Like most investors, Canadian pension funds are facing challenges due to increased market volatility, but the risks posed by the financial market fallout from Covid-19 are manageable, says Fitch Ratings.
In a new report, the rating agency said that Canada’s 11 largest pension funds, which collectively manage $1.7 trillion, should be able to weather current market conditions without facing ratings downgrades.
“Near-term valuations and returns are expected to be pressured from the economic fallout of the coronavirus pandemic, given the breadth and global nature of its impact,” Fitch said.
However, the large pension funds should be able to handle these pressures, “given their long-term investment horizons, ability to adjust contribution rates and the captive nature of inflows,” Fitch said.
Additionally, funds’ current ratings reflect their strong asset and liquidity levels, solid investment records and relatively stable interest and dividend income, among other factors, Fitch noted.
Pension portfolios are diversified among stocks, bonds and a variety of private assets.
“The long-term investment horizons provide greater flexibility to work through troubled investments, as the funds are not forced sellers of assets,” Fitch said.
The report noted that Canadian pension funds have increased their exposure to private assets in recent years, including private equity, debt, real estate and infrastructure.
“While the illiquidity of these investments can lead to higher returns, they can also yield more concentrated exposures to individual companies or sub-sectors if not carefully managed,” Fitch noted.
Most large Canadian pension funds don’t have outsized exposures to the energy sector, apart from renewables, Fitch said. Fitch noted most pension funds’ real estate investments are diversified among residential and commercial/industrial holdings.
“Some pensions have above-average exposure to retail properties and hotels, which are expected to be more impacted by coronavirus related shutdowns,” Fitch said.
Given their strong liquidity positions, large pensions have the ability to take advantage of investment opportunities, Fitch said, while also remaining capable of rebalancing their portfolios, meeting margin calls, refinancing debt and funding current pension obligations.