How HOOPP's Jim Keohane Beat the Crisis

Chris Butera of Chief Investment Officer wrote a very nice profile on HOOPP's CEO Jim Keohane and how he saved the plan from the Great Recession by noticing problems ahead of time:

Jim Keohane, the outgoing president and chief executive officer of the Healthcare of Ontario Pension Plan (HOOPP), has been a mainstay at the fund for more than 20 years and has accomplished a rare investing feat: He beat the global financial crisis.

Keohane, who will retire from the $58.7 billion plan in March 2020, first noticed something bad was coming in 2005, when he was overseeing equities and derivatives for the plan.

The honcho’s skepticism of too-good-to-be-true investments was reinforced during the 2000-03 tech bust, when the fund quickly went from being overfunded to underfunded. It didn’t do nearly as bad as others, but that wound taught HOOPP a lesson.

“Most of the risk impact came from asset liability so we tried to think about ways to more effectively manage that risk,” he told CIO. That meant assessing risks ranging from a stock market slide to long-term interest rate decreases to mounting inflation. “What we tried to do is restructure the portfolio to reduce the risk premium and increase the inflation sensitivity and the industry sensitivity of the portfolios,” he said.

That meant an overhaul in 2007. Keohane, elevated to chief investment officer that year, converted 30% of the fund’s stocks into long-term bonds, real return bonds, and real estate. The bonds were a buffer for rate moves while real estate was targeted because real estate has a high correlation to wage inflation, a significant factor for a pension plan.

“It was really a risk-driven decision,” he said.

That’s not to say the fund came out unscathed. When the crash hit and slammed most of the world’s pension reserves and financial institutions, notably destroying Bear Stearns and Lehman Brothers, HOOPP took a 11.96% hit. But in relative terms, compared to the drubbing others suffered, that was just a scratch for the Canadian plan. It only dropped to 97% funded in 2008. The fund bounced back and then some the following year, returning 15.18% to bring funding levels to 102%.

“We did a lot of things right at that point,” he said modestly.

“We were not immune to the effects of the crash, but we weathered it much better than many other pension plans,” HOOPP Vice Chair Dan Anderson told CIO.

Keohane’s savvy drew widespread praise. So in 2012, the fund named him CEO, succeeding John Crocker.

“I joked with him: ‘That’s it, Jim, I’ll only hire you twice,’” said Anderson, who’d also been on the hiring committee when Jim was promoted to CIO. Today, the plan is 121% funded.

Not bad for a guy who left hedge funds to start a derivatives program at HOOPP in 1999, where he really proved himself.

Keohane’s investment approach has helped navigate the plan through other rough patches, such as in 2018. Trade tensions, Fed hikes, and stock swings caught many an institution off guard after a decade-long bull run. Some, such as Danish fund ATP, saw negative returns, and a plethora of hedge funds shut their doors. HOOPP returned 2.17% that year; not great, but when compared to its 0.01% benchmark, pretty decent.

“He is very well-respected in the industry,” said Anderson, adding that Keohane has built a strong team over the years. “People are loyal to him. If you look at turnover at HOOPP, it’s minimal—particularly in the investment area.”

“Jim and I began at HOOPP within a few months of each other and have worked together for 20 years,” Jeff Wendling, the fund’s executive vice president and chief investment officer said. “He’s got a vision, and he’s building and innovating, and people see that and they get inspired by it.”

The executive veep added that Keohane sees opportunities during market swings, when other investors either show too much optimism or are beginning to panic.

“He makes good calls, and has led an investment team that has made a lot of good calls,” said Wendling.

HOOPP’s top performers have been alternatives, specifically private equity and real estate. The classes returned 13.7% and 8.88% in 2018. They account for 12% and 18.1% of the total portfolio, which is split into two halves‑-a liability hedge portfolio (which houses bonds and real estate) and a return-seeking portfolio (stocks, private equity, corporate credit, short-term money market and foreign exchange, among others).

“We always kind of look at both sides of the equation, if our valuation is OK we tend to be more aggressive about buying things,” Keohane said. “If our valuations are high we tend to be less aggressive. So that drives a lot of our decision making – relative value and valuations. We also do [spend] a lot of time on risk thinking and how big of a drawdown can you have.”

For the 10- and 20-year period, the fund has returned 11.19% and 8.52% yearly, surpassing its 8.43% and 6.88% benchmarks. Keohane said he is always aware of investment behavioral traps.

“I think people tend to get caught up on one side or the other,” he said, meaning investors tend to be too focused on risk if things are not going well, and too focused on return when things are going well.

“We try to keep balance of those things all the time and make balanced judgments and understanding both sides all the time,” he said, adding that while we’ll see the occasional recession, we won’t see another 2008 anytime soon.

“That said, if we knew when the next crash would be, it wouldn’t happen,” he said. “It always surprises you.”

To protect against the next downturn, the plan is constantly assessing the structure of its asset allocation.

“We only actually deal on a fairly narrow part of the universe right now, so it’s cool for us to add things but we want to do things that really play into our strengths and capitalize on things we do well already so that’s what we’re working on,” he said.

The departing CEO is also credited for being a leader of liability-driven investing in Canada. Thanks to his foresight, the fund emerged largely unscathed from 2008, and cut the funded ratio’s overall volatility.

“Jim was an architect of LDI,” said Anderson. “We’ve done exceedingly well, and we’ve had world-class results since LDI was introduced.”

Keohane announced his retirement in March, but plans to stay on for another year to aid the fund’s transition with his replacement. “I don’t want to leave the board in the lurch where they suddenly have to get somebody in the door next week … but I’ve given [the board] lots of time and we want to have an orderly transition to make sure we have continuity and no sort of bumps created by that,” he said.

While he’d like to join “a number of boards” after he departs, the fund’s board isn’t one of them. The outgoing CEO said if he had a seat, it might be too challenging to sit back and watch instead of making the executive decisions. Instead, he’d rather stick to skiing, golf, and traveling with his wife.

“That’s one of the opportunities you can get once you retire is to go and spend a couple of months [somewhere else],” he said, mentioning his recent journeys to Australia, Vietnam, and Cambodia. With the newfound time, he plans to revisit those places and seeing more of Asia in general.

“I’ve traveled around the US pretty extensively at different times and I’ve traveled in Europe quite a bit too, so more of that would be good,” said Keohane.

The last time I saw Jim was in late March, right before he announced his retirement.

I had asked him about his retirement plans and he told me to "stay tuned". He also told me he enjoys traveling with his wife and on a recent trip to Viet Nam, he saw how a few of the elderly people were having a hard time keeping up, and it made him think it's probably best to retire now that he's still in good health.

The other thing Jim mentioned to me is "when you're a CEO, you have no real time off, you can't delegate things like when you're a CIO." He said he had a few trips interrupted by urgent matters he needed to attend to, and that's definitely not fun.

Anyway, regarding the article above, Jim told me: "the interview was about retirement so the slant of the article was a bit different than I expected."

I like the article because it demonstrates how Jim thinks about markets, evaluating risks first and foremost to limit the drawdowns.

Under Jim's watch, HOOPP has become a derivatives powerhouse, and everything from the back, middle and front office is running like a very tight ship. They invested a lot of money upgrading their systems to be able to handle the volume in repos, swaps, futures and options.

It's quite a sophisticated operation. Jeff Wendling, HOOPP's Executive Vice President and CIO, is doing a great job and has learned a lot working closely with Jim.

My sources tell me Jeff is in the running to become HOOPP's next CEO and Michael Wissell who recently joined HOOPP from the Ontario Teachers' Pension Plan as the Senior Vice President, Portfolio Construction and Risk, is in the running to become HOOPP's next CIO.

All I can say is if this happens, it will leave HOOPP in fantastic shape following Jim's departure next March. Both Jeff and Mike have significant experience and they will be outstanding leaders if they are called upon to fill these respective roles.

Now, in my opinion, in a post-Jim Keohane world, HOOPP is going to have some growth challenges. In particular, as the assets under management grow significantly over the next decade, it will be harder to deliver the same outstanding risk-adjusted results by investing everything internally.

In private equity led by Jim Walker, HOOPP already does a lot of co-investments based on fund investment relationships, but I'm thinking of infrastructure where HOOPP hasn't done anything compared to its larger peers.

This is partly due to high valuations. In recent years, Jim told me he thought a lot of the bigger deals were being done at nosebleed valuations. I agree with him, which is why a few of the large Canadian pension funds have taken advantage of this frothy environment to divest from some of their infrastructure assets.

But HOOPP is in a unique position to do something very different in infrastructure. In particular, and I have mentioned this directly to Jim, it should be looking to partner up with Andrew Claerhout, the former head of Infrastructure and Natural Resources at Ontario Teachers' Pension Plan, to invest in his infrastructure platform called Atom.

Andrew recently shared this with me:

When I set out on this journey I did so hoping to find an anchor investor (or a small club of anchors) that could commit a sizeable amount of capital to the fund to stand it up and de-risk a broader fundraise. The elevator pitch to these investors was that they could invest in scale (e.g., $300 million towards a $1 billion target) in a segment of the market that they would not be able to access directly (i.e., mid-market core plus and value add infrastructure) and do so cost-effectively both through the discounts in management fees and carried interest they would receive from their minority ownership stake in the fund and from fee and carry free co-investment. Furthermore, given their close working relationship with the fund as a minority shareholder, they would be able to affect knowledge transfer. Said differently, they could leverage the fund as an additional set of eyes and ears in the market.

While I continue to speak to a number of LPs about anchoring the fund, another idea I have started to explore is developing Atom into as a captive platform company. So rather than thinking of Atom as being a fund, with an anchor that receives preferred economics, Atom could be a portfolio company of the investor where the sponsoring institution is the controlling shareholder. This would provide a large institution (such as CPPIB) the ability to put that much more capital to work and have that much more control.

The advantage of anchoring Andrew's platform, is you get an experienced veteran who knows the asset class very well, will provide knowledge transfer, co-investments from the onset and attractive terms because it will be a captive platform company.

I believe HOOPP, IMCO and AIMCo would make great anchor investors but I also believe a CPPIB and PSP can easily invest $1 billion in this platform and be the only client. CPPIB and PSP will say they don't invest in infrastructure funds but this is silly, this isn't a fund, it's a platform run by a seasoned veteran who was successfully managing the asset class at OTPP, someone who also understands the future of infrastructure investing.

You might accuse me of promoting Andrew on my blog, and you're right, I'm biased and really like the guy. I think he's an outstanding professional who got the short end of the stick at Teachers' and think very highly of his new platform (I have no vested interest in Andrew's success, just call it as I see it and it really irks me when I see an A player not getting the break he rightly deserves).

Apart from infrastructure, HOOPP's Real Estate team led by Stephen Taylor is doing very well, and in the years ahead, they will be diversifying the real estate portfolio more outside of Canada. I met Lisa Lafave, HOOPP's senior portfolio manager in real estate, here in Montreal last year and think she's a wonderful person doing a great job.

What else? External hedge funds. It's been a no-go at HOOPP for the simple reason that they do all their absolute return strategies internally, paying no fees, but as the plan grows, I foresee some external mandates to large alpha funds who will be attracted to HOOPP because of its level of sophistication.

The problem is as you grow, you simply cannot do everything internally, it's impossible and that is why Ontario Teachers', CPPIB, OMERS, AIMCo, CDPQ, and other larger funds allocate to external absolute return managers.

Again, I don't have the monopoly of wisdom on HOOPP's future path, I just think it makes sense to invest more in private markets (especially in infrastructure) and allocate some risk to external absolute return funds as HOOPP grows in the decade ahead.

The focus will remain on keeping costs low, something HOOPP has set the bar on, but there will be a shift in the decade ahead, a necessary one to keep delivering outstanding long-term results.

Lastly, while Jim Keohane is leaving the organization next March, perhaps his most enduring legacy will be the culture he has fostered at HOOPP. There's a reason why many employees are loyal to him, he's an outstanding leader who has mentored many investment professionals over the years.

To HOOPP's future leaders, you should all strive to be a lot more like Jim in every way, including educating the public about the value of a good pension.

Below, at a Canadian Club panel in late 2017, HOOPP President & CEO Jim Keohane was asked to outline the risk management and investment strategies that allowed the successful pension fund to withstand the 2008 financial crisis.