Lisa Melchior, founder and president of VERTU Capital, joined us at this morning's meeting to speak about something most of us don't consider: the risks associated with our investments in privately managed pension funds. Lisa comes well equiped for this kind of discussion. Having worked for Wood Gundy, CIBC Capital Partners and OMERS (Ontario Municipal Employees Retirement System), she knows the investment industry well.
Lisa spent 17 years at OMERS, opting to leave last summer so that she could establish her own company. VERTU works with well-established companies on investment capital deals, specializing in placements for firms working on application software, HCIT, cleantech and tech-enabled services, or industrial technology.Pension funds use an asset allocation process to manage the relationship between risk and return on behalf of their investors. Historically, funds have tended to favour lower risk investments to higher risk ones in an approximation of the "80:20" rule. As the average age of the Canadian population has increased, pension funds have experienced heightened pressure to generate the returns necessary to meet their obligations in defined-benefit pension plans. This has resulted in a trend for companies to veer away from employer-sponsored defined-benefit plans, and a tendency for pension fund managers to migrate more funds to higher risk investments.
In addition to the aging of our population, Lisa cited the ongoing low interest rate environment and concerns about public equity volatility as factors that have created challenges linked to the trend for higher risk investment preferences within pension funds. Lisa's presentation included a lively discussion about the nature of risk: how it is defined, along with the various types of risk that may apply in a given investment scenario. In addition to considering the risks associated with a target investment, investors also need to consider the management risk associated with those operating the pension fund; the most skilled managers will consistently achieve fund performance that exceeds that of the related stock index.