities only; utilize a consistent value bias and a threshold on market cap.