Over the period from 2004 through 2018, Canadian pension funds outperformed their international peers in asset performance and liability hedging, according to a research paper that says a key to this success is a three-pronged business model that would have boosted the returns of US and other pensions had they used the same tactics.

The three-pillar business model consists of managing assets in-house to reduce costs, redeploying resources to investment teams for each asset class, and funneling capital toward growth assets that increase portfolio efficiency and hedge liability risks.

The model works best for pension funds with liabilities indexed to inflation, according the paper, which was written by Sebastien Betermier, an associate professor at Montreal’s McGill University, along with Alexander Beath, Chris Flynn, and Quentin Spehner of benchmarking company CEM Benchmarking.

In conducting their analysis, the authors analyzed performance metrics, asset allocation strategies, and cost structures for 250 pension, endowment, and sovereign wealth funds in 11 countries. They then split the sample into large and small funds depending on whether assets exceeded $10 billion in 2018, and they quantitatively analyzed the distinct features of Canadian funds. “We first examine the large funds and show that, between 2004 and 2018, Canadian funds outperformed their peers on all fronts,” said the paper.

“Not only did they generate greater returns for each unit of volatility risk, but they also did a superior job hedging their pension liability risks.” The researchers then examined the factors that made the large Canadian funds successful and identified three distinct features that characterize their asset allocation and cost structure.

The first feature is that Canadian funds, on average, manage more than twice as much of their assets in-house (52%) as non-Canadian funds (23%). And that gap widens significantly among the funds with more than $50 billion, which manage on average 80% of their assets in-house while non-Canadian funds of that size manage only 34% internally.

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