New fixed-income investments added to Bond Fund

As a member of the CSS Pension Plan, you have options when it comes to investing. We offer a simple four-fund lineup, giving you choices to invest your pension funds in any or all of the Balanced Fund, Money Market Fund, Equity Fund or Bond Fund.

Each investment fund offers different levels of risk vs. return, and we frequently analyze the changing marketplace with the goal of improving risk-adjusted returns for members. Current trends show capital markets are expected to produce lower returns than they have in the past 30 to 40 years, an outlook supported by the Plan’s  investment consultant, Mercer, and the marketplace.

To help offset expected lower returns, we are making changes to further diversify the fixed-income (i.e. bonds) components of both the Balanced and Bond Funds.

NEW MANDATES INCLUDE EMD AND COMMERCIAL MORTGAGES

Earlier this year, the Plan added an Emerging Market Debt (EMD) mandate to the Balanced Fund – our default investment fund that approximately 93% of CSS members are invested – and also increased the allocation to Commercial Mortgages with the aim to further diversify and improve returns on the fixed-income portion of the fund.

The Plan is now making similar adjustments to the Bond Fund, which are expected to be in place in the fourth quarter of 2018. 

The reason for the change? The 10- year median return expectation of Canada Universe Bonds – the current fixed-income allocation within the Bond Fund – is lower at 2.02% than the return expectations for both EMD and commercial mortgages, which sit at 5.93% and 3.95% respectively. However, in both the EMD and Commercial Mortgage asset classes, we must also consider the relative risk expectations (volatility) and diversifying properties (correlation). While volatility measures the expected ups and downs of the markets,  correlation measures the degree to which the asset classes move in relation to each other.

To help test this, the Plan together with our investment consultant, Mercer, performed modelling exercises and scenario testing which considered the return, risk and correlation expectations of the Canada Universe Bonds, EMD and Commercial Mortgage asset classes in various proportions within the Bond Fund. The output from these exercises provides us with a picture of how each potential option for the Bond Fund might perform over the next 5-, 10- and 20-year periods.

The analysis shows that an allocation of 65% Canada Universe Bonds, 24% Commercial Mortgages, 10% Emerging Market Debt and 1% Short Term provided the best expected outcomes across 5-, 10- and 20-year periods and various market environments.

The new allocation is expected to produce a median return of 2.9% with a volatility (risk) of 4.5%. Both measures for this new Bond Fund show improvement over the current Bond Fund expectations (2.02% return, 5.3% volatility).

The new asset mix and its risk and return characteristics are expected to better position the Bond Fund within the Plan’s investment fund line up.

Article from the fall 2018 issue of TimeWise