The Future of Institutional Investing in Canada
The moderator was Amber Kanwar, a well-known BNN Bloomberg anchor and reporter appearing on The Open and The Disruptors who took time off her maternity leave to moderate this panel. She did a great job, asking many good questions.
Was this panel discussion worth the $75 plus tax I paid to watch? Yes, any time you get Blake Hutcheson, Jo Taylor and Jeff Wendling in a discussion, you'd be an idiot not to pay to watch what they have to say.
Having said this, my own feeling is there should be a standard price for these web events, say never more than $50 flat (including tax) and they should make them free for students.
I wish I could embed the full discussion below but it wasn't free. Luckily, I jotted down a lot of notes for those of you who didn't see it.
[Update: the discussion between Jeff Wendling, Jo Taylor and Blake Hutcheson is now available on HOOPP's website here (scroll to the end and click the link).]
Let me begin by telling Blake Hutcheson that I don't know where Mark Wiseman gets off texting and razzing you about the way you dressed today, you looked fine to me, very comfortable and I liked the picture of the ship behind you.
Blake is the eternal optimist and he certainly didn't disappoint today. Whenever you feel like slicing your wrists because of all the catastrophic news on television, take some time to listen to Blake Hutcheson, he'll restore your faith in humanity and the future.
I'm more of a pessimistic cynic by nature (part of my Greek genes) and was agreeing with a lot of things Jo Taylor was saying, not that he's a pessimist and hopeless cynic, far from it, he's more of a realist and offered great insights.
And Jeff Wendling? I'd say he's in between Blake and Jo with his views but all three of them agreed on the important points.
Anyway, Amber Kanwar began by asking the three CEOs who have the distinction of starting to work recently as the pandemic hit what their thoughts are.
They all said they feel privileged and honored to be leading these great organizations but the pandemic has obviously presented challenges.
Blake Hutcheson quoting Mark Wiseman said they "measure a quarter over 25 years, not three months." He is proud to serve over half a million active, retired and deferred members.
He said we will get through this pandemic and was very pleased at how the troops at OMERS were able to come together and deliver under these difficult circumstances.
Jo Taylor said he began working on January 1st and they couldn't foresee the pandemic or the upheaval of going 100% from working at the office to 98% of the staff working from home.
Still, they managed to do it all very well, placing their members first by making sure they continued to respond to all their needs and questions.
He said he has 35 years of experience working at various companies and even prior to the pandemic, had a steep learning curve taking over the top job at Teachers'. He said even as a CEO, it's been challenging mentally at times to adapt to the new normal of working from home.
In fact, he mentioned that OTPP shifted its attention lately to focus on its employees' mental health because of the extraordinary circumstances they are operating under.
Here, I have to pause to commend Beth Tyndall, OTPP's Chief People Officer, for being so open about her struggles of coping with the pandemic on LinkedIn. That takes courage and it demonstrates strength and character.
[Note: Remember, mental health is critical, depression and other mental illnesses can affect anyone at any time, not just during a pandemic, so don't be ashamed to reach out for help if you need it. My father and brother are both psychiatrists and they've seen it all. If you get help, you can treat even the toughest mental illness. If you refuse to get help, it will only get worse.]
Jeff Wendling said he is honored to serve Ontario's front line workers during this difficult time, reassuring them their pensions are safe.
He said there was major market chaos back in late February and March and yet the transition to working from home went very smoothly on all fronts (investments, member services, etc.) and he commended HOOPP's technology team (see an earlier comment of mine on HOOPP's IT journey).
Canada's Policy Response
The discussion then turned to Canada and the policy response.
Blake Hutcheson commended our central bank and federal government for providing liquidity to the financial system and to people that needed it.
Citing a conference call with Steve Poloz, the former Governor of the Bank of Canada, he said the economy hit a "ditch" and needed liquidity to get out of it (Jeff Wendling later corrected him and said the former governor used the word "crater").
Blake sees a K-shaped recovery with winners and losers. He mentioned he met up with the CEO of the Cirque du Soleil and they had to cut almost all their staff (3900 employees) as revenues went to zero.
He said "a lot of people are sitting comfortably at the office" but we need to recognize the challenges of many small businesses struggling, like restaurants forced to close again as they try to balance their inventory and keep their employees afloat.
Blake said fiscal support is absolutely needed but thinks the economy is recovering and that down the road, the risk might be too much stimulus will lead to an overheated economy.
He thinks low rates are here to stay and cheap debt is helping to sustain the housing market as people move from city condos and apartments to single family homes in rural and urban areas.
As far as oil & gas, he said other countries control supply and it's tough to predict how oil prices will move in the near term.
Jo Taylor was "slightly less bullish" on the Canadian economy citing lower oil prices impacting Alberta and high household and corporate debt. He said if there's a significant price correction in housing, it will be bad for the economy.
However, he said fiscal and monetary policies in Canada are "more coordinated" with the Bank of Canada standing ready to monetize debt.
Jo said Canada's large pensions can lend money to bigger companies but small and medium sized businesses that are "on the edge" need support from banks, governments (and the BDC and EDC).
Jeff Wendling also praised the policy response and thinks it's still needed and he was generally constructive on the recovery going on right now but said we're not out of the woods and there are challenges ahead.
Shift Toward Private Markets
The discussion then went into asset allocation and the shift toward private markets.
Jeff Wendling said back in 2006-2007, HOOPP decided to adopt a liability driven investment (LDI) strategy and they bought a ton of Canada 30-year bonds to hedge their liabilities and protect against downside risk.
A bit fortuitously, they did this a year before the great financial crisis in 2008 and that really helped them pass through that crisis.
They rode the yields down on those 30-year bonds but are now faced with a problem because the yields on those 30-year bonds are too low, so they are looking to invest more in infrastructure, real estate, private equity and other yield enhancing strategies (see my comment on HOOPP's LDI 2.0 approach).
Jo Taylor said they traditionally matched assets with liabilities but because their plan is more mature than other plans (ratio of active to retired members is lower), they had a more balanced portfolio investing more in private markets and investing more internationally.
He warned however that returns in core infrastructure, private equity and real estate are coming down and you need to be extremely selective in the deals you enter. "It's harder to execute on private markets, it's more challenging and returns are lower."
Blake Hutcheson agreed and said the "tsunami of capital" flooding these assets is negatively impacting valuations and returns.
Still, he said they're looking to double their total assets in the next ten years and will continue to invest half in private markets.
He said they differentiate assets during the pandemic in three buckets:
- No touch red zone because of COVID.
- Green zone where opportunities abound because of COVID.
- A grey zone where a disconnect is happening giving rise to long-term opportunities because of COVID.
Blake didn't use the colors, I did, but he was explicit that he sees opportunities in Office space which is interesting because my last comment was on what I see as a secular shift in real estate.
Blake used to head up Oxford Properties so I'd expect him to be more optimistic than me and he could very well turn out to be right (I remain very worried).
He said even if offices take a 20% hit, some people will come back to offices, so say that's 10%, and leases are five years on average, if not longer, so he doesn't see a massive hit materializing.
He said "great office buildings will continue to do well."
Jo Taylor said they see value in Europe and Asia and are taking more sector views here and looking at deals closely to make sure they can add value in tow ways:
- Help a business grow organically
- Help businesses that are not getting liquidity because of their capital structure
Jeff Wendling said HOOPP is really just launching its infrastructure portfolio and they too see opportunities in private and public markets in Europe. he said they will continue to grow their real estate and private equity portfolio all over the world.
The China Factor
The conversation then got interesting because they talked about direct investing in China.
Jo Taylor brought up an great point stating: "It's really easy deploying capital in China but really challenging extracting it. The rule of law isn't there, the regime can basically take actions which impact your investments overnight."
He said OTPP is doing direct investments there along with local partners, but they're also looking at Asia Pacific more broadly as other countries will benefit from China's growth (they recently opened up their Singapore office).
He also said China impacts companies here, like Apple, citing increased nationalism there and how it can impact these giant tech companies in North America.
Blake Hutcheson agreed, "you can't ignore China but it's tricky". OMERS is currently invested 3% in Asia and looking to go to 10% but it's a "long game, a relationship game".
Jeff Wendling said HOOPP has 2-3% of its assets in emerging markets and it will increase them as growth will be there but they will do so mostly through public markets.
Still, HOOPP did a private equity deal in China and will look at all private market deals there if they make good sense and if they have the right local partners.
United States Elections
The panelists were asked about the upcoming US elections and they all said no matter who wins, they are playing the long game there and the US remains the most important country in terms of foreign investment (public and private markets).
I think Blake said OMERS has 30-35% exposure to the United States and they're going to continue investing there over the long term, both with great partners and directly when they see opportunities, including in growth equity and venture.
Jo Taylor also said the US remains an important country for their long term investments but he said the election might bring some turbulence and they stand ready to capitalize on any opportunities.
He said you need strong local partners there but also "bring our Canadian heritage" to improve businesses there.
Jeff Wendling said 50% of their credit exposure is in the US and a significant chunk of private equity and real estate too.
ESG, Diversity & Inclusion
The panelists ended by talking about ESG, diversity & inclusion.
Jo Taylor said Canadian pensions got the "E and G" right but the focus has shifted on the "S".
He said they are very long term institutions, custodians and answer to their members and need to respect and enhance their brand in Canada and the rest of the world.
He warned against the tendency to go for the "quick buck" doing things that undermine value, your brand, and your partnerships.
He explicitly stated in ESG, "you can just talk the talk, you need to walk the walk".
Blake Hutcheson agreed and said they look at everything through an ESG lens.
He said "it's not all about the returns", it's about the people, the brand and enhancing long-term relationships.
Jeff Wendling said HOOPP looks to be "a good corporate citizen" and ESG can be a win-win for everyone over the long run.
In the wake of George Floyd's tragic death and widespread BLM protests this past summer, the panelists were pressed hard on what they are doing to address systemic racism.
Blake Hutcheson said there's no question it's time to act to address long-standing structural issues.
They are looking at their hiring policies across the organization, doing programs to look at unconscious biases, but he said it will be a slow and incremental process and he doesn't have all the answers which is why he sits on a diversity & inclusion committee along with the Head of HR to try to figure it out, getting feedback from everyone.
Jeff Wendling said he signed the BlackNorth Initiative and is committed to it. They too are reviewing their hiring practices, addressing unconscious biases in their training and elsewhere and he strongly believes that diversity & inclusion is a win-win and will strengthen the organization over the long run.
He said they have committees for gender diversity, people of color, LBGTQ community and aboriginals (no mention of people with disabilities however, which disappointed me but nobody talks about them).
Jo Taylor didn't beat around the bush, he flat out stated they take diversity & inclusion very seriously within their organization and in the companies they invest in.
In particular, he mentioned gender diversity and said at their investee companies that at least 30% of their board members have to be women (more challenging in Asia because of cultural reasons).
He said they are looking at all levels of their organization to bolster diversity & inclusion, "not just at the junior ranks."
I was happy Jo mentioned that and think he's absolutely right but he too admitted more work needs to be done and they have a lot of room for improvement, as do all of Canada's large pensions.
I'm glad Amber Kanwar who I believe is of Indian descent pressed them on diversity & inclusion and they responded very frankly stating they are doing a lot but more needs to be done.
Alright folks, I really don't get paid enough for all these great comments I provide you.
I'll wrap it up here and if there is anything I need to edit, please let me know.
Once again to the panelists and the moderator, great job, I really enjoyed this today and hope they eventually make it public so I can embed it here.
Below, Blake Hutcheson, president and chief executive officer of Ontario Municipal Employees’ Retirement System (OMERS), discusses the pension fund's investment strategy amid Covid-19, and how OMERS integrates ESG factors into its investment decision-making processes. He also talks about governments and private investors working together and finding projects that both sides want to build and invest in.
Update: the discussion between Jeff Wendling, Jo Taylor and Blake Hutcheson is now available on HOOPP's website here (scroll to the end and click the link).