2018 Power 100 list:
For the seventh iteration of the Power 100, confidence is key, and as we approach potentially choppy waters in 2019, maintaining that confidence will be essential to timing the markets. That’s why these asset owners are the best of the best in 2018.You can view this year's Power 100 list here and the profiles here.
It’s easy to flourish in a bull market, but as we saw this year, anything can happen in an instant. Throughout a swath of selloffs and rallies, these esteemed asset owners kept their cool (and their patience) to deliver stellar returns and innovate new concepts to their strategy as they rolled with 2018’s punches.
Speaking of innovation, our selections took full advantage of their abilities to secure their slots, (innovation accounts for 50% of our methodology). They also made their best effort to reach out to their peers and collaborate some of the highest-profile deals of the year.
Chris Ailman, Britt Harris, and Robin Diamonte have kept their 2017 spots in our top five leader bracket, but they are joined by Lim Chow Kiat and Ash Williams, who have made dramatic ascensions from their #10 and #13 ranks of last year.
There were a few Canadian pension CEOs who made the list, however, only two of them had profiles. First, Mark Machin CEO, Canada Pension Plan Investment Board who is pushing for radical diversity:
Diversity, efficiency, and responsibility are essential to the long-term success of any investment firm, especially the largest retirement organization in Canada.I'm not surprised Mark Machin made the Power 100 list (#10) nor that he received a 98% approval rating on job and recruitment site Glassdoor. I only met Mark once but he struck me as a very nice, intelligent and thoughtful leader who cares about his employees and having the right culture at CPPIB.
Mark Machin, President and CEO of the Canada Pension Plan Investment Board, is ensuring that success daily for the body’s beneficiaries and it’s $366.6 billion in assets.
Machin is a believer in diversity, not just across asset classes, but in the boardroom as well. This year, the firm’s sustainable investing team put board effectiveness as a major focus area for its goals, which also include climate change, water, human rights, and executive compensation. That means more women and people of color on company boards, and better corporate governance structures to help keep those companies running —and growing— for years to come.
“While there’s much talk about companies bringing broader perspective to the boardroom, it’s not consistently accompanied by action,” he wrote in an opinion piece in the Globe and Mail titled “How CPPIB is advocating for more women on boards.”
“It’s crucial for companies in which we invest capital to assemble boards that reflect the full range of talent available,” Machin said in a recent statement. “If companies don’t take the required action to achieve the board effectiveness that today’s business environment requires, it falls to investors to provide a nudge, and when necessary, a push.”
The fully funded CPPIB is committed to urging those companies to rigorously evaluate their directors, including their gender makeup,” he wrote, adding that the plan believes companies with diverse boards are “more likely to achieve superior financial performance.”
Last year, Machin and staff helped push for change at 45 Canadian companies that it invested in, which had no female directors. Almost half of those companies have added women to their director seats since. The same was done earlier this year for 22 other companies, where the organization voted against six nominated chairs, and against the entire board slate for seven more.
“By signaling that board effectiveness is a core topic of engagement for us, CPPIB urges other large institutional investors to send similar messages that they, too, believe the pace of change must accelerate,” he said in the newspaper column.
This CEO has a 98% approval rating on job and recruitment site Glassdoor. That’s not an accident. Machin remains staunchly committed to the Canada Pension Plan Investment Board’s goals of long-term sustainable companies.
Some of his investment decisions include considerable private equity ventures and green initiatives to keep the risk as low as possible. This year, the firm became the first pension fund in the world to issue green bonds, and announced plans to expand its renewable energy portfolio by more than $3 billion. The fund takes a direct investment approach to private equity and real assets, and is long on these vehicles.
“Our intention is to hold direct equity investments for several years—and even decades in the case of infrastructure or energy investments,” it said in its report.
The organization’s assets are well-diversified, both by assets and region, as only 15% of that $366.6 billion stayed in Canada. Its asset mix, as of March 31, was 38.8% public equities, 20.3% private equity, 12.9% real estate, 11.1% government bonds, cash, and absolute return strategies, 8% infrastructure, 6.3% credit investments, and 2.6% in other real assets.
As for global diversification, 37.9% of those assets were in the US, 20.4% Asia, 13.2% Europe (excluding UK, which had a 5.6% allocation), 3.5% Latin America, 3.1% Australia. The remaining 1.2% was scattered across other parts.
In fiscal 2018, the Canada Pension Plan Investment Board returned 11.6%, slightly down from 2017’s 11.8%, but still impressive. Over the past 10 years the fund has returned 8%, and 12.1% over the last five.
On the issue of diversity, I agree with CPPIB and other institutional investors pushing for more women on boards. It's 2018, women are probably more important contributors to the economy than men, it's totally unacceptable to lack gender diversification on boards.
Also, Mark Machin is the head of the Canada Pension Plan Investment Board, the biggest and most important pension fund in the country. Half the contributors are women so he's right to ask the companies they invest in to have more female representation on boards.
But I'm going to share something here even if some of you think it's unjustified or controversial. Canada's large pensions aren't that different from large banks, large Crown corporations and large government offices and when it comes to gender diversification at all levels of their organization, there is still a lot more work that needs to be done (let's not kid each other, it's still an old white boy's club, especially the higher you go in the organization).
No doubt, it's getting better and will get better over the next decade but there is still way too much gender inequality and lack of equal representation at all levels of the organization.
And for some groups, like people with disabilities, there is no effort whatsoever to attract, accommodate and retain them. None, all they state is "we do not discriminate against applicants based on race, color, sex, religion, national origin, disability or any other status or condition" but a lot of that is just posted for legal reasons, the reality is quite different.
Importantly, and I've written about this before, there should be a comprehensive diversity report in the annual report which provides hard statistics on how each organization is addressing diversity within its workplace at all levels of the organization.
Saying you don't discriminate but never bother to follow up with concrete actions to promote diversity at all levels is akin to window dressing, it looks good on the outside but it's covering up a serious deficiency on the inside and sends the wrong message internally.
Again, you don't have to agree with me, I'm calling it like I see it and in private conversations, many leaders have admitted to me they can do a lot more to promote diversity and inclusion within their organization at all levels.
It might not be easy but nothing worthwhile ever is.
Still, I have to applaud Mark Machin's efforts for promoting diversity outside and within CPPIB. I know it's something he believes in and takes very seriously.
The other profile I wanted to cover is Vincent Morin, president of Air Canada's Pension Plan who discussed how Air Canada retooled its structure for better returns and lower pension plan risk:
CIO: You are in charge of a major enterprise. Air Canada’s pension plan assets are significant in size when compared to its market cap. Tell us about this situation and the challenges it presented at the outset.It remains to be seen whether Air Canada’s move to enter the annuity market is the start of a new pension trend but Vincent Morin and his team have done wonders bringing back that pension from the abyss after the 2008 crisis.
Morin: Air Canada Pension Plans, with $20 billion in Canadian dollars in assets, are enormous in size compared to the plan sponsor, mainly due to the relatively generous plan design inherited from the early days when they were a crown corporation. Pension liabilities were and still are a multiple of Air Canada’s market cap.
Pension plans became a significant enterprise risk management issue and pension financial risks had to be reduced. However, long-term expected return needed to be maintained to keep long-term costs reasonable, as the plans were still mainly open in 2008.
Before joining AC in 2009, I was with a large consulting firm, working to develop strategies that would better manage the risks associated with pension plans, while keeping the expected return at a reasonable level. AC had virtually outsourced all investment activities at that time and they asked a couple of key individuals to join them to help build an investment team and the necessary systems to implement the strategy.
CIO: How did you go about doing that?
Morin: The first big innovation was the strategy in itself: Moving from a traditional 60-40 allocation, completely outsourced, to a very sophisticated, mostly internally managed active strategy.
The strategy required a decent use of leverage, so we needed to convince our stakeholders that leverage didn’t necessarily imply increasing risk and could also be a good risk management tool. However, we had to build everything from scratch. From governance, IT, systems, risk management, trading capabilities, operations, reporting, etc., it all needed to be created, as no out-of-the-box system was available to implement our structure and ideas. We were also working on a relatively tight budget.
We had to enter into agreements to trade derivatives—using International Swap and Derivatives Association Master Agreements, or ISDAs, and Global Master Repurchase Agreements, or GMRAs, and ask for credit lines to counterparties. This was just after the financial crisis, which was not an easy task for a company that came close to bankruptcy and needed to negotiate special regulations with the federal government to reduce pension deficit payments. Nevertheless, we gradually convinced them to work with us. We now have ISDAs with 23 counterparties globally and 16 GMRAs, and we trade with 35 executing brokers.
CIO: No doubt you had to win over Air Canada’s management.
Morin: Educating and convincing our board that their primary focus should be on managing the asset versus liability risk, and not only focusing on absolute performance of the assets, was a very long-term process.
Prior to implementing the strategy, we worked on the governance structure to clearly define the roles and responsibilities of the board and the Management Pension Committee, composed of AC executives reporting to the board. They delegated to me and my team the authority for all investment activities. This provided us with much needed flexibility and agility in executing the strategy.
CIO: Then there’s the matter of risk management.
Morin: We are strong believers in alpha and, although beta risk is often the driver, alpha risk is usually too small, over-diversified, and not well-balanced with beta risk. We believed that added value coming from active management could be a strong driver in improving the financial situation of the plans over the long-term, even though our strategy had a very significant allocation to fixed income.
To do so, we had to be very nimble. Therefore, we had to work on our investment structure and governance process to allow for such nimbleness, while keeping risks at a reasonable level. We worked for many years on our risk budget framework and developed investment polices to achieve the desired process.
CIO: How did you do that?
Morin: We needed to ensure we had the best toolbox possible to implement a very dynamic strategy, while also developing internal risk systems and hiring specialized staff to allow us to trade virtually anything. We now use a toolbox similar to many hedge fund managers, and we manage almost 80% of the portfolio internally with a team of close to 50 individuals, versus a 100% outsourced model nine years ago.
We use most of the complex instruments—from traditional interest rate swaps to the most complex variations of variance swaps—to reduce our risk or build hedges to our more traditional positions. We also now run multiple quantitative strategies developed internally and we execute over 2,000 trades every month.
CIO: Do you have an allocation to private markets and, if so, what is your approach?
Morin: We have a significant allocation to private markets(real estate, infrastructure, private equity, private debt, etc.) which we manage with a very dynamic and opportunistic approach. We set an overall target of 20% of plan assets in private markets without a fixed target at the sub-asset class level, allowing us to move around within the latter according to market opportunities.
In addition, we invest significantly in co-investments and niche investments to improve returns, enhance diversification and reduce fees. This is supplemented by risk management models emphasizing embedded leverage—a big challenge in private markets—and some dynamic hedging overlays that are used to manage undesired risks.
CIO: How are you structured for collaboration?
Morin: We have a unique portfolio management approach/team structure, which manages the plans as one team and one book, to avoid the creation of silos and to foster idea generation and discussions. This resulted in a very flexible approach where, for example, a real estate investment can easily be compared to a high-yield bond investment to ensure we invest our capital where the best return expectations by unit of risk reside.
CIO: How has that worked out in terms of performance?
Morin: Ending September 30, our team has added value relative to the benchmark for the last 25 quarters in a row, that’s over six years now. This results in an annualized performance for the plans of 12.1%, versus 8.9% for the benchmark, ranking us first in the universe of large Canadian plans over the nine years ending June 30, both on a total return basis and on a value added relative to the benchmark basis.
The deficit of the plans on a wind-up basis went from a $4.2 billion deficit in 2012 to a $2.6 billion surplus in 2018, while reducing our overall risk compared to liabilities by more than half. Air Canada has been in contribution holiday mode for the last three years.
CIO: Now that you are in surplus and have significantly reduced the risk of the plans, what’s next in your strategy?
Morin: This year, I convinced the board of Air Canada to innovate even further in reducing the risk of its pension plans by gradually purchasing annuities for its pension plans in a whole new way. Air Canada is in the process of creating a new wholly-owned life insurance subsidiary which will be registered with the regulators. That structure will allow us to provide additional capacity in the Canadian market to purchase a significant amount of annuities which will help secure pensions paid to our members and, at the same time, create a new line of business for Air Canada. My team leads this unique project—to our knowledge, a first worldwide—which is still ongoing.
As I stated in my last comment on IMCO, Vincent's predecessor, Jean Michel who is now IMCO's CIO, was the one who built the team and the processes that led to this success and Vincent has taken it a step further with this wholly-owned life insurance subsidiary.
In a nutshell, Air Canada's Pension replicated HOOPP's approach (read a nice background here) bringing as many assets as possible internally and using leverage intelligently (bond repos and intelligent use of derivatives) to juice returns while always emphasizing an ALM approach and risk-adjusted returns.
I used to work with their Senior VP Fixed Income and Derivatives, Marc-André Soublière, at PSP and still consider him one of the best global macro managers in Canada. I believe when I last communicated with him in early September, he was telling me "US long bond yields are going higher". He was right but I remain a long bond bull despite the backup in yields this year (He shared this after reading this comment: "No longer short duration, now small long duration through short end of Canada and US").
In late August, their Vice President Asset Allocation, Jean-Francois Paquin, came to my house with his son to pick up two bookcases of finance and economics books which he bought from me. I needed to get rid of all my books and a lot of furniture fast to renovate and hope he and the team at Air Canada Pension enjoy those books which I collected over many years.
Anyway, Air Canada's Pension is in great shape and along with CN Investment Division run by Marlene Puffer, it's one of the best corporate DB plans in the country (from the few remaining).
My only advice to Vincent is the same advice I gave above to everyone else, try to do more to promote diversity within your team at all levels.
Don't take this as harsh criticism, I'm a stickler for diversity and inclusion, real, not bogus diversity at all levels because I believe it not only enriches an organization and makes it better, it's the right moral and ethical thing to do in an open and multicultural society.
Let me end by bringing to your attention something Marlene Puffer, President and CEO at CN Investment Division posted on LinkedIn last month from the Canadian Gender & Good Governance Alliance, a CEO blueprint for gender diversity:
This is a blueprint for CEOs who understand that implementing gender balance throughout their organization is important. It will give you a step-by step framework on the components of building a vision, structuring and mobilizing management teams and focusing on gender diversity initiatives that actually work.You can can download the guide here. it is also available in French.
Building a gender diverse organization is more than the morally right thing to do. A conclusive body of evidence indicates that diverse organizations tend to be more innovative and perform better financially than their peers. Your customer base reflects growing social diversity, and you need to respond to stay competitive.
If you are a publicly traded company, your investors might already ask for your gender diversity policies before buying your shares. And in the global race for talent, organizational diversity will be a key recruitment tool.
Designed to help frame a CEO's agenda on gender diversity, the CEO Blueprint outlines three key steps and provides tactics throughout for:
1. Building your vision
2. Making it mission critical
3. Focusing on high impact practices
This guide can show you how to take advantage of leading practices for your organization.
Below, UPS's Janet Stovall's TED talk on how to get serious about diversity and inclusion in the workplace. And research proves that diversity and inclusion in the workplace directly correlate to driving innovation, a better understanding of customers, a higher return on equity, and significantly higher earnings. Retail and consumer brand CEOs weighed in at NRF 2018 Retail's Big Show.