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Canada : Public equities and alternative assets are expected to substantially outperform bonds in 2015.

Equity markets performed well in 2014, and had a positive impact on Canadian pension plans, as did the falling Canadian dollar on foreign asset returns, said Diane Alalouf, Investments Leader for Eastern Canada. This was great news for most defined contribution members, but unfortunately was insufficient to offset the negative impact of the level of long term interest rates for defined benefit sponsors, which skimmed 60 year lows at the end of 2014. The Mercer Pension Health Index, which tracks the solvency financial position of a hypothetical defined benefit pension plan, fell from 106% at the end of 2013 to 95% at the end of 2014. While the solvency financial position of almost all defined benefit plans will have deteriorated, the magnitude of the deterioration will vary significantly depending on factors such as asset mix policy, liability characteristics and level of funding contributions made in 2014.

As plan sponsors look to the year ahead, Jaqui Parchment, Investments Leader for Canada advises There are two areas that pension investors should focus on this year : Despite managers modest expectations of alternative asset class returns in 2015, Mercer continues to encourage pension investors to diversify away from their reliance on the equity risk premium. Mercer believes many alternative asset classes, such as hedge funds, real estate and infrastructure will help investors achieve strong returns over the long term with lower risk.

Second, low yields and credit spreads mean that the risks to traditional index-focused bond strategies have increased. Mercer agrees with the manager forecast for these mandates and that flexible mandates with fewer constraints are more likely to add value in this environment. In particular, absolute return bond and multi-asset credit strategies offer material benefits over more traditional approaches to bond investing.

The asset classes that managers are most likely to see increase in allocations include emerging markets (65 per cent), infrastructure (62 per cent), global equities (62 per cent), and low volatility equities (55 per cent). Only 8 per cent of managers expect allocations to Canadian large cap equities to increase.

2014 Al Bawaba ( Provided by SyndiGate Media Inc. ( ).

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Publication:Mena Report
Geographic Code:1CANA
Date:Jan 8, 2015
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