Thursday, August 7, 2014

Pension Tsar's Harsh Hedge Fund Lesson?

Chris Newlands of the Financial Times reports, Ontario pension tsar’s harsh hedge fund lesson:
When Ron Mock became president and chief executive of the Ontario Teachers’ Pension Plan in January – one of the world’s largest pension funds – his appointment raised more than a few eyebrows.

Not just because Mr Mock, who is a 13-year veteran of the $140.8bn Canadian pension scheme, has a background in the somewhat controversial area of hedge funds, but because the hedge fund company he once presided over collapsed in 2000 with losses of more than $125m.

A year after that collapse – and in a show of great confidence – Ontario Teachers hired the 61-year-old as director of its alternative investment arm despite an ongoing investigation into why Phoenix Research and Trading, the hedge fund company Mr Mock co-founded, was forced into closure.

The blame for those losses and the company’s eventual demise was later found to lie firmly with Stephen Duthie, a rogue trader who had taken large unapproved positions in US government bonds. However, in 2003 Mr Mock was reprimanded by the Ontario Securities Commission for failing to supervise Mr Duthie properly and he was prohibited from becoming a director or officer of a public company for six years.

At the time of that reprimand Mr Mock was busy rekindling his career at Ontario Teachers. He had already been promoted to the position of vice-president, a title he held until 2008, when he became senior vice-president and assumed responsibility for all fixed income assets as well as alternative investments and hedge funds.

A source close to Ontario Teachers says the pension fund was “well aware of the Phoenix collapse” at the time of Mr Mock’s initial appointment. “Thorough due diligence was done and the board concluded that Ron had behaved honourably, in self-reporting the employee’s unapproved position.”

Mr Mock, who trained as an electrical engineer, says: “My career is the sum of my experiences. That particular situation reinforced in my mind the critical importance of the reality that the burden of responsibility rests with the CEO.”

And it is clear Mr Mock’s ability and confidence have not been frayed by the events. Ontario Teachers – famous for its direct investments in private companies, infrastructure projects and property – has returned an enviable average annual return of 10.2 per cent since its inception in 1990. In its first set of annual results since Mr Mock took charge the fund posted returns of almost 11 per cent.

During Mr Mock’s first few months at the helm he also oversaw the purchase of a 50 per cent stake in Flynn Restaurant Group, a Taco Bell franchisee, and finalised terms for a 20-year licence to operate the Irish National Lottery.

“I’m having fun,” says Mr Mock, who was once responsible for safety at a nuclear plant. “I believe we broke the mould in the pension fund model when we launched. We were one of the first pension plans to employ derivatives. We were one of the first to go into hedge funds. And we were one of the first to buy a real estate operating company in which we actually develop as well as manage property.

“So who do we look to in order to better ourselves? Probably the toughest form of competition of any kind – we look to ourselves,” he says.

The fund’s list of infrastructure assets is long and includes minority stakes in Birmingham Airport, Bristol Airport, Copenhagen Airport and Brussels Airport; the High Speed 1 rail line linking London with the Channel tunnel; and international water and power utilities. It also owns Camelot Group, which holds the exclusive licence to operate the National Lottery in the UK.

“We don’t say at the beginning of the year that we are going to invest $3bn in Europe or $4bn into Asia. We don’t think like that,” says the chief executive. “We have people all over the world and what we say to them is: ‘There is money available to invest. Bring us what you find, but if you don’t find something that fits with our liabilities and our risk-adjusted returns then there is no pressure to push money out the door.’”

Where Mr Mock does feel the pressure, however, is in finding and hiring the right people to make those investments. Once again he believes Ontario Teachers “broke the mould” in the 1990s by paying staff above and beyond what they would expect to earn at other pension funds.

“Our philosophy is pretty simple,” says Mr Mock, who was paid $2.9m last year. “If you want upper-quartile performance, you need upper-quartile people. We don’t make cars and we don’t make rubber tyres, our assets go up and down the elevator every day. Our assets are intellectual capital and we need to make sure that we are attracting the best intellectual capital we can get our hands on.

“So back at a point in time when pension plan CIOs and CEOs were getting paid $125,000 and $150,000 a year we said: we have to start paying market rates, we have got to start paying for performance. And so today our portfolio managers can make $700,000 to $900,000, while many of our vice-presidents can make $2m. That is not normal pension-plan compensation.”

Mr Mock, however, is quick to point out the fund never overpays – a philosophy Ontario Teachers, which invests assets on behalf of 307,000 active and retired primary and secondary school teachers, also takes into its investments.

“We don’t get turned down when it comes to infrastructure deals,” he says. “Seriously, we don’t get turned down. In fact, we will get asked to join deals because of who we are and what we bring to the table. We get asked into deals where we won’t even pay the highest price.

“But we turn ourselves away if there is a bidding war and the price for assets gets silly. When the price for assets gets too high, that becomes a risk and you can end up paying for it three, four or five years down the line, which can take all your senior management to fix.”

Ontario Teachers is not afraid of taking risks but those risks must be calculated, adds Mr Mock – a message that might indeed be applied to his own appointment some 13 years ago.

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Curriculum vitae

Ron Mock

Born 1953

Education

B.A.Sc. in electrical engineering, University of Toronto

MBA, York University, Toronto

Career

Various positions in field work, design, construction and research at Ontario Hydro

Director of sales and trading staff in derivatives products at Nesbitt Burns (now BMO Nesbitt Burns)

Founder and chief executive of Phoenix Research and Trading

2001 Joins Ontario Teachers’ Pension Plan as vice-president of fixed income

2009 Senior vice-president of fixed income and alternative investments, Teachers’

2013 Chief executive, Teachers

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Ontario Teachers’ Pension Plan

Founded 1990

Headquarters Toronto, with an office in New York City

Assets under management $140.8bn at December 31 2013

Employees Fewer than 1,000 employees in Toronto, London and Hong Kong

Ownership Teachers’ is an independent organisation set up by its two sponsors. The Ontario Teachers’ Federation represents all members. The Ministry of Education and Ministry of Finance jointly represent the Ontario government
I thank Claude Macorin for sending me this article. You can read my comment on OTPP's new leader as well as my review of OTPP's 2013 results when it gained 11%.

The last time I met Ron was back in March at HOOPP's 2014 conference on DB pensions. We grabbed a coffee right before the conference and we had a nice chat.

Ron told me that he didn't accept the job right away. He asked for some time to think about it and wanted to make sure he can handle the responsibility that goes along with it. Truth be told, I'm not jealous of any CEO at Canada's large public pension funds. Their job consists of one meeting after another, and they're not always fun investment meetings.

Most of the time, they have to deal with brutally mundane things and their board of directors, the type of stuff that would drive me insane (the great thing about blogging is I can turn my attention to markets when done which is the thing I love most). And it's a seven day a week job, leaving them little time to enjoy life with their family.

But I'm not shedding tears for them either. I have firm views on the compensation of Canada's public pension chiefs and think they get compensated extremely well for the job they're doing.

And while I agree with Ron, OTPP has amazing individuals (Neil Petroff, Wayne Kozun, Daniel MacDonald are three that impress me a lot), there is still work that needs to be done to hire the best and brightest (OTPP dropped the ball on some excellent candidates I highly recommended in public and private markets, people that can dance circles around anyone at their organization). I also feel that like all other Canadian public pension funds, more needs to be done to diversify their workplace and start hiring more disadvantaged minorities, especially persons with disabilities.

As far as Ron, he told me he is having fun and working hard (you never hear him complain even when you sense he's tired as the job is very demanding). The article above is well written but the reporter forgot to mention that Ron had another lesson in hedge funds when running that group at OTPP.

In particular, Teachers got slammed hard in 2008. Since then, they shifted their hedge funds mostly into managed accounts to "manage liquidity risk, have more transparency and control" (you can read more on their hedge fund strategy here). That too was a painful lesson that investing in funky, illiquid hedge fund strategies can come back to bite you in the ass.

But what I like about Ron is he takes ownership of his mistakes, which is more than I can say about other leaders which always blame others when the shit hits the fan. Of course, CEOs can't fire themselves so they will always fire others when their fund sustains heavy losses.

As far as "breaking the mould," I take this stuff with a grain of salt. No doubt about it, Teachers is one of the best pension plans in the world, but there are plenty of others who "broke the mould" before them (ABP, ATP, HOOPP, etc). And the competition is heating up among large pension and sovereign wealth funds, something that Ron is acutely aware of.

Below, a one on one discussion with Ron Mock at Teachers 2014 annual meeting. Listen to his concerns going forward in the clip below and here, they offer a glimpse into his vision. Ron is always thinking 18 to 24 months ahead and prepares for the worst scenarios. Teachers is very lucky he's at the helm of that organization at this critical time.

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