IMCO Flying Under the Radar?
One of the biggest institutional investment managers in Canada is sharpening its sales pitch.Amanda White of Top1000funds also reports, IMCO plots private, inhouse future:
The Investment Management Corp. of Ontario only became fully operational in July 2017, but when it came online, it did so as the ninth-largest institutional fund in Canada. The organization has more than $60 billion in assets under management courtesy of its first two clients, the Ontario Pension Board (OPB) and the Workplace Safety and Insurance Board (WSIB).
Now, IMCO is getting ready to try to attract new members from the patchwork of funds that invest on behalf of the province’s public-sector entities. According to the head of the fund, there is “a huge potential client list” for IMCO to go after.
“We believe we’ve got a very compelling value proposition,” said Bert Clark, president and chief executive of IMCO, in an interview. “What we’re building is something that none of them could replicate at the same cost.”
Created by the provincial government (although it is an independent firm), the intent was for IMCO to try to pool funds and offer public-sector pension plans lower costs with economies of scale. It is similar to outfits in other provinces, such as the Alberta Investment Management Corp., although participation in IMCO is voluntary.
“There are many, many public funds in Ontario,” Clark said. “Every university has its own pension fund. Crown agencies have their own pension funds. There are various pools of capital in the province itself, and all of those right now are being administered separately.”
Under its model, IMCO offers advice and makes the day-to-day investing decisions for clients, but members retain responsibility for their liabilities (such as pension payments) and control over the asset allocation strategy.
Since coming into the world under an act of provincial parliament in 2016, Clark said the fund has been busy working on its risk-management system and front-office operation. Come early 2019, IMCO will ratchet up its recruitment efforts.
“We haven’t been out aggressively telling our story yet, because we wanted to have all the foundational capabilities in place,” said Clark, who was formerly the head of Ontario’s infrastructure agency, Infrastructure Ontario.
“In January, we will go out and say, ‘This is who we are. This is what we can do for you. These are our costs. This is the value proposition. And this is the process for joining.’”
IMCO’s name is starting to turn up in some interesting places as well. That includes the announcement last week that the fund was part of a consortium that purchased a 25-per-cent stake in a 413-megawatt portfolio of Canadian hydroelectric assets owned by Brookfield Renewable Partners LP.
“It underscores our capability to provide our clients with access to high-quality investment opportunities and aligns with our strategy of creating strong partnerships with leading, global infrastructure firms,” said Jean Michel, IMCO’s chief investment officer, in a press release announcing the transaction.
IMCO is also teaming up with commercial real estate company Cadillac Fairview to build an $800-million office tower in downtown Toronto, an investment the fund noted was “well-aligned” to the Ontario Pension Board’s return objectives.
“The management fees for some of these asset classes are really high,” Clark said. “But again, if you pool the assets together, and we’re doing that as a $65-billion or bigger organization, we have a different bargaining power. We can establish strategic relationships with funds. And so the costs are a heck of a lot less.”
IMCO, being only a few years old, has no legacy IT systems to update, which Clark called a “huge, huge advantage.” The fund has the benefit of hindsight and history as well.
“What were unique strategies 25 years ago have become much more commonplace,” Clark noted.
IMCO has already reached a “critical mass” with its current mountain of assets, its CEO says, and the fund booked a total return for 2017 of 10.3 per cent.
Existing clients are expecting their membership to pay further dividends. In its 2017 annual report, the Ontario Pension Board, which administers the Government of Ontario-sponsored Public Service Pension Plan, said that its 2018 operating expenses were “expected to decline due to the outsourcing of OPB investment operations to IMCO.”
And with every additional client, Clark added, the costs of doing business are spread over an even wider base.
“I’d like to think that within five years, we’re at $100 billion,” in assets, Clark said. “But in order to hit $100 billion, we’d need to have pretty good growth of the existing assets we’re managing, and new members.”
Clark has no illusions about the challenge ahead in getting those members to sign on.
“These will be big decisions for our clients,” Clark said. “I think there’s a long sales cycle to this, but it begins in January.”
The C$60 billion ($48 billion) Investment Management Corporation of Ontario, Canada’s newest pension investment manager, is assessing its inherited asset allocations and making plans to revitalise.Earlier today, I had a chance to talk to Bert Clark, IMCO's president and CEO, and go over this article and much more.
The fund, which was created in July 2016 and launched a year later, will look to increase its allocation to private markets and make more direct investments. It will also introduce a global credit portfolio, consolidating the global credit allocations that are now scattered across the asset-class buckets.
“The new structure will have all credit within one diversified portfolio, and we would expect the credit exposure of clients to increase because of that,” IMCO CIO Jean Michel says. “It’s a great way to diversify.”
IMCO’s current asset allocation is public equities (39 per cent), fixed income and money market (23 per cent), real estate (14 per cent), diversified markets (7 per cent), infrastructure (7 per cent), absolute return (6 per cent), private equity (3 per cent) and private debt (1 per cent).
Compare this with Ontario Teachers’ Pension Plan, one of IMCO’s contemporaries, which has an allocation to private equity of about 17 per cent.
Two specific aims of IMCO’s strategy evolution are to increase its amount of private assets and to increase the amount of assets managed inhouse.
When IMCO’s two inaugural clients, the Ontario Pension Board and the Workplace Safety and Insurance Board, came into the fold, the fund inherited their existing strategic asset allocations.
One of IMCO’s core offerings is to provide asset allocation and portfolio construction advice; it is now going through that process with clients. IMCO clients will retain asset allocation decision-making, with input from the IMCO team, which will offer 15 strategies for clients. It offers only eight now.
Key to its approach is the belief that asset allocation is among the most important determinants of investment returns and risk. Another core belief is that understanding and managing risk is at the core of investing.
One of IMCO’s key initiatives, and one of the purposes of the pooled asset management concept, is to provide better access to investments than clients can get on their own; in particular, minimising the use of expensive structures and maximising scale and experience to pick strong strategic partners.
“We inherited asset allocations that were fully invested and were 75 per cent externally managed,” Michel says. “We also inherited a cost structure we think we can improve on, as the existing investments include lots of active management as well as fund of funds and manager of managers.
“We are working with clients to look at the type of portfolio we are offering and working with them on asset allocation 2.0.”
Internal management, manager relationships and fees
Michel was appointed CIO in June, coming from Caisse de dépôt et placement du Québec, where he was executive vice-president, depositors and total portfolio. Prior to that, he was the president of Air Canada Pension Investments. He says the plan is for IMCO to manage the majority of assets inhouse within five years.
“We will be cheaper than our clients [for] the same asset mix,” he says. “The savings we make by managing assets internally we are using to build out our risk and portfolio construction function. Then, overall, we will get a better asset management function.”
As with many pension fund managers, one of IMCO’s core beliefs is that costs matter. That’s something it lives day to day.
“When we look at results, we look at them on a fully net basis, not every asset management firm does that,” Michel says. “We make sure all our portfolio managers understand the full costs of what it takes to invest and know all the external management fees they have, explicitly and implicitly, even those that are not fully transparent, so they can make the best decisions on whether to invest.”
IMCO will internalise investment management where it makes sense and where costs work. About 40 of the firm’s 100 staff are in the investment team. The expectation is that, five years from now, the organisation will employ between 250 and 300 people.
Direct investments are expected to provide a big portion of this growth. But Michel is quick to point out that the evolving investment structure will include a total-portfolio team to look at the fund as a whole.
“The probability of achieving long-term value creation is increased by looking at the total portfolio view. This is critical for us,” he says.
IMCO has many external managers, with an average of 10-15 partners per asset class. This will be reduced and the number per asset class is expected to be closer to five or six.
“Using strategic partners will be very important to us and we will focus on a limited number of great partners,” Michel says.
As the investment decision-making process becomes internalised, with IMCO taking more direct investments, there will also be a shift in the way the firm uses managers.
“We will be making more direct, but also more complex, transactions,” Michel explains. “So we will still use partners but use them differently. The goal is to be closer and create true partnerships. We will also look to co-invest but on more equal footing.”
IMCO chief executive Bert Clark, who was formerly chief executive of Infrastructure Ontario and the recipient of the 2017 Champion Award from the Canadian Council for Public Private Partnerships, says good partners offer something the firm can’t provide itself.
“We think what makes a good partner is origination capability and asset management expertise we don’t think we can replicate,” Clark says. “One clue to what that might look like is the fact IMCO has a global portfolio but just one office, in Toronto. Private assets are becoming more difficult and complicated, as there is more demand and also expertise has risen. We need to be important to external managers, and I think we can, as we can move quickly but still look at complicated transactions.”
IMCO was created following extensive review by the Ontario Government into the best model for managing pension assets, resulting in a report by the pension investment adviser, William Morneau. The report outlines the key attributes of best practice – including appropriate scale and an approach to governance – that could be a guide for all organisations managing pension assets.
Morneau’s report shows the advantages of a pooled pension management organisation, including reduced duplication and costs, greater access to additional asset classes and enhanced risk-management practices. It also outlines potential cost savings between $75 million and $100 million a year, once fully implemented.
Clark says the organisation offers strong risk management and reporting, which also requires scale.
There are two key advantages to such a new investment organisation, Clark says.
“On the IT side, many organisations struggle with legacy systems and it is hard to move off those. Starting at this point means we don’t have those legacy problems and, for example, we can buy software as a service [not a product].
“We also get to step back and see what’s worked for other big public funds globally. Everyone is aware of the success of the Canadian model, but that is not the only successful model and we’ve looked to the Northern European pension funds and the US endowments,” he says. “Starting with C$60 billion means we have the critical mass to build right.”
Specifically, the fund has looked to the specialties of various players and can borrow from each of them. US endowments are good at strategic partnerships with managers and focusing on the origination of investments. Northern European funds are good at total portfolio management. The Canadians are good at internal investment management.
IMCO has now built up its risk and investment functions and is ready for action.
“We are very close to being ready to engage with potential clients and will look to do that in Q1 next year,” Clark says. “We have our CIO, CRO [chief risk officer], a risk system and a way of reporting to clients. We have a set of investment strategies for each asset class and can advise on portfolio construction.”
First, let me thank Neil Murphy, IMCO's Vice President, Communications, for setting up this conference call and sending me some material to read to prepare, including Bill Morneau's October 2012 report, Facilitating pooled asset management for Ontario’s public-sector institutions.
Take the time to read the full report here and below, I note the passage that struck me (click on image):
This is an important passage, one I will come to later.
Second, let me thank Bert Clark for taking the time to speak with me. It was the first time we spoke and he struck me as an extremely nice, bright, focused and humble guy who really knows what he's talking about.
Bert is a lot younger than his peers but what he lacks in experience he more than makes up for in passion and knowledge. I got the sense he's learned a lot since taking over the helm and enjoys learning and is very focused on delivering the very best value proposition to IMCO's current and potential clients.
He began by giving me a quick backgrounder on IMCO. The image below is taken from the website (click on image):
He explained there are many pools of capital in Ontario that are too small and their investment management is either being outsourced to external consultants (outsourced CIOs) and actuarial firms or is not benefitting from the size and scale of an IMCO. "The bigggest problem is their high cost structure, especially to access private markets."
Bert told me by onboarding and now fully managing the assets of the Ontario Pension Board (OPB) and the Workplace Safety and Insurance Board (WSIB), they were able to achieve "critical mass right out of the gate."
It's important to note that IMCO is a large investment manager like CPPIB, PSP Investments, AIMCo, BCI and the Caisse and only handles the investment side of the equation. Unlike OMERS, OTPP, OPTrust, it does not administer pensions, handle liabilities or set asset allocation (it advises its clients on asset allocation and I would take that advice seriously).
Unlike other large Canadian pensions, however, IMCO does not have captive clients so a considerable amount of time will be going to educating prospective clients on the advantages of joining IMCO. "Much like a private asset manager, a lot of time will be going into client development."
Bert seems fine with that and relishes the fact they need to prove themselves but I told him that Ontario's legislators made a big mistake by not forcing these pools of capital to join IMCO (in fact, this was a recommendation of the Morneau report). Moreover, I said some pools of capital will perceive IMCO as a threat even if they're not run as efficiently and don't benefit from scale and the internal expertise IMCO has.
He told me there's roughly $80 to $100 billion in potential pools of capital and while some may perceive IMCO as a threat and "choose not to join for all the wrong reasons," he hopes to convince most of them that IMCO's value proposition and advantages are too compelling not to join.
In particular, he cited three factors as to why it makes great sense to join IMCO:
- Advice around portfolio construction: It's no secret that asset allocation is the biggest determinant of returns and part of IMCO's seven investment beliefs is that by providing strong in-house asset allocation advice and a diverse range of investment products, they can enable their clients to achieve sustained, long-term results that exceed their required rate of return.
- Access to private markets: IMCO's scale allows it to form strategic partnerships with top funds all around the world so they can invest and co-invest with them on larger transactions to lower overall fees. Smaller funds lack this scale and end up paying big fees to funds to gain access to private markets.
- Unparalleled risk management: Again, another one of IMCO's seven investment beliefs is that understanding and managing risks is at the core of investing: "We believe that the ultimate risk for our clients is their inability to meet their promised financial obligations. True diversification and capital preservation are key to mitigating this risk and strong risk management systems and practices improve the investment decision making around these factors. Therefore, a robust risk framework and client engagement guide our investment activities."
I shifted my attention to investments and asked Bert about deploying capital in public and private markets after a long bull market. He told me: "In retrospect, it has been a very good ten years but if you think back to October 2008 and even 2009, people were very wary of taking risks back then."
Very true. He also agreed with me that a large pension has to invest over the long term and cannot time public or private markets perfectly.
Still, in our discussion on infrastructure, an asset class he's very familiar with because he was the head of Infrastructure Ontario before joining IMCO, he said they're open to doing some greenfield investments as long as the risks are appropriate and that illiquidity premiums of the past are gone and you can't just deploy capital in infrastructure, you really need operational excellence to add value to an asset.
I couldn't agree more and told him that in the old days, they used to hire investment banking people focused on deals and look to buy assets on the cheap. Nowadays, that strategy doesn't work, you really need people in infrastructure who know how to add value, "not plain old originators of deals because illiquidity premiums have come down considerably."
In fact, Bert notes this is the case for all private markets, "they have become mainstream investments and the differentiating factor which will lead to success is scale, building direct investment capabilities (co-investments or purely direct deals you originate) and adding value through operational excellence."
In order to do this properly, IMCO needs to hire a great investment team and that job falls under Jean Michel, IMCO's CIO. Bert told me Jean has been busy meeting with potential candidates to fill the spots of head of public markets, head of private markets and other important investment roles.
Recall, Jean Michel joined IMCO after leaving the Caisse where he was the Executive Vice-President, Depositors and Total Portfolio. His departure from that organization was another bonehead HR move, one of a few I've seen at Canada's large pensions, but the Caisse's loss is IMCO's big gain.
Prior to joining the Caisse, Jean was the president of Air Canada Pension where he focused on asset liability matching, portfolio construction, risk budgeting and the intelligent use of leverage to bring that plan back to fully-funded status from a huge deficit.
In fact, just today, I read a great interview on Chief Investment Officer where Vincent Morin, the current president of Air Canada Pension, explains how Air Canada retooled its structure for better returns and lower pension plan risk. Vincent is a very smart guy, he learned a lot under Jean's watch.
Anyway, Jean Michel has to build his investment team and he has great candidates to choose from in Toronto, Montreal and other cities. He needs alpha generators in public and private markets and people who will cooperate and work well across all asset classes, not in silos.
I have no doubt he's going to find the right people to join his team and he has the full backing and support of Bert Clark.
Bert told me he's very happy and proud of his entire executive team and has full confidence in them. He even told me they recruited a great Chief Risk Officer, Saskia Goedhart who served 20 years as Group Chief Risk Officer at AMP Limited in Australia prior to joining IMCO.
It sure looks like the ramp-up phase at IMCO is over and come 2019, the rubber will meet the road.
We ended our conversation discussing communication and diversity in the workplace.
I asked Bert if he's going to be out there more often talking to the media. He told me not particularly but whenever there is something material to discuss concerning IMCO, be it a big investment or something else, he believes it's his duty to be open and transparent with members and all stakeholders, including the media.
As far as diversity in the workplace, I told him that over 20 years ago, I was diagnosed with MS and it hasn't always been easy (doing fine now). It's a disease which affects many young Canadians in the prime of their life and in too many cases, it impacts income security.
The experience of living with MS has made me very sensitive to the struggles of people with disabilities who through no fault of their own, do not have equal access to employment opportunities at large private and public organizations.
I told Bert I admire his father, Ed Clark, for his long-term focus on diversity in the workplace and hope he will continue this tradition. He told me it‘s part of his core values that were instilled in him.
I can't think about a better role model than Ed Clark to be a great leader, but make no mistake, Bert Clark is his own person with his own views and he will pave his own road to success using the values both his parents instilled in him.
I wish him and all the employees at IMCO many years of success, have fun during this journey.
Below, an older (2016) clip where Bert Clark, the then head of Infrastructure Ontario discussed P3s. All I can tell you is P3s are fine but they aren't as good as what the Caisse is doing with the REM project which keeps getting trashed in the media for no good reason.
I also embedded some clips with Ed Clark that I enjoyed watching. First, his talk at Rotman School of Management about receiving CEO of the year in 2010. Listen to what he says about having a strong bias against the great leader theory and what it takes to be a great leader.
Second, four years ago, the then outgoing TD CEO Ed Clark talked to Amanda Lang on his time at the bank, the highlights of his career, and the charitable causes he supports.
Lastly, to mark the 10-year anniversary of the financial crisis, Ed Clark, former CEO of TD Bank Group, shares his views with BNN Bloomberg on how he managed to steer the ship during the crisis. His takeaway: "you have to understand your risks."
Very wise advice which I'm sure Bert Clark knows all too well.
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