On HOOPP's Maniacal Focus on Liquidity
An increased focus on liquidity management through factors, a leaning towards public markets and robust risk management are all key to implementing HOOPP’s “maniacal focus on liquidity” that helps CIO Michael Wissell sleep at night. Amanda White spoke to the Toronto-based investment chief ahead of the Fiduciary Investors Symposium.
In comparison to its Canadian peers with huge weightings to private markets, the C$112 billion HOOPP leans slightly towards public markets, a preference consistent with its liability-driven approach and focus on member outcomes.
For instance, it has a 26 per cent allocation to public equities and 12 per cent to private equity and Wissell believes public companies are still bringing ingenuity that is worth investing in. (CPP Investments has 24 per cent public equities and 33 per cent private equities by way of comparison.)
“The innovation some of those public companies are bringing is great. It’s not either or, but public and private together that is compelling, they have different characteristics,” Wissell says. “Our relationship between private and public assets is a little bit more public oriented, which is predicated on our maniacal focus on liquidity.”
Historically HOOPP has been good at making returns in troubled markets, and Wissell is quick to point out that can only happen when there is cash available.
“We have ratios we look at and the quantum of cash available if we need it. How much is tied up and how much can you get at,” he says.
Liquidity management has developed using a series of factors to measure and manage the portfolio.
“I sleep well at night knowing tomorrow I can come up with an enormous amount of capital if I need to. We don’t think we need to, but we manage for events that can happen over time or in the near term,” he says. “We use a series of liquidity metrics, and then when something does go bump in the night you are a buyer. My crystal ball is not as clear as I’d prefer it to be, but you can build a diversified portfolio, hedge the risks you can and leave yourself liquid, because something will go bump.”
As an example, he says COVID presented enormous opportunities, and HOOPP was a buyer throughout all of 2020.
It’s Wissell’s opinion that “we do live in perilous times” but the fund is not leaning into any one thematic, rather it’s exploring themes, including AI and the impact on investments.
“AI for a large pool of capital is a tool for us to manage our corporate processes, management process, an area of investment and something our portfolio companies need to be aware of,” Wissell says. “There are a lot of touch points on that and makes it more complicated, it’s something we are spending a lot of time on.”
The investment process focuses in on understanding broad economic factors and examining its portfolio through certain factor exposures and the comfort around those, for example growth and inflation risk.
Once the risk parameters are set, for example around growth risk, the decision is made whether to get that exposure through in this case private credit or another investment that may have a better tradeoff.
“We try to build the best portfolio you can with the broad factors you are comfortable with,” Wissell says. “For example, how many nominal bonds can you own without inflation risk getting too high. This is where global diversification comes into play, and we tend to learn into the developed world economies. We have some emerging markets but that is an example of where we think we can make good returns but it’s a little bit trickier to know if you’re really getting paid for all the risks there.”
Fixed income allocation
Wissell says the team is continuing to manage the broader bond portfolio, which can be “tricky” in this inflationary environment.
“We need to be mindful of that and it’s why we have been actively adding to the real return bonds and can see that is going to pay dividends this year. It’s something I feel very strongly about,” he says. “When you can pick up 2-3 per cent real, for a plan like ours, on that portion of our investment assets it takes us a long way, because it is guaranteed return and liquid. With our remining liquidity it takes down the return pressure.”
Throughout the year HOOPP has been adding to its real return portfolio with the aim of getting the mix to 50:50 between nominal bonds and real return bonds.
“It’s a unique period of time where can manage inflation risk and lock in comparatively compelling rates for a really long time,” Wissell says.
HOOPP has invested in private credit for some years but only formalised it in the policy portfolio in 2023. It performed well for the fund last year with 9.33 per cent and Wissell says he continues to think the outlook for private credit is “constructive”.
“I’m in the camp that at this base interest rate and some of the spread tightening a bit, we will still get returns that meet our pension promise at reasonable risk,” he says. “Some of the structural changes mean it will remain compelling over the medium term. A 5 per cent allocation to that asst class, that’s a measured amount earning good returns.”
Decision making process
Wissell describes the portfolio construction as a “constant refreshing”.
“I like to think about it as if I was building the portfolio from scratch today how would we build it? And if that’s not the portfolio we have then make changes and bring people in. That’s’ how we stay fresh.”
HOOPP’s decision making process is best described as collaborative. Chief executive, Jeff Wendling, is the ex-investment chief of the fund and someone whose counsel Wissell finds important.
“On big decision he’s very much involved, he’s a phenomenal investor,” he says. “Some of the tweaks we are managing right now is with me, our asset class head experts, portfolio construction team, then on top of that there’s a risk team.
“It might seem like a lot of voices, but you want to avoid the unintended consequences. We take risk and are comfortable with markets going up and down, but don’t want to make an investment we didn’t really fully consider. This leaves you with a high degree of confidence and why HOOPP has done so well for so long.”
HOOPP has a 115 per cent funded status and a 10-year annualised return of 8.43 per cent.
Michael Wissell is one of the speakers at the Fiduciary Investors Symposium at the University of Toronto from May 29-31.
This is an excellent and short interview with HOOPP's CIO Michael Wissell.
I'm just going to give Amanda White some unsolicited advice: stop comparing HOOPP or any other large Canadian pension plan/ fund to CPP Investments.
It's literally comparing apples to oranges because base CPP still makes up the majority of the assets and therefore CPP Investments can easily take on more illiquidity risk than any other fund (this will change when enhanced CPP assets take over but we are far from reaching that point).
CPP Investments is also managing roughly six times the assets of HOOPP and has a more diversified portfolio across public and private markets.
Again, two excellent funds but let's stop comparing CPP Investments with any other Canadian pension fund including CDPQ (CPP Investments has more PE and private debt exposure than anyone else).
Now, as far as HOOPP's maniacal focus on liquidity, it's true they're always making sure they have access to huge liquidity especially when the going gets rough to seize on opportunities (as do other Maple Eight funds).
But in HOOPP's case, because they manage assets and liabilities so closely, balance sheet and liquidity management is critical to is operations:
Liquidity refers to how easily investments can be converted to cash. Highly liquid investments (such as bonds or stocks) can be sold quickly while less liquid investments (e.g., real estate or infrastructure) can take a little longer to find a buyer. For a pension plan like HOOPP, having sufficient liquidity ensures that liabilities (e.g., paying pension obligations) are covered and there is money available for investment opportunities.
The Balance Sheet and Liquidity Management Team ensures that HOOPP has the funding it needs to cover its cash needs (e.g., paying pensions), manage risk and enhance the performance of the Fund by investing excess liquidity (available money) to earn a return.
Our team focuses on managing HOOPP’s balance sheet (our assets and liabilities) and liquidity, while seeking to generate returns in two primary ways:
Basically, HOOPP's Balance Sheet & Liquidity Management team led by Robert Goobie uses derivatives like total returns swaps and engages in extensive repo activities on their massive fixed income portfolio to shore up liquidity and make sure they are using their capital efficiently.
Having a dedicated Balance Sheet & Liquidity Management team allows the Plan to capitalize on opportunities and allows CIO Michael Wissell to sleep well at night because if there are market dislocations, he knows the will have access to plenty of liquidity to capitalize on them.
And HOOPP is no stranger to concentrated equity markets.
Back in the day, former CIO and then CEO Jim Keohane shorted Nortel when it was 37% of the TSX using a costless collar strategy that netted HOOPP $850 million.
So, the boys and girls at HOOPP know their derivatives strategies inside out, and use derivatives to manage risks and liquidity.
What else? Michael Wissell still likes real return bonds but since our bonehead federal government did away with them, they're buying Treasury Inflation Protected Securities (TIPS) and have half their bond portfolio in them, the rest in nominal bonds.
I'm still of the view inflation pressures will persist so this isn't a bad decision.
As far as private debt, Michael is constructive on it and if you see recent comments from CPP Investments' CEO John Graham here, as long as your portfolio is diversified and you have the right partners, you can still make decent high single digit returns.
I would recommend you go back to read my interview with Michael when we discussed HOOPP's 2023 results here.
Nothing has really changed, HOOPP is in the "pension delivery business" as Michael always alludes to.
They go at their own pace and take intelligent risks where they see a clear payoff based on capital they're risking.
One thing worth noting above is they assess their portfolio constantly and stress test it against different macroeconomic factors, especially growth and inflation risk:
The investment process focuses in on understanding broad economic factors and examining its portfolio through certain factor exposures and the comfort around those, for example growth and inflation risk.
There are two terrible scenarios for pension plans/ funds: a protracted period of deflation and a protracted period of stagflation.
A high exposure to nominal bonds will somewhat ease the pain of the first scenario, a high exposure to real return bonds (or TIPS) will ease the pain of second scenario.
Alright, that's pretty much it for HOOPP's maniacal focus on liquidity.
Below, HOOPP's former CEO Jim Keohane describes how he used derivatives to profitably manage risk. He discusses how he in early 2000 he recognized that the then-highflying stock Nortel Networks Corp posed a threat to HOOPP’s portfolio, and how he chose to effectively short Nortel via a “costless collar” strategy, a decision that netted HOOPP over $850 million.
Comments
Post a Comment