Canadian institutional investors continue to rebuild and show their resilience amid the persistent remote working environment and across shifting market, regulatory, and stakeholder needs. Change, challenge, and opportunity continue to accelerate. The potential for renewed volatility and market disruption continue to weigh on asset owners as they contemplate the investment, operational, and risk management lessons from the pandemic.

Asset owners have recognized the critical importance of data and technology capabilities that can easily support an internal team’s ability to understand, execute, and justify investment decision-making; the pandemic-driven, sustained remote and hybrid working environment has significantly accelerated this trend. Delivering against rising needs requires taking a different approach from the past, as well as a digital and data-driven mindset and skillset.

Institutional investors are looking to data for a competitive advantage, to help more meaningfully gather asset allocation, improve investment performance, and other imperatives. Whether managing assets in-house or overseeing allocations entrusted to outside managers, institutional investors and allocators are increasingly focused on managing and using data to drive competitive advantages that can off-set fee and cost pressures. They also recognize the importance of improving the stakeholder experience and addressing key stakeholder demand for increased transparency across asset classes. Increased transparency is a driving factor behind the need to achieve pan-asset class reporting. Clients are seeking to understand their exposure on both the private and public sides of their multi-asset class portfolios. Asset owners, allocators, and their managers are paying close attention to both sides of the performance equation and looking to hold both internal and external asset management teams accountable for both costs and returns.

Right Mix

Taking all the challenges associated with investing in alternative assets into consideration, determining the right mix of investments, and executing on that strategy is critical to the success of asset owners. Some are used as longer-term investments, and receiving an accurate valuation of an investment like private equity or real estate at any given or specific time can be difficult – valuation of these assets is lagged, meaning reporting isn’t always current. Others, like funds of hedge funds, offer little visibility into the value of underlying funds that make up each hedge fund. Asset owners are responsible for collecting investment data and turning it into meaningful information for investment committees, boards, trustees, plan members, and other key stakeholders. This can be challenging for asset owners that don’t engage extensively in alternative asset classes, as alternatives add a level of complexity that can make it an even greater challenge.

According to the first chapter of CIBC Mellon’s new research series, ‘Taking Control: Canadian Asset Owners Transform To Face Uncertainty,’ 68 per cent of asset owners are accelerating their investments in alternative asset classes – such as funds of hedge funds, private equity, real estate, and liquid alter- natives – in an effort to find new ways to diversify their portfolios, increase alpha, and reduce risk. Alternative assets ‒ such as private equity, real estate, infrastructure, and private debt ‒ have been viewed as offering institutional investors shelter for their capital from short-term risks and market movements while also generating strong returns.

There are many different investment strategies for institutional investors, such as increased alpha, increased beta, de-risking glide paths, co-investments, and liability driven. As our original research reiterates: asset owners are employing a diversity of approaches and no one size fits all. With that being said, some sizes fit more and asset owners are building, exploring, and deploying a diversity of approaches based on their unique strategic goals.

Accelerating Data

Institutional investors seek comprehensive solutions allowing them to lever- age their own data to improve the investment process while obtaining a single view across their multi-asset portfolio. Clients require deep expertise and a comprehensive solution set that offers transparency across an array of data sources and requirements. A few examples include traditional and alternative asset classes, solutions to track manager fees, and capabilities to monitor and manage environmental, social, and governance (ESG) factors and more. A provider that can offer transparency across asset classes at the total portfolio level is key to managing the investment process. Technology is also widely regarded as a route to the greater transparency that investors are now demanding. New tools that connect investors with detailed information about the way their funds are performing – and how they are managed – offer exciting advances in this regard.

As allocations to alternative investments rise, there is increased demand for pan-asset class analytics and flexible, integrated reporting. Asset owners and their managers face complex risk pressures such as complying with new regulations, managing transparency concerns, and mitigating investment risks across diverse asset classes. They need the support of robust analytical tools on the front lines of risk management.

When investors stay at the table and set clear expectations for companies they own and the external managers they partner with, they can encourage and support the transition to more resilient, net-zero world. We need to encourage these same parties to provide us and other market actors with sufficient climate-related disclosures to support informed investment decisions and help evaluate progress against decarbonization targets.

There are many tools available to investors to assist and amplify their engagement efforts, including Climate Engagement Canada, Climate Action 100+, and the Institutional Investors Group on Climate Change. Partnership with these groups can help ensure engagement activities are informed by science and that investor requests are aligned and consistent wherever possible.

Engaging external investment managers in dialogue not only establishes investor expectations, but also provides the opportunity to encourage managers’ bilateral and collaborative engagement with companies they own on behalf of their clients to promote multi-tiered alignment on climate objectives.

Sustainable Pension Promise

While challenging, targeting net-zero portfolio emissions by 2040 is prudent and our way of delivering a sustainable pension promise while helping a more rapid decarbonization of the global economy. Climate stability is essential for pensions, members, and the community we all share.

We offer the above key learnings from developing our Climate Action Plan, recognizing that the coming transition will present risks and opportunities for investors of all sizes. This is not a challenge solved in isolation and concerted action and partnership amongst financial leaders is no longer a nice to have, it is necessary in fulfilling our collective fiduciary duty.

Alistair Almeida is the Executive Director and Segment Lead, Asset Owners at CIBC Mellon.