Ontario's New Kid on the Block?
Imagine an institutional money management startup — one seeded with about C$56 billion ($43.6 billion) to invest and a potential client base of as many as 75 public pension funds, endowments and foundations, and other asset pools in Canada’s largest province.I want to first thank IMCO's Andrea DiNorcia for bringing this article to my attention. Andrea works in HR and Communications and posts a lot of great material on LinkedIn.
That’s been what Bert Clark has been overseeing as he leads the Investment Management Corp. of Ontario, Toronto, through its formative first year. Created by the Ontario Parliament in 2016, it was launched last July and now manages money for the C$29.4 billion Workplace Safety and Insurance Board and the Ontario Pension Board, which administers the C$26.4 billion Public Service Pension Plan, Toronto. The two asset owners have provided assets and investment staffs to create the foundation for the new firm, which operates independently from the Ontario government.
Mr. Clark’s first order of business since becoming IMCO’s president and CEO in October 2016 was combining the investment management cultures of two somewhat disparate public agencies — a pension plan and workers’ compensation organization.
“I spent my first six months merging, frankly,” Mr. Clark said in an interview at IMCO’s Toronto offices; “merging two organizations with all of the types of challenges that are typical in any merger, regardless of the type. We had two compensation schemes, two different risk systems, employees were in two different benefit programs, we had two different IT systems, we had two different segregated portfolios. And so we had to figure out how to bring all those people and capabilities into one organization. Effectively, what we were negotiating was a joint venture agreement to establish IMCO between WSIB and OPB.”
With that well underway, Mr. Clark now can direct IMCO’s attention to its prescribed goal of managing assets — not for the large Toronto-based provincial plans like the C$189.5 billion Ontario Teachers’ Pension Plan, Toronto, but for the 75 pension plans, endowments and other public institutions in Ontario, each with assets in the hundreds of millions of dollars, that are targeted by IMCO as prospective clients, Mr. Clark said.
“We completed what I would call Phase I of the project, which was merge the two organizations,” Mr. Clark said.
The second and third phases, which in some cases are happening at the same time, are now underway with a goal of bringing on external clients sometime in 2019.
“Phase II is to take what we inherited and turn it into an institutional asset manager capable of taking on more clients,” Mr. Clark said. “That’s no small task because what we inherited was investment capabilities from two organizations, but not the full suite of capabilities you would expect from an asset manager. Phase III is enhancing our investment capabilities. We want to provide a better platform, but to go beyond that, to have great portfolio construction capabilities that offer more asset classes than (asset owner clients) have today. There’s a big appetite for infrastructure, for example ... also to provide great risk reporting. That’s going to take a few years, to be honest.”
IMCO was modeled after government-created public money managers like the C$298.5 billion Caisse de Depot et Placement du Quebec, Montreal; C$135.5 billion British Columbia Investment Management Corp., Victoria; and the C$103.7 billion Alberta Investment Management Corp., Edmonton. But unlike those organizations, which are mandated to manage assets for all public asset owners in their provinces, membership among asset owners in the Ontario corporation is voluntary, Mr. Clark said. So IMCO executives have to learn how to market the organization.
“For example, (WSIB and OPB) didn’t have a head of client service. They had no external clients; they were internal investment teams. But if you’re going to solicit clients, you better have someone to interact with clients. They didn’t have a standardized way of reporting to clients. Why would they? They had internal reporting documentation, which looks quite different from what you’d need to construct for clients. So we had to build up that capability. ... We needed to develop products for clients. We didn’t have any products; we had two segregated portfolios. We had to take what we got and turn that into a full set of products. So that’s Phase II, which we’re in right now.”
IMCO clients will control their own asset allocation, similar to the model in Alberta, British Columbia and Quebec, and like them, IMCO will provide advice on any allocation questions. “They can’t delegate 100% discretion to us,” Mr. Clark said, “but it’s important to use our investment expertise to provide advice on allocations, risk tolerance, time horizons.”
Ultimately, IMCO will offer 15 strategies “that clients can assemble the way that suits their particular investment beliefs and liabilities,” Mr. Clark said. “It’s actually anything but a one-size-fits-all platform. We’re trying to construct a set of products they can assemble in a variety of permutations and combinations. ... We’re trying to see what range of products you could offer a client, sit down with them and meet almost everyone’s liabilities.”
Currently IMCO has eight asset-class strategies that came from WSIB and OPB: public equities, fixed income and money market, real estate, diversified markets, infrastructure, absolute return, private equity and private debt. Neil Murphy, IMCO spokesman, said the seven asset classes that will be part of the new product suite are still being formed but will “evolve” from those that currently exist.
In alternative investments, Mr. Clark said IMCO won’t necessarily have a disadvantage in generating returns or in competing for deals with the large public plans in Ontario that have been internally managing private markets, infrastructure and real estate for years. “The alternative asset classes are less ‘alternative’ today than they were 15 to 20 years ago,” Mr. Clark said. “They’ve become pretty accepted as parts of a typical portfolio. Twenty-five years ago, what was cutting edge at (Ontario) Teachers, to get involved in infrastructure, private equity, real estate in a direct way, is no longer a distinguishing investment strategy. All the large Canadian institutions are doing it and doing it directly. I think it’s still worth us being in those asset classes, but nobody should expect too much ifferentiation in returns for merely being in those asset classes.”
He said IMCO will set itself apart from the other provincial public plans on alternatives by creating its own specializations.
“It’s not enough to just say, ‘I’m going to be doing infrastructure, I’m going to be doing it internally.’ You have to say, ‘I’m going to be doing infrastructure, I’m going to be doing it internally, and I’ve got some differentiating expertise,’” he said. “We’re comfortable with construction risk in greenfield infrastructure, and we’ve developed an expertise in that regard. That makes you different from everybody else. We will show up if we can bring something distinctive to ownership of that asset class or that particular investment. ... That’s one of the advantages of showing up 25 years after everyone else ... Our organization doesn’t reflect the strategies of 10, 15 years ago that may be less powerful now.”
Bert Clark is a smart man. Having helped Gordon Fyfe ramp up private equity, infrastructure and timberland at PSP and warning the Board back in 2005 to steer clear of commodities as an asset class, my best advice to him is don't follow the pension herd and don't be scared to think and act differently.
But in order to do this, IMCO has to hire top talent and it's lucky because it's based in Toronto, the heart of Canada's pension ecosystem. There is a lot of talent on the street right now in Toronto (and Montreal) looking to join an organization like IMCO.
So far, the timing hasn't been right but I think things are slowly changing and I expect some announcements in the weeks and months ahead (you can track IMCO's news releases here).
IMCO first had to deal with the merger of two distinct entities, WSIB and OPB, but that seems to be almost done and they can now focus on Phase II which is taking on more clients and Phase III which is managing assets.
My advice to IMCO's clients is to delegate 100% discretion to IMCO's staff when it comes to asset allocation. Sure, you can work with your actuaries and consultants but at the end of the day, you need to trust your investment managers.
Having many clients isn't always easy, nor efficient. Ontario Teachers' has an advantage over an AIMCo, BCI or Caisse because its clients are all teachers, it's much easier managing assets and liabilities when you have one client.
Part of the challenge IMCO will have is to juggle competing sets of interests and recommending the right strategies to its clients depending on their liabilities and risk tolerance.
In this regard, IMCO is acting like a multistrategy hedge fund which offers bespoke strategies to each of its clients, not a single multistrategy fund for all clients.
As far as strategies, Mr. Clark is already signalling he's not afraid to venture into terrain Canada's large pensions typically avoid, like greenfield projects. Keep in mind, Bert Clark was the former CEO of Infrastructure Ontario, so if it's one thing he knows very well is PPPs and taking on construction risk.
I recently wrote about the Caisse's greenfield revolution, discussing the massive $6.3 billion REM project where I said the Caisse is doing something no other pension has done and if successful, will likely transform the way governments finance, construct and operate their infrastructure projects.
I barely had time to end that comment when all the naysayers came at me with skeptical emails questioning Michael Sabia's 8-9% return expectations and also questioning the governance of this project. One guy even asked me: "Why didn't the government do a big RFP for this REM project?".
My simple answer is nobody would have done it. The typical PPPs are much smaller in scale and the construction companies get big subsidies to construct, they also put down no or negligible equity, get financed by banks (debt) and incur no revenue risk.
The Caisse is putting down 55% equity, bears construction and revenue risk so if something goes wrong, it will need to put more money into the project. In other words, the Caisse has significant skin in the game which is what you want when investing in a greenfield infrastructure project.
There's no way a Macquarie or even Brookfield would have assumed such risk, they would have piled on the debt and walked away at the first sign of trouble (at least Macquarie).
As far as other governance matters, it's not Michael Sabia and Claude Bergeron calling the shots. Of course there are external verifications taking place and it's public knowledge the Auditor General of Quebec is looking into all aspects of this project and will shortly come out with a public report.
And Sabia's 8-9% figure for the REM project is pretty conservative if you ask me. Again, it's a greenfield project so the Caisse is incurring construction and revenue risk, but if all goes well, it should be able to deliver 200-300 basis points premium above brownfield infrastructure investments which yield 5-6% in this environment.
Bert Clark knows all this. I'm not saying he's going to go out and bet the farm on one huge greenfield infrastructure project but given his experience, he's right to look into greenfield projects in an environment where brownfield assets are being bid up to nosebleed levels, negatively impacting their future returns.
What other strategies will IMCO engage in? That all remains to be seen but I'm getting very nervous on credit strategies including private debt or alternative lending which everyone is jumping on these days as they reach for higher yield.
Below, take the time to watch AIG's CIO Doug Dachille who appeared on CNBC earlier today. Great interview, I love this guy, he knows what he's talking about. "I'm in the business of trying to earn spread on where I price liabilities and where to invest." (sorry, only Pro subscribers can watch the full interview so I added a brief clip of him providing perspective to the fixed income space in a low-rate environment.)
He said AIG has long-dated liabilities and a very large commercial loan portfolio lending to businesses where banks don't lend but he noted that illiquidty spreads in this space have come down considerably as many new players (like Canada's large pensions) enter the space.
Like I said, private debt makes me very nervous, too many players chasing fewer and fewer deals.
As far as Ontario's new kid on the block, I wish Bert Clark and the folks at IMCO all the best as they get ready to roll out Phase II and III. If you're looking for some consulting advice, feel free reach out to me and I'll be glad to chat with you.
Update: Mathieu St-Jean brought to my attention that Jean Michel, the former Executive VP, Depositors and Total Portfolio at the Caisse, was just named CIO at IMCO (click on image):
More on this appointment from the Globe and Mail here:
Bert Clark, CEO of IMCO, said he was drawn to Mr. Michel’s experience in portfolio construction, which involves an analysis of a client’s liabilities and needs and how each investment made for them will contribute to their overall investment goals.I am happy for Jean Michel and think this is a great decision on IMCO's part. Mr. Michel did wonders turning Air Canada's Pension around (bringing it back to fully funded status) and I think his knowledge and experience will prove invaluable at IMCO.
“Almost every investor will agree that that’s the most important thing you do is decide what you’re going to invest in. And yet if you look at the asset management industry, the time that’s spent on portfolio allocation pales in comparison of the amount of time that’s spent on outperformance in individual asset classes,” Mr. Clark said.
Mr. Michel will also build up more internal investment expertise at IMCO so that clients’ money can be directly put to work in asset classes such as private equity, infrastructure or real estate. This is already a significant departure for the two current clients, which outsourced the majority of their investments.
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