Portfolio Objectives, Construction and Management: Fall 2025
In this tab, we indicate how the Pension portfolio is constructed along with the risk-return objectives that are fixed for each component part. The engagement and monitoring of our fund managers is also described. We indicate the appropriate perspective for assessing the Plan’s results. The second tab is in effect a more detailed version of the material in the newsletter that you have been receiving on a regular basis. The Links tab gives you access to recent Annual Reports. We plan to update these sections each quarter.
​We plan to update these sections are every quarter. We should also reassure you (and ourselves!) that this material presented in these tabs will been vetted by Treasury to ensure that the confidentiality conditions governing the Pension Committee have not been violated.
The capital pool that has been amassed by the Plan now stands around $1.6 billion at the end of 2024. Contributions to the Plan during the year comprised $30 million from members and $40 million from the University. The Plan is supported by some 4000 active members (growing by some 60 during 2024), including 3000 full-time permanent employees, and around 2500 pensioners and beneficiaries (2024 growth of 70).​
Plan management in practice is a balancing act that equates future liabilities of the Plan (i.e., Pension benefits) with the future revenue generated by the pool of capital. In short, the challenge is to match anticipated outlays with anticipated revenues, both as viewed from the present. The financial notion that ties the future back to the present is the discount factor; money in hand brings interest benefits, so future outlays are effectively cheaper (i.e., discounted) by the rate of anticipated financial returns. ​ The actuaries hired by our Plan support our current discount rate of 5.9%. The number is ultimately tied to the expected real returns of the market. It is the number you should focus on when reading our Plan’s Annual Report.
A. How to Read Plan Returns
But even so armed, you must be careful not to be fixated on one annual number. We should be looking at returns over longer horizons, such as 3-year, 5-year or even 10-year. As well, avoid average returns over these horizons; look for compound returns, a calculation that smooths jumps in annual returns during the horizon period. You should also only be happy with returns that are presented as rolling windows over the horizon (for example, where the COVID period occurs at the beginning, then in the middle, then at the end of a ten-year window). Only in this way, can the performance of the Plan be properly assessed during a period of stress.
Here is a recent assessment: In the graph that follows, the performance of the Plan is depicted in this way. The flat line represents the desired 5.9% return objective, the red line the annual return on the portfolio, and the blue line depicts the 5-year rolling window of returns. This overall picture is reassuring in different ways: · Our mid-term rolling returns surpass the Plan’s 5.9% security level throughout the last ten years by some 2% · The Fund’s annual returns have never lost money in sharp contrast with the performance of the NYSE which has been much more volatile with several annual negative returns
The construction of the portfolio that generated theses returns is described in some detail in the next tab. An important risk faced by both the University and members is inflation. The impact on the Plan sponsor is different than that on our members. The University’s budget constraint is tested by increased nominal costs with no guaranteed increase in revenues; the liability side is increased with future outlays increasing with salary. Future returns are uncertain in an inflationary world. By contrast, our members face the inflation erosion of a primary source of revenue extends over their remaining lifetime. Automatic indexation to the level of CPI growth may remedy the shock to pensioner’ income streams. But it may have a negative impact on the sustainability of the Plan. Based on this perspective, we have adopted a conservative approach to indexation that is conditional on the Plan’s return performance prior to the price shock as we now elaborate. The details are given in the Links tab
B. Funding Policy and the Investment Sub-Committee
In 2018, following the adoption of Bill 29 (An Act to amend the Supplemental Pensions Act in 2015), the Board of Governors adopted a new version of the Plan’s Funding Policy; see Link. The act specified a variety of governance procedures that must be adopted by defined benefits pension plans under the province’s jurisdiction. Our Plan had similar policies in place as early as 2011 that elaborated precise funding policies:
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To ensure the continuity of the Plan, including the security of benefits to be provided to pensioners
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To preserve intergenerational equity by minimizing volatility in contributions
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To maintain the Plan as fully funded at a stable and sustainable cost over the medium and short terms-- in other words that maintains the current target of average 5.9% returns
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These objectives can only be achieved through the adoption of a risk-oriented investment culture that achieves the 5.9% return target at the lowest possible level of Plan operational risk. The most impactful risk from an investment perspective involves the loss of capital due to a changing technological or trade environment. Other risks include inflation and demographic changes.
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The Investment Sub-Committee (ISC) of the Pension Committee is charged with finding specific investment strategies meeting these overall performance criteria. It holds day-long meetings (at least) eight times a year to discuss the performance of individual managers, diagnose potential weaknesses, and identify new and promising investment approaches. The two CUPA representatives on the Pension Committee participate as well on the ISC.
C. Plan Structure and Allocation— 2024-2025
The Plan’s funds are allocated to different managers to meet the overall objective of long-term returns of 5.9% with as little risk as possible. In the old days (pre-2005!), this was generally achieved by assigning 60% of the portfolio to several equity managers (higher risk) and 40% to a small number of bond managers (stable returns). But the markets are not as calm as they once were, and the established relationship between stocks and bonds has itself broken down. Moreover, globalization has opened new challenges and opportunities. Investors of institutional fuds are now no longer wary of hedge fund products. The baby-boom generation has amassed a huge amount of pension capital that is searching for return just as we are!
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At Concordia, over the last ten years we have evolved different portfolio allocation strategies. We have engaged some thirty managers with specific profiles. These have been selected and grouped into ‘buckets’ to meet three broad objectives that we have called respectively Capital Preservation (Cash-return + 4%), Growth (Cash-return + 8%) and Diversification (Cash-return + 6%). Each bucket has its own return benchmark (as indicated in parenthesis).
The rationale for this approach is straightforward. Managers in the Growth (20% of the Fund) bucket aim for high returns with an acceptable level of risk; in Capital Preservation (40% of the Fund) the managers exchange some upside return for reduced risk; while Diversification (40% of the Fund) groups different strategies that display independent behavior from the market while their returns are mutually uncorrelated. Here the percentages indicate allocation objectives that are allowed to vary within certain agreed upon bounds. It should also be noted that to reduce concentration risk our investment can total no more than 15% in the manager’s fund nor more than 15% in our own. Portfolio allocation is a dynamic activity. At the outset potential managers must be carefully vetted as to their investment style (do they do as they claim) and past performance (as benchmarked by the relevant bucket’s objectives). Once selected they are then closely monitored on a regular basis with monthly phone calls. Once a year, each manager presents a detailed account how of how the allotted funds have been invested and their assessment of current returns and future return prospects. Concurrently, the ISC monitors on a monthly basis the overall performance of the portfolio as measured by various benchmarks, including: overall portfolio return (≥ 5.9%) and risk as measured by the standard deviation of returns over a certain horizon(< total return); the cost, relative to the risk of the realized return (Sharpe Ratio); the correlations of returns among the managers (more than 95% of managers
D. A Recent Initiative
Recently, the Investment Sub-Committee has embarked on an initiative to improve the performance of the managers grouped within the Capital Preservation bucket. Their returns have been good, but these have shown too much volatility relative to the benchmarks expected from the managers in this class. Observations during recent market stress periods, including the COVID-19 pandemic, revealed vulnerabilities in single-strategy approaches, prompting a strategic pivot toward multi-strategy and multi-portfolio manager (multi-PM) solutions.
These managers direct multi-strategy platforms. Each such platform allocates funds across a large number of managers who have been chosen by their track record in executing a particular strategy consistent with the orientation of the platform. The platform provides capital along with comprehensive data analytics and risk analysis for these individual managers. These are given well defined medium-term performance objectives. The manager is let go if the specified objective is not met. To take an example, Millenium, is a hedge fund manager in our Diversification bucket that oversees the activities of well over a hundred managers within its platform. It has been an outstanding performer in our portfolio for a considerable number of years. What follows is a description of the systematic search procedure followed by the ISC to engage a potential new manager in this area. It is included to illustrate the due diligence concerns that are at the heart of the Plan’s approach to responsible investment. The Committee first engaged a company—bfinance—that conducts searches for managers with specific profiles. In this case, in good finance-speak, we were looking at Lower end of the volatility spectrum, single digit volatility but downside risk mitigation and diversification is key. Proposals should demonstrate consistency of return generation across market cycles and have a focus on downside risk control. Equity beta of 0.3 or lower required. Moreover, the manager should have a certain weight: Firm AUM (assets under management) of USD 500m.. 5 years firm-level track record, with a preference for longer (stablished firms with demonstrable pedigree preferred). Forty-seven multi-strategy managers showed interest. Eleven met our specific criteria. Four were subsequently invited to make 90-minute presentations. It is interesting to review these four possibilities; after all, the winning manager(s), if we choose one (or two), may have several hundred million of our dollars to manage. Manager A is a highly diversified low net exposure global equity market neutral strategy, implemented using a multi-PM platform model with capital allocated across 52 underlying PM teams. Manager B is a fund-of-hedge-funds which seeks to invest in high-quality managers displaying a tangible edge and delivering persistent, dependable, and uncorrelated return streams. Manager C is a market-independent multi-strategy fund aiming to generate strong risk-adjusted returns through allocations to predominantly arbitrage-oriented investment approaches via an internal multi-PM platform model. Manager D provides access to macro and alpha-capture oriented strategies through an actively managed platform of uncorrelated PM teams taking risk in their areas of specialization. After their presentations, two were chosen by the ISC. The recommendations were then passed along to the Pension Committee once Concordia’s Treasury group verified their credibility: see the next tab.
E. Conclusion
This section has described the work of the ISC in portfolio construction. It has evolved over the last fifteen years within the framework of the funding policy described above. It will continue to evolve as the world’s economies grow and interact in different ways, introducing new challenges and risks. We should also realize that Concordia itself faces risks such as changing demographics and changes in the funding of the University. The goal of the Plan, however, remains ambitious: to maintain an affordable and attractive defined-benefits pension plan that is sustainable and respects each generation of our fellow employees.