Investment strategy for participating life insurance product

As of March 31, 2023

Expected exposure

*low
**medium
***high

Expected exposure

*low
**medium
***high

¹ This table reflects investment in the high yield space through bonds. An investment done through publicly-traded leveraged loans would imply limited remuneration for exposure to interest-rate fluctuations, but a higher compensation for illiquidity risk.

Source: Desjardins Global asset management.

Government bonds

The government bond portfolio forms the strategy’s defensive core. This asset class offers mainly provide yield while reducing portfolio risk.

Corporate bonds and high-yield credit

The portfolio holds bonds issued by Canadian and foreign companies in various sectors of the economy. These investment or high-yield securities enhance the portfolio’s performance with credit spreads that, on a historical basis, largely cover the additional credit risk. Investments in the high-yield portion could also include Leveraged loans, which are publicly-traded. Leveraged loans have characteristics similar to those of high-yield bonds in terms of credit risk and expected long-term return, but they diversify credit exposure with floating-rate, rather than fixed-rate, instruments.

Commercial mortgages and loans

The vast majority of the commercial mortgages and loans portfolio consists of mortgages granted to businesses and public bodies for various types of properties in Canada’s major urban centres. These assets play a role similar to that of corporate bonds, while generating additional remuneration because of their illiquidity.

Preferred shares

Preferred shares, often regarded as a cross between common stocks and corporate bonds, are another way to obtain a high and generally stable yield. The role of such assets includes diversification of the fixed income portion of the portfolio.

Common shares

Common shares provide exposure to global economic growth. Stock market exposure also makes it possible to benefit from portfolio companies’ efforts to improve their profit margins. Equity exposure involves acceptance of fluctuations in a company’s valuation levels and fluctuations related to economic cycles. To ensure diversification, the portfolio is exposed to 3 categories of equities: Canadian, U.S. and international (other developed markets and emerging markets).

Alternative investments (private equity, private debt, infrastructure, real estate)

Alternative investments refer to private, off-market investments in companies or real assets, such as real estate and infrastructure. As with common stocks, investors benefit from exposure to economic growth as well as enhanced returns on value-creation activities made possible by full control of assets and judicious use of leverage. These investments also offer good diversification potential vis-à-vis more traditional assets.

Specialized strategies

We round out the portfolio with specialized strategies designed to be independent of the market’s overall direction. A portion of the portfolio is allocated to a market-neutral strategy that invests in long-short pairs of similar securities, such as shares of 2 companies in the same sector. Holding a long position in the one security at the same time as a short position the other security neutralizes general market effects and sector dynamics; the only risk the investor is exposed to is the manager’s ability to choose, on average, the security that will do better than the other. Because pairs trading is a substantially self-funding strategy (the proceeds of the short sale being used to purchase the long position), the return of the strategy is the net return of the pairs plus the return of a simultaneous money market investment.

The par investment strategy also uses active management. Such an approach:

• improves the portfolio’s risk-return profile in relation to index-only management; and
• allows for an increase in the expected return that exceeds the often marginal impact that may have on the portfolio’s volatility.

Note that the low impact of active management in terms of volatility is due to the fact that the value added is, on average, unrelated to the general direction of the markets.

Various active strategies may be used for the participating product:

• Quantitative or fundamental management of assets traded on public markets;
• Tactical asset allocation (overlay using futures); and
• Active management of all alternative investments by default, with no passive management possible.

Specific strategies are selected to take advantage of another level of diversification involving different signals being used by different active management approaches. For example, traditional common share strategies emphasize fundamental analysis (such as a company’s business plan, earnings and management), whereas tactical asset allocation strategies focus more on analysis of the expected economic environment.

At Desjardins Global Asset Management (DGAM), we firmly believe that taking ESG issues into account when we select investments and allocate assets, with a view to sound management of risks and investment opportunities, is entirely consistent with a portfolio manager’s fiduciary duty.

In that spirit, DGAM has been an active signatory to the Principles for Responsible Investment (PRI) since 2017.

PRI is the world’s leading promoter of responsible investment. It contributes to a better understanding of the impact of ESG issues on investment and supports the international network of signatories in their integration of such factors into investment decisions.

DGAM has a team of nine professionals specialized in responsible investment. They contribute their expertise mainly by providing guidance to portfolio managers for the analysis of investment opportunities to ensure informed decision making. They also promote the Desjardins Group’s values through the exercise of voting rights at shareholder meetings. Each year, they also maintain a dialogue on key issues with the leaders of more than 125 companies, with a view to improving their ESG-related performance.

In the case of the PAR product, a number of active management mandates are defined in such a way as to achieve ambitious goals in terms of responsible investment and reduced carbon emissions.