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Voices of RPIA
In Our Work
Where RPIA Fits
We serve a broad range of investors through a variety of solutions catering to their unique investment goals. We apply our differentiated active skillset in all our strategies, which vary from low-risk to higher-risk. Although our toolkit and risk/return levels vary across our suite of products, our credit expertise, proprietary technology, and rigorous risk management are applied throughout. We have collaborated closely with institutional investors in developing several of our strategies to ensure that the portfolio mandate aligns with their long-term investment objectives.
Hurdles Facing Foundations
The Government of Canada is increasing the disbursement quota for foundations, which presents a particular challenge for institutions that now need to make at least 7% per annum to meet their spending commitments and preserve the real value of their asset base. This comes as foundations are already facing return challenges given the expected investment returns across many asset classes will be lower going forward as monetary and fiscal policy are scaled back. In light of this problem, we believe foundation executives and trustees should look to “Active Credit” to improve the return potential of their fixed income allocation.
How Active Credit Can Help
Canadian foundations have an average of 30% allocated to fixed income, which has served foundations well over the last decade. However, given the outlook for fixed income returns, this allocation will drag foundation portfolio returns in the coming years. The silver lining is that foundations are blessed with much more investment flexibility than other institutional investors, such as pension plans and insurance portfolios. Therefore, CIOs and foundation board members can “get creative” to meet this return challenge. We believe the most logical first step is to explore ways to adjust the fixed income allocation to ensure a better balance between risk and return. Active credit strategies can be a key part of the solution for foundations because they can deliver additional returns from fixed income without taking undue risk. Credit markets are inefficient, making it possible for a skilled manager to add excess returns while still maintaining the traditional defensive characteristics that investors require from their “safe” assets. Therefore, allocating active credit strategies can be a quick and effective solution to help move a foundation’s expected returns toward the higher Disbursement Quota. Furthermore, active credit strategies can make an ideal complement to government bonds or private debt allocations. Foundations were already facing a return challenge in a lower return environment, which is now compounded by requiring a higher return target. In our view, it is incumbent on fiduciaries to take a fresh look at the risk-reward of the fixed income allocations in place. At this point in the cycle, an incremental change can be better placed than materially increasing portfolio risk. We believe active credit strategies are a key part of the solution.
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