Asset Mix: Critical to Performance and Risk Management
Establishing an asset mix policy is a critical part of what we do on behalf of plan members. That's because the type of assets we own and the relative emphasis we place on each asset group are the primary drivers of our long-term investment performance. As well, broad diversification is our most important risk management tool.
Because this strategy is vital to results, our Board sets asset policy weights annually — and sometimes more often — based on expected market conditions and our risk budgets. Variance from these weightings is allowed only under certain circumstances and only within defined tolerance levels.
Our Asset Mix Strategy
Our asset mix includes equities, debt, commodities and real assets (real estate, infrastructure and timberland). At all times, broad diversification of our assets is maintained.
We use bond repurchase agreements to fund investments in all asset classes because it is cost effective and allows us to retain our economic exposure to government bonds. For efficiency reasons, we also use derivatives to gain passive exposure to global equity and commodity indices in lieu of buying the actual securities. Derivative contracts and bond repurchase agreements have played a large part in our investment program since the early 1990s.
In addition, absolute return strategies enable us to earn positive returns that are uncorrelated to other asset groups. We employ these strategies internally to capitalize on market inefficiencies and we complement our own activity by using external hedge fund managers. The use of external hedge funds provides us with access to unique approaches that augment performance and diversify risk.
Net Currency Exposure
Exposure to the economies of various countries reduces overall volatility and offers the potential for better returns than if we confined our investments to one country or one asset group. Because we invest globally and report in Canadian dollars, we actively manage our currency exposures.
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