Many financial advisors struggle with building portfolios based on long-term, strategic asset-mix considerations. There are myriad reasons: compensation geared toward commissions; a focus on stock research and selection; and an absence of asset class modelling and tracking tools.

However, as aging baby boomers stream into retirement in ever- growing numbers, they increasingly will demand a more strategic approach to portfolio management. For many advisors, a good starting point for familiarizing themselves with this approach is to give Canadian pension plans a closer look.

According to the Pension Investment Association of Canada, the overall asset mix of its membership’s defined-benefit plans in 2013 was composed of 41% equities; 29% fixed-income; 15% real estate and infrastructure; 8% private equity; and 7% in other assets, including hedge funds. This mix is light years away from that of 1990, when 64% was in held cash and fixed-income; 31% in equities; 4% in real estate; and 1% in other asset classes.

The portfolios of pension plans, facing the increasing longevity of their members, have evolved into a more growth- oriented mix. Similarly, advisors counselling retirees need to assess the suitability of their portfolios’ asset mixes relative to their clients’ expected funding requirements. Moreover, a discussion with each client about of the risk of portfolio depletion needs to balance clients’ perennial concerns about cyclical portfolio declines.

Canadian pension plans also have gone global. More than 70% of their equities are allocated to foreign markets, including the U.S. and international developed markets. Emerging markets, out of favour with retail investors, comprise almost 10% of pension plans’ regional equities market allocation. The Canada Pension Plan’s exposure to emerging markets is even higher – almost 12% of that plan’s equities are allocated there.

Pension plans clearly see an opportunity to enhance absolute and risk-adjusted long-term returns by utilizing a global approach. Canadian advisors, many of whom exhibit the same “home bias” as their clients, should examine their clients’ portfolios for undue Canadian concentration.

Pension plans have embraced real estate and infrastructure as long-life assets with income streams that typically increase with inflation and match the long-term funding needs of plan members. A number of mutual funds focus on these asset classes, as well as on a range of exchange-traded funds in Canada and the U.S.

Advisors should note that although publicly traded real estate investment trusts (REITs) have equities-like volatility, studies have found that over long holding periods, REIT performance tracks that of direct real estate investments. A similar case can be made for publicly listed infrastructure-related holdings. Nevertheless, advisors still need to give some consideration to the volatility of these publicly traded vehicles in portfolio allocations.

Advisors will need to develop strategic asset mixes that are customized to the objectives, risk profile and circumstances of any client looking for long-term investment solutions. Canadian pension plans offer some starter lessons.IE

Michael Nairne is president of Tacita Capital Inc. of Toronto, a private family office and investment-counselling firm. The company, its principals, employees and clients may own securities mentioned in this article.

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