By Josh Welsh
July 18, 2025
Excerpt from article:
Canadian pension plans are undergoing a strategic rethink, particularly in their approach to private equity, according to one director at a large asset management firm.
Stephen Johnston believes Canadian pension funds have built up hefty allocations, often between 30 per cent to 50 per cent in alternative assets with the expectation of strong risk-adjusted returns. However, he argues that those investments no longer function as true alternatives.
Over time, the characteristics that once defined alternative strategies - niche markets, specialized management teams, and exposure to under-financialized sectors - have essentially been eroded, he explained.
Instead, what pension plans now hold are mostly large-scale institutional private equity positions that behave more like mainstream market investments than uncorrelated sources of alpha.
"What they're increasingly finding is that they don't really have alternative investments. It's actually beta returns masquerading as alpha,” said Johnston, private equity manager and director at Omnigence Asset Management. “They’ve been disguising that beta with high leverage and financial engineering for probably over a decade but those tools don't drive returns anymore. You can't lever to the same extent you could historically. Financial engineering runs out of an ability to ultimately generate returns so what pension plans are finding is that they have these very large allocations to things that are largely now vanilla and very mainstream and behave like pure market investments. They’re not getting their alpha and these investments don't generate yield, so plans are saying, ‘We have to reduce our allocation to these kinds of strategies’.”
Original article here