Should Pensions Be In The Seeding Game?
I spent the day in Toronto on Thursday visiting pension fund managers with the commodities relative value manager I met a couple of weeks ago. Went down there by train on Wednesday afternoon and he gave me a lift back to Montreal after our afternoon meeting. I was too exhausted to blog late last night so I decided to write my comment this morning.
Below are my bullet points on this trip (please take the time to read them all):
Below are my bullet points on this trip (please take the time to read them all):
- I took the train down to Toronto. Booked Via Rail business class one way and left Wednesday afternoon. Cost me $246.36. If I planned it in advance, I could have flown there for less with Air Canada or Porter, but it was last minute and I like the train (business class was a perk I treated myself to but it wasn't worth it).
- Brought a copy of Dan Ariely's book, The Upside of Irrationality: The Unexpected Benefits of Defying Logic, which I highly recommend. The first chapter, Paying More For Less, Why Big Bonuses Don't Always Work, is brilliant. Big bonuses are often not doled out to the most competent managers who are aligning their interests with shareholders (or pension fund beneficiaries).
- Stayed with a buddy of mine in Toronto who trades currencies for a living. He lives out in Oakville, Ontario, about 30 minutes outside Toronto when there is no traffic. I typically stay at the Fairmont Royal York which is downtown and right across the train station, but he insisted I stay with him and his family. His wife spoiled me with a nice meal and had everything ready for me, including a laptop to write my blog and my vitamin D drops which I forgot back in Montreal (thank you Nancy, you're a sweetheart!).
- On Thursday morning, I had an eight o'clock meeting with Jim Keohane, Senior VP and CIO at Healthcare of Ontario Pension Plan (HOOPP). My buddy warned me that we have to leave the house at 6:15 or else we'd get stuck in traffic. Woke up at 5:30 naturally but didn't feel great and by the time we left it was 7:00 a.m.
- Disaster! The traffic in Toronto is horrendous! It took us over an hour and a half to come downtown. I emailed Jim to reschedule for a little later in the morning. I also emailed Andy Moysiuk, Managing Partner at HOOPP Capital Partners to see if he was available to grab a coffee before my meeting with Jim. Luckily, he was.
- Driving in from Oakville and being stuck on the highway, I noticed a lot of nice cars on the road: BMWs, Mercs, Porsches, etc. Told my buddy "there is a lot of money in this city. He replied: " Yup, no thanks to the Parti Quebecois. There are lots of showoffs too. Torontonians are more like Americans; they want to display their wealth. Montreal's rich are more European, they are a lot more low key" ( a point that Andy Moysiuk reiterated during our meeting).
- As we were stuck in traffic, we talked about seeding hedge funds, business opportunities in Greece (imports to Canada), and listened to some talk show on why women prefer "bad boys" (LOL!). The radio commentator read an email from one lady who wrote in "I prefer to have great sex for one year with a jerk than make love to a nice romantic man for 10 years." My buddy and I looked at each other thinking how some women can be so stupid (not that men are any better as many like chasing skirts with attitude!).
- Anyways, grabbed a coffee with Andy Moysiuk at Mercato, a nice little coffee shop right next to HOOPP's offices. Andy is a smart private equity investor. I don't agree with all his views on pension investments but he knows his stuff, especially in private equity and venture capital.
- We didn't have much time. Our discussion was on seeding funds, not just hedge funds but funds in general. Andy sees this as a strategic partnership. "You're nurturing a business, not just a fund. You want to make sure this will be a success, and you want to make sure the manager will not pack up and leave at the first sign of trouble leaving you, the seeder, holding the bag."
- This is an excellent point. When you are seeding a fund, any fund, you are nurturing a business. You want to make sure the manager is committed to the business (it's not just about managing money). The pension fund is there for the long-term and wants to realize gains on their seeding activity. The last thing any pension fund manager who seeds a fund wants is to pull the plug fast. They want to realize gains on the business as it grows and eventually IPOs.
- I also talked to Andy about board governance at pension plans. Told him I know he sits on a board of a fairly large church pension fund along with Diane Urquhart an several other experts. He told me: "It's a good board and well managed fund but every board member brings their baggage. The actuaries tend to be overly-sophisticated, sometimes to the detriment of the investment process." I can relate. Often, it's best to keep things simple.
- My meeting with Jim Keohane, SVP and CIO at HOOPP was brief but excellent. Jim is incredibly smart, he really knows his stuff across all public and private asset classes. Told him that Andy warned me not to trash derivatives but I added: "I have nothing against derivatives, only pension fund managers who take stupid risks using derivatives".
- HOOPP is a derivatives powerhouse. They know exactly how to use derivatives wisely to match assets with liabilities, do enhanced indexing, overlay and absolute return strategies which they do exclusively internally (no allocations to outside funds in public markets and limited ones in private markets).
- I asked Jim why not allocate more to outside funds. He replied: "It's all about cost of delivery. When I got here 15% was allocated to outside managers but they were underperforming the market. By indexing using swaps, we got our beta, lowered the volatility and reduced costs substantially."
- I told Jim that Leo de Bever did the same thing at AIMCo, substantially lowering the costs, but the media in Edmonton harped on bonuses he doled out to internal managers (some reporters are so stupid!). However, Leo de Bever kept managers in public and private markets that earned their fees, delivering alpha that cannot be replicated internally. Again, I asked Jim why doesn't HOOPP do the same thing? If they're worried about risks, they can use managed accounts and have full transparency and control over the investment portfolios.
- Jim replied: "We are doing a good job creating alpha internally. Maybe that will change in the future, but right now there is no point of outsourcing we can can do the job internally at a lower cost of delivery." This is a bit of a sticking point with me because I believe true alpha exists in long-only and absolute return strategies and the best managers are not working at pension funds, they're running their own fund, charging fees for this expertise. As one pension fund manager told me later in the day: "If they're that good, they'd be charging 2&20 managing their own fund."
- Importantly, it's in the best interest of pension fund beneficiaries to discover these fund managers and allocate to them. No doubt about this in my mind. It's just that most pension funds are not approaching their allocations to outside managers in an intelligent way, using managed accounts in public markets or co-investing in private markets, negotiating hard on fees and extracting maximum knowledge leverage off their external partnerships using solid investment management agreements with clauses that list exactly what they expect from the partnership.
- Something Jim said about the big private equity funds did make perfect sense.: "Pension funds investing in these large PE funds are going to underperfom large cap stocks. Because of their size, these mega buyout funds are taking out large public companies at substantial premiums. It just doesn't make sense to pay fees and take on illiquidity risk for these large deals. "
- Thanked Jim, told him I wish HOOPP was managing the pensions of all healthcare professionals across Canada, and went off to my next meeting where I hooked up with the commodities fund manager and the External Portfolio Management team at a large pension fund. It was an excellent meeting, I mostly listened and observed the manager and the team that was evaluating his presentation. The manager covered a lot of ground and the team asked good questions.
- At the end of that meeting, I asked the head of External Portfolio Management team whether they plan on seeding funds. He told me that they're looking into it and if "they think it makes sense, they'll recommend it. Maybe even partner up with other funds on such a venture." Maybe I was a bit bitchy yesterday morning but I answered back: "I've sat in your shoes and done many board presentations. If I'm sitting on your board, I don't want to hear 'I think it makes sense', I want to hear 'IT MAKES SENSE' and here is the research from PAAMCO on emerging funds to prove it."
- Afterwards, the relative value commodities fund manager told me "nothing personal, but it shows you haven't done a lot of marketing, interjecting at times and telling the guy how to do his job." I replied: "Let's get something straight, I am here as an independent, not to market your fund. We have not signed any legal agreement. I believe in you and this fund which is why I opened the doors using my senior pension contacts and got you meetings in record time. My comment to the head of this team was not intended in a malicious way but more to make the forceful case for seeding funds and why it's in the best interest of pension fund beneficiaries. No offense taken and will take your constructive criticism and recommend that you speak more slowly during our afternoon meeting."
- We parted ways at lunch as he had to meet someone. I ate outside, enjoying the sun and exchanged some emails with Colin Carlton, former Vice President, Investment Research at CPPIB, telling him I was in the vicinity. Colin was recently replaced by Jean-François L’Her, formerly of the Caisse, but he has consulting mandates to complete at CPPIB.
- Colin told me that he was busy writing large parts on CPPIB's 2011 Annual Report. I appreciate the time and effort it takes to complete these annual reports and told him one of my former employers, the Business Development Bank of Canada (BDC), has a whole team dedicated to corporate planning and drafting the annual report. It's a lot of work!
- I praised him for the annual report but did mention that the whole discussion on benchmarks and value added needs more clarification as it's overly complicated. Colin said they have simplified it and will do more.
- I also asked him about his future plans and told him I see a huge gap in pension consulting. He agreed and is looking into some options but told me he's not interested in expanding a new business and having a crazy work schedule. "My wife is my boss now." Colin is an intelligent and nice man and I wish him success in his new projects, wherever they lead him.
- Hooked up again with the commodities relative value manager and headed to our afternoon appointment with another large pension fund. In the lobby, I ran into the president, greeted him and introduced the manager. We then proceeded to meet with the VP of Alternative Investments and his portfolio and assistant portfolio managers.
- In my opinion, this meeting was even better than the first. The VP of Alternatives couldn't stay long but let his portfolio manager ask the questions. Before the VP rushed off to his next meeting, I asked whether their investment policy precludes them from seeding funds. He replied: "Not at all. If it makes sense and fits in our portfolio, we will seed a fund."
- I asked him if he can let the CIO know I am in their offices but he was in a rush so I emailed the CIO myself to let him know I was in a meeting at their offices and would like to say hello after. To my surprise, the CIO came into our meeting wearing a golf shirt, holding a cup of Starbucks coffee, introducing himself and asking if he can sit in. I loved it!!!
- The portfolio manager was asking amazing questions. This guy is simply the best at analyzing hedge funds and strategies (told him to write a book). The manager answered all the questions and even gave numerous examples on his strategy and how he mitigates risk (excellent exchange). The CIO listened carefully and then asked the important business questions on fees and why they should consider seeding his fund. He got the answers to his questions and walked out of the meeting after 30 minutes. Before walking out, he told me he liked my last comment on reducing risk and told me that Roger Martin, dean of the Rotman School of Management sounds like a "frustrated professor" in his op-ed (totally agree).
- We wrapped things up with the portfolio manager who explained the next steps. He also stated he likes the relative value commodities strategy, the liquidity, the fact that it fits on their managed account platform, but needs to do more background checks. The manager provided him with a list of references and urged him to call them.
- We then proceeded to drive back to Montreal. It was a long drive, we stopped off at Chalet Suisse for dinner, but I really enjoyed my conversation with this relative value commodities manager. He's exceptionally bright, driven, has the entrepreneurial mindset, right work ethic and values which he and his wife instill in their three children. We got into a lot of personal discussions during this car trip and I admire the depth of his character given the personal challenges he's faced growing up as an orphan at an early age. I honestly marvel this individual and know the pension fund that seeds him and his team will not regret their decision just like I have no regrets whatsoever introducing him to these two large pension funds.