Sun Life Financial Inc. is adding a new asset management business to attract defined-benefit pension plan investment with the promise of higher yields than in the public market.
The move comes at a time where persistent low interest rates can be a drag on bond investments. Sun Life Investment Management Inc. will launch with three pooled funds for institutional investors that mirror the same investment strategies Sun Life has been using internally to manage its own assets.
“In many ways Sun Life is very similar to a pension plan. We have long obligations, we have long promises to live up to, and we need to invest to meet those. And for a long time we’ve invested in markets outside the public domain to access more yield but not give up quality,” said Steve Peacher, Sun Life Financial’s chief investment officer who has been tapped to run the new asset management business.
The three new pooled funds focus on asset classes – private debt, real estate and commercial mortgages – Sun Life has long relied on for higher yields than the corporate bond market offers without taking on the added risk of the equity markets.
The private fixed-income-plus fund will invest in private fixed-income investments in Canada, the U.S. and potentially some other developed economies. The fund will also pursue public debt securities. Sun Life is known as a strong investor in Canadian public-private partnerships.
A Canadian commercial mortgage fund will invest in high-quality office, retail, industrial and apartment building properties in the country’s urban areas.
The Canadian real estate fund invests in real estate assets in expanding urban areas.
Sun Life Investment Management can also create custom accounts for clients to align investments with specific current and future liabilities.
The target investors for these funds are defined-benefit pension plans without large in-house staff teams to manage investments. Sun Life isn’t going after the mega-pension funds such as the Canada Pension Plan Investment Board (CPPIB) or Ontario Municipal Employees Retirement System (OMERS), although it could pursue co-investment deals with these funds.
The new business has been designed to compliment Sun Life’s defined-benefit solutions business, which can transfer the risk of a defined-benefit pension plan to a subsidiary of the insurer through a buying an annuity or longevity insurance. The Canadian Wheat Board is a recent customer of that group.
The banner of Sun Life Investment Management will now fly over the investment operations of Sun Life Assurance Co. of Canada, which has $100-billion in assets. More than one-third of that is in private asset class investments.
Mr. Peacher said it was important to brand this initiative separately from it’s other asset management businesses, such as Boston-based MFS Investments Inc., because the mandates are different. MFS is focused on the public markets, running mutual funds and institutional accounts.
The new funds are awaiting regulatory approvals and cannot yet solicit investments, but Mr. Peacher said initial conversations with potential clients indicate strong demand for its investments.
The insurer is likely to face competition in private debt from other insurance companies because of their traditional strength in these investment classes. Other independent asset managers, such as Stonebridge Financial Corp., also invest here. Over all, Mr. Peacher considered the private debt to be less competitive than real estate, where there are several other Canadian funds.
But there may be other opportunities for Sun Life to expand the private asset management program through its other international offices if it is successful.
“This broadens the asset management pillar of our enterprise strategy, providing an excellent complement to MFS, Sun Life Global Investments Canada Inc. and our Asian asset management businesses,” said Dean Connor, chief executive officer of Sun Life Financial, in a statement. “We are starting the new business in Canada and intend to expand it to other markets over time.”