D3

By Greg MacPherson

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Sometimes I hear references to what the "smart money" does. The smart money is often considered to be ultra-high net worth investors or some very highly paid analysts and hedge fund managers that are supposed to be in the know.

Unfortunately, the opposite of smart money is considered to be everyday individual investors who do not spend their livelihoods pouring over investment research.

In my opinion, both individual retail investors and the "smart money" are just as susceptible to the herd mentality and are wrong about their predictions as often as they are right. In my mind, the smart money is in the disciplined managers of pension funds. This kind of smart money is a lot more boring, but it works.

I recently looked at the results of a survey of 157 corporate and public defined benefit (DB) pension plans. The survey was conducted by the Canadian Pension Fund Investment Directory and sponsored by Pyramis Global Advisors.

Several people have come to different conclusions on the results of the survey, but one of my main conclusions is that the way pension funds invest can easily be turned into a model of how the everyday investor should invest.

According to the survey, the average Canadian DB plan allocates 56 per cent of its money in equities, 34 per cent in bonds, five per cent in cash investments, three per cent in alternative investments and two per cent in real estate.

On average, the 56 per cent allocation to stocks is broken down as follows: Canadian equity, 25 per cent of the portfolio; U.S. equity, 12 per cent; international equity, 12 per cent; and global equity, seven per cent.

By the way, that is nearly 45 per cent of the equity allocation in Canadian equity.

Understand that everyone's situation is different and that this allocation would not be ideal for everyone. Having said that, we could note the following:

1. Regardless of weighting, pension funds are diversified into every asset class. They know that they can reduce their risk and volatility dramatically through diversification without drastically reducing expected return.

2. There is an overweighting in Canadian equities. This is sometimes criticized, but I am personally in favor of it. Not only do I feel that Canada is going to be an excellent market for the next decade, but it removes some of the currency risk from investing in foreign markets.

3. Although there are bonds and cash in the portfolio for stability and consistency, pension funds know that in order to have a reasonable return that beats inflation over time, they must have a reasonable weighting in equities (stocks).

4. There is a gradual shift towards some alternative investments like water, infrastructure, and private equity. I too, have been interested in the diversification and long-term potential that private placements and other alternatives can bring to clients.

The smart money knows that spreading out your risks and mixing growth investments with some safety is the best path to reasonable returns with relative consistency.

The opinions expressed are those of the author and may not necessarily be those of Manulife Securities Incorporated, Member CIPF. Greg MacPherson, BBA, CFP, FMA, CSA, FCSI is a financial advisor in the Woodstock branch. Contact his office with questions or to book an appointment: 328-8889.