Update on private market assets during the pandemic
Plan sponsors may wish to consider whether this investment news has implications for the investment options in their plans. Sun Life Assurance Company of Canada purchases units of the funds listed below. The funds are established as a segregated fund in accordance with the Insurance Companies Act (Canada).
Sun Life Group Retirement Services (GRS) offers several funds to clients that invest in assets with no publicly traded market. The managers of these funds are Bentall Green Oak (BGO), Invesco, Franklin and Sun Life Capital Management (SLC). Private market assets offered on our platform include real estate, infrastructure, commercial mortgages and private fixed income. These funds, or a portion of their underlying assets, are valued monthly or quarterly instead of daily. They may have special operational requirements and may require client acknowledgement of liquidity and transaction restrictions. Because of their unique nature, we’re providing updates on these funds below.
Direct Real Estate and Real Assets:
- BGO Canadian Prime (DB platform)
- BGO Canadian Real Estate Plus (DB & DC platforms)
- Invesco Global Direct Real Estate (GDRE) (DB platform)
- Franklin Global Real Assets (DB platform)
The COVID-19 pandemic has significantly reduced the number of real estate and infrastructure transactions. At the same time, it’s had a profound impact on real estate (shopping centres, hospitality) and infrastructure (airports, toll roads, ports) in the short-term. As a result, it’s become more difficult to value these assets. The managers of these funds have responded by increasing the number of appraisals and/or making valuation adjustments more frequently.
The investment managers expect that the pandemic will negatively affect both income and some asset valuations. They’re receiving requests for rent deferrals from tenants, particularly in the retail space. BGO Canadian Prime had collected 80% of the rent due May 1 as of May 26, 2020. None of the funds use extensive leverage and there are currently no significant liquidity issues. The managers expect that investors can continue to transact normally.
Fund investment returns were mixed in the first quarter of 2020. The income generated by these funds has largely offset the depreciation of asset values. BGO Canadian Prime returned 1.3% in Q1 2020. At the same time Invesco GDRE’s return was -0.2% before the impact of currency and significantly positive after currency impact. This is due to the appreciation of the US dollar. The Franklin Global Real Assets fund, which includes infrastructure and real estate, declined more significantly (-4.1% in Q1).
The funds will continue to deal with rent deferral requests, re-leasing challenges, and the impact of reduced economic activity in 2020 and beyond. The managers will also focus on updating the properties to meet new social distancing and other safety requirements (cleaning practices, for example) as the lockdown ends.
Private Fixed Income and Commercial Mortgages:
- SLC Canadian Commercial Mortgage (DB platform)
- SLC Core Fixed Income Plus (DB & DC platforms)
- SLC Long-Term Core Fixed Income Plus (DB platform)
- SLC Private Fixed Income Plus (DB platform)
Like public fixed income, pandemic-driven changes in interest rates and credit quality affected private fixed income and commercial mortgage assets. SLC conducted an interim valuation of assets in private fixed income funds in March 2020 due to the increased market volatility. Private fixed income and commercial mortgage funds had slight negative returns in the first quarter of 2020.
SLC, which maintains its own proprietary credit ratings, has downgraded only a small number of their holdings so far. As well, SLC has approved a limited number of requests for payment deferrals. SLC expects the risk of loss of principal in the funds to be low in the short-term. Private fixed income investment activity was very limited in April. SLC priced only one new investment across their funds.
The GRS Investment Solutions team will continue to monitor the liquidity, valuations and cash flows in private market asset funds. We’ll communicate any significant issues, should they arise.
Please contact your Sun Life Group Retirement Services representative.