With caps on foreign investment lifted for Canadian registered plans, a significant percentage of Canadian defined benefit pension plan sponsors expect to make significant shifts to the equity allocations within their portfolios over the next two years, according to a new survey by MFC Global Investment Management.

On an asset-weighted basis, 53% of defined benefit plans are expected to change their Canadian equity allocations, with a variety of new approaches to be implemented.

The most significant planned increases were with international equities. Fully one-third of plans intend to hike their international (ex. U.S.) equity allocation over the next two years.

Eighteen per cent of plans intend to hike their allocation to U.S. equities while at the same time 13% intend to decrease the allocation. Fifteen per cnet of plans intend to hike their allocation to global equities (strategies combining international and U.S. equities).

On fixed income side, more than one in four said they expect to decrease their Canadian fixed income holdings in favor of fixed income investments in the U.S. and international markets, according to the survey. The overall allocation to fixed income, however, will hold steady over the next two years.

“The elimination of the 30% foreign content limit has created an unprecedented investment opportunity for Canadian pension plans to generate enhanced returns and greater diversification potential by making larger allocations to global capital markets,” said Keith Walter, MFC Global’s senior vp for sales and marketing, in a news release. “It appears now that Canadian plan sponsors are moving toward taking greater advantage of those investment opportunities both in equity and fixed income.”

For Canadian pension plans, equities typically account for 56% of investments and fixed income typically accounts for 41% of investments, while real estate and other alternatives account for approximately 3%. Canadian stocks typically account for 50% of equity investments, U.S. stocks account for 19%, international (excluding U.S.) for 18%, and global (including U.S.) for 12%. Emerging markets account for 1%. U.S. and other foreign investments are generally regarded as quite distinct. Three-quarters of plans describe their U.S. holdings as distinct from other foreign investments.

The survey indicated that while overall investment in U.S. equities is expected to increase, plans with a high proportion of equities in the U.S. also are more aggressively looking to invest in mid-, small- and all-caps seeking both diversification and higher returns.

“Clearly, sponsors are looking for opportunities to find alpha and it appears they expect to find it in the U.S. market, particularly in the mid cap and small cap space,” Walter said. “We see that the survey indicates that sponsors also will be looking for more active investment management, which also is consistent with plan sponsors’ search for extra returns.”

Many plan sponsors indicated that they stay primarily in Canada for its convenience, ease of investing and to meet their Canadian dollar obligations. Others point to currency risk and foreign market risk as the main barriers to investing more globally. Only four in 10 plans surveyed use hedging to protect against currency risk.

The survey sought to assess the appetite for foreign investment among defined benefit plans with assets in the $75 million to $10 billion range. Telephone interviews were conducted with senior representatives from 148 defined benefit plan sponsors across Canada, who are involved in the asset allocation decision on behalf of their plans. The interviews were conducted between January 5 and February 5, 2007 by The Brondesbury Group.