Our Total Fund strategy is designed around four strategic portfolios, each of which serves a specific purpose in helping us to deliver on our MDI objectives. These portfolios are: the Liability Hedging Portfolio (LHP), the Return Seeking Portfolio (RSP), the Risk Mitigation Portfolio (RMP) and the Funding Portfolio (FP).
Liability Hedging Portfolio
The LHP is designed to help manage funded status volatility by mitigating risk associated with changes to the discount rate of the Plan’s pension liabilities. We do this by hedging a significant portion of the interest rate sensitivity of the Plan’s liabilities. Our LHP is composed of long-term Canadian government bonds. It also serves as the main source of liquidity for the Plan.
Return Seeking Portfolio
To keep our pension promise to our members, we must earn enough return to keep the Plan fully funded over the long-term. This means investing in a Return Seeking Portfolio, which is a diversified portfolio of assets that we expect will earn a risk premium over time. Assets in this portfolio include: private and public equity, credit, multi-strategy investments, real estate, and infrastructure.
Private equity is expected to generate higher returns than public equity over the long term while providing a smoother volatility profile. We invest directly into private companies, typically alongside partners and indirectly, through private equity funds.
Our public equity exposure is designed to complement our private equity strategy and generate returns using liquid market instruments. We implement our public equity strategy through enhanced developed market equity indices, active management in the emerging market space and a small amount of equity futures.
Credit has an attractive return-risk profile for a maturing pension plan. It has both equity and fixed-income characteristics and allows us to gain exposure to all parts of a company’s capital structure.
We invest in a mix of customized, liquid alternative strategies to access a broader and more diversified set of risk premia and value-add opportunities. These investments are less correlated with traditional market returns and make our Total Fund portfolio more resilient to different economic and market environments.
The real estate portfolio provides attractive risk-adjusted returns and stable and predictable income streams. These assets help to diversify Total Fund risks and act as a partial hedge against inflation over the long term.
Infrastructure investments add diversification to the Total Fund and act as a partial inflation hedge. They also provide cash flow and the potential for return enhancement through long-term capital growth.
Risk Mitigation Portfolio
This portfolio provides an added layer of diversification for the Total Fund and helps to mitigate risk in market downturns. We hold US Treasuries, safe-haven currencies and gold in this portfolio, as these assets typically perform well in market stress environments.
This portfolio represents the net funding for the Total Fund. It allows us to access a broader mix of risk premia exposures and therefore achieve the returns we need over the long term at a lower level of risk. Our primary source of funding is bond repurchase agreements; we also obtain funding through the use of derivative instruments, for example equity futures.