Toronto's Annual Spring Pension Conference

Last week, I attended the CFA Society Toronto's 2019 Annual Spring Pension Conference:
The 2019 Annual Spring Pension Conference will be held on March 28th at Toronto Board of Trade in Lennox Hall. This event aims to provide you with the latest updates on issues impacting the Canadian pension industry and markets where they invest. Thought leaders and practitioner experts will address many hot topics to help better navigate as we enter an environment with increased volatility and uncertainty surrounding disruptive forces. Come hear the insights from leading practitioners on what the environment may hold in 2019 and learn about best practices and practical tips to guide you in managing businesses and investment portfolios. You will also have the opportunity to exchange ideas during networking and lunch sessions as well as some drinks at our popular evening reception following the event.

Topics Include:
  • Our CIO panel discussion on navigating portfolios in an increasingly volatile world and changing business landscape
  • A session on the Canadian economy post new-NAFTA, carbon pricing and Fed balance sheet deleveraging.
  • What artificial intelligence & machine learning is doing to transform prediction but may not replace judgement
  • Insights on global political landscape from those in the know. US/China trade wars and impact of Brexit are just a few disruptors to discuss.
  • Hear about practical tips on how to improve diversity at corporate boards and asset managers, and hear about the new Diversity Project for asset managers
  • Learning about China from an investment perspective from an investment expert in the region
  • Some initiatives from practitioners to help prepare for Climate change risk assessments in a world with imperfect knowledge about the future

This was a great conference but before I get to it, I also wanted to mention the day before, I went to a luncheon hosted by the Canadian Club where Michael Denham, President and CEO of the BDC gave an incredible speech. In fact, it was so good, I embedded it below.

At that luncheon, I was sitting at the KPMG table with James Davis, CIO of OPTrust, Scott Lawrence, Managing Director and Head of Infrastructure at CPPIB, Andrew Claerhout, the former Head of Infrastructure and Natural Resources at the Ontario Teachers' Pension Plan, Andrew Walton, Partner of Ironbridge Equity Partners, Mike Murray, Managing Partner of Peloton Capital Management, George Rossolatos, CEO of the Canadian Business Growth Fund, Jon Haick, Managing Partner at The Woodbridge Company, and Benjie Thomas, KPMG's Canadian Managing Partner for Advisory Services (KPMG was one of the sponsors of this event).

All these people are very accomplished, intelligent and extremely nice. Jon Haick was sitting next to me and given his experience working at Brookfield Asset Management's private equity group (see this recent article, Brookfield shuns 'eat-what-you-kill’ in quest to transform private equity unit into giant) before joining The Woodbridge Company, I really enjoyed our conversation.

Now, remember the phrase value creation, I will be referring to it in this and subsequent posts where I will be profiling some of the fund managers I met last week, including Peloton Capital Management and the Canadian Business Growth Fund, and other key intermediaries who help GPs and LPs realize gains in their acquisitions.

On Wednesday, the day before the CFA conference, I also had meetings with Jean Michel, the CIO of IMCO, and Michel Leduc, Senior Managing Director & Global Head of Public Affairs and Communications at CPPIB.

Both are super nice guys, very down to earth and they really know their stuff. Jean told me they made some key hires in infrastructure and other areas which they will be announcing soon and he discussed his vision and priorities.

I don't want to give too much of it away as he repeated some things at the pension conference the following day but let's just say he thinks the good years are definitely over in public and private markets, you need to be well diversified, have a value creation plan and execute it flawlessly, and "fight for every basis point".

He is particularly keen on ramping up the credit team which is headed by Christian Hensley who was recently appointed the Senior Managing Director, Public Equities and Credit. Jean shared this with me, and I totally agree: "Credit people think differently, more focused on risk, they will be a nice complement to the rest of the team."

What else did he say? Credit will consist of sovereign debt, high yield, leveraged loans, but also other private debt investments. On the alpha side, he wants to build out 15 strategies and even have an "idiosyncratic bucket" for things that fall between the cracks (like royalties).

Asset allocation is the key, something Bert Clark alluded to when discussing why the Canadian model must evolve, but he was careful stating that asset allocation will not swamp the added value in any year.

Interestingly, on added value, he thinks 100 basis points will be considered "top decile" and that it will be critically important to have a very diversified approach and that all assets deliver on their targets to make money going forward.

He also wants to build out a dedicated currency team, stating if you look at the variation of returns among Canada's large pensions on any given year, a lot of it can be explained by the currency hedging policy they adopted.

I completely agree and told him in my experience, no large pension plan in Canada has consistently made money trading currencies so they typically give up and adopt a fully-hedged approach or more likely, no hedging whatsoever.

The problem? Even if you don't hedge, you're still taking active currency risk and there are some years where you want to be a lot more active in currencies (like if the CAD crosses above 150 or goes back to parity).

Right now, IMCO partially hedges currency risk but Jean is keenly aware he needs to build his group's capabilities in that department. He also wants to revamp all the systems (back, middle, and front) to make them a lot more robust to be able to handle the volume and complexity of the trades they'll engage in and more importantly, so when IMCO goes out to entice new clients to join them, they feel very comfortable they can pass any operational and investment due diligence.

On the macro front, he told me "there's a lot of debt" in the system, growth is waning and he sees the US economy rolling over later this year or early next year. We talked a lot about deflationary structural factors like the debt problem, an aging population, and rising inequality. Jean is extremely well read, a thinker, not afraid to express his macro views.

And when he said "last year, when the 10-year US Treasury yield hit 3.25 % and everyone was saying it will go to 4%, I thought that was the top for yields," I felt like jumping out of my chair screaming "yes, someone I can finally agree with on bonds and last year's bond teddy bear market."

Sorry, I get very passionate about bonds especially when I hear Jeffrey Gundlach, Warren Buffett and others poo-pooing them on television.

Anyway, after my meeting with Jean Michel, I met up with Michel Leduc of CPPIB. Super nice guy and extremely fit (like David Denison, he runs 10K every morning and departs for the office at 6:30 a.m.). Told Michel I had dinner with Malcolm Hamilton the night before and he said: "I know Malcolm, he's my favorite curmudgeon."

Michel explained the three stools of retirement very clearly to me: people invest in a house, they save for retirement and they have CPP. From those three stools, CPP is the safest one, you can count on it till the day you die, it's the one stool that "protects you the best from longevity and investment risk."

Again, I completely agree which is why I thought it was about time we enhanced the CPP for all Canadians.

Interestingly, even though he told me CPPIB will surpass $1 trillion in assets in a decade, they are not in the business of chasing after deals. Instead, they remain very disciplined, focus on total portfolio risk and their differentiating factors. "We cannot compete with large sovereign wealth funds writing huge cheques, so we like to find large complex deals others shun where we think we can add value."

He told me Geoffrey Rubin who is responsible for overall fund level investment strategy and heads the Total Portfolio Management (TPM) department has a huge job but everyone is implicated in the big investment decisions, especially Mark Machin.

What else? We spoke about Danforth and Greek restaurants in Toronto. I politely listened to some of his recommendations but even my friends in Toronto will tell you it's impossible to find a really great Greek restaurant in that city (although I was told two of the most expensive steak houses, Jacobs and  Harbour 60, are owned by Greeks). Told him the next time he and Mark Machin are in Montreal, I'll take them out for lunch at Milos, by far the best lunch special in the city for the quality of the food you're getting (another one I really love is Molivos, took Henri-Paul Rousseau there for lunch a while back and he was raving about the food).

Alright, let me finally get to the CFA Society Toronto's 2019 Annual Spring Pension Conference. You can download the agenda here, see the speakers here, and most timely, you can now download the slides from the presentations here.

I thought it was a fantastic conference, I give credit to Heather Cooke of Fiera Capital and the other committee members for organizing a great conference but I was a bit disappointed with the turnout and thought it lacked more representation from large pension funds (too many asset managers in my opinion, where were all the pension fund members?).

[Note: I met a super nice guy who just started working at CPPIB's Risk Group, Michael Friesen. Apart from him, can't say their were many pension representatives, maybe a few more.]

Anyway, since I'm a macro guy at heart, I really liked Eric Lascelles' morning presentation going over the main global macro risks and I also enjoyed Catherine Yeung's afternoon presentation on what China’s One Belt, One Road strategy and the ‘Made in China 2025’ strategy mean for the region (super sharp lady who really makes you think long and hard about China's economic and political policy).

To be honest, all the presentations were excellent which is why I'm glad they made the slides available here.

There was also a great panel discussion on diversity & inclusion in the morning featuring Tanya Van Biesen and Kelly Battle that I think should be made public so everyone can hear their views (not sure they tape these discussions but that was an awesome exchange).

Obviously, my focus was on pensions so I was particularly honed into the morning presentation on sustainable finance featuring a panel discussion with Stephen Kibsey, CFA, VP of Emerging Risks at the Caisse de depot et placement du Quebec; Pieter Wijnhoven, Managing Director at Ortec Finance Canada & Barbara Zvan, OTPP's Chief Risk & Strategy Officer.

Barb spoke about the progress being made with the Expert Committee on Sustainable Finance. She said the final report should be coming out at the end of this month or early May with key recommendations.

She spent some time going over this slide (click on image):

She said something interesting that stuck with me, even in Canada's oil & gas industry, when oil prices fell, they figured out ways to adopt new technologies to make extraction more efficient, lowering costs using less energy.

Anyway, Barb is extremely intelligent, she did over 500 interviews to add to that final report (as did others) and I'm looking forward to reading the final version once it's made available.

As a footnote, Barb Zvan and Kim Thomassin will be speaking at the CAIP Quebec & Atlantic Conference at Mont-Tremblant in late September.

Pieter Wijnhoven, Managing Director of Ortec Finance Canada basically went over OPTrust's climate savvy project.

Stephen Kibsey, VP of Emerging Risks at the Caisse, shared a lot of interesting information. He mentioned the Caisse published its second Stewardship Investing Report, which provides an update on actions taken and concrete results it has obtained in 2018 on a variety of environmental, social and governance (ESG) issues.

From the press release:
Several initiatives were undertaken over the last year in key areas related to la Caisse’s activities as an investor. With regard to the fight against climate change in particular, la Caisse exceeded its target with the addition of $10 billion in low-carbon assets in 2018, prompting it to raise the target for 2020. In addition, the 10% reduction in carbon emissions for each dollar invested in 2018 is on track to reach the 25% reduction target for2025.
I think the Caisse is at the forefront on stewardship investing but others are catching up fast and in Canada, it's safe to assume sustainable investing is taken very seriously.

What Stephen said that struck me was everyone in his team had to go back to school to "learn the science of climate change." In fact, he kept stressing the need to keep up-to-date with the science to really understand the risks and opportunities across public and private markets.

From his six-member team, three are continuously looking at data and recalculating it when it isn't available.

He also stressed once they had management "buy-in", the "ball carriers were aligned with us and there was a good flow of communication to generate output/ disclosure."

As I stated, the Caisse has an ambitious strategy for climate change (click on image):

What I got out of that panel discussion is there's still a lot of confusion and misperceptions about ESG investing and to be fair, it's an area which we are only beginning to understand and we need to continuously expand our knowledge.

For example, this weekend, I read Bill Gates's note on why we should discuss soil as much as we talk about coal, noting the following:
Most discussions about fighting climate change focus on electricity and the need for renewable energy. De-carbonizing the way we generate electricity would be a huge step, but it won’t be enough if we don’t reach zero net emissions from every sector of the economy within 50 years (and make a serious dent in the next ten). That includes the agriculture, forestry, and land use sector, which is responsible for 24 percent of all greenhouse gas emissions—just one percentage point less than electricity.

Gassy cattle are a memorable and significant example of emissions—but they’re not the only major contributor to agriculture, forestry, and land use’s slice of the emissions pie. We’re just as well-off picking on soil.

Here’s a mind-blowing fact: there’s more carbon in soil than in the atmosphere and all plant life combined. That’s not a big deal when left to its own devices. But when soil gets disturbed—like it does when you convert a forest into cropland—all that stored carbon gets released into the atmosphere as carbon dioxide. That’s one reason why deforestation alone is responsible for 11 percent of all global greenhouse gas emissions. (Another reason is that forests and grasslands are natural carbon sinks. Clearing them reduces the planet’s capacity to remove carbon dioxide from the air.)

The microbes in soil can also create greenhouse gases when they come into contact with fertilizer. Synthetic fertilizers revolutionized how we feed the world, but they release a powerful greenhouse gas called nitrous oxide when broken down by those microbes. Natural fertilizers like manure aren’t any better, because they release greenhouse gases as they decompose.
Take the time to read Gate's full note here.

Alright, let me jump into the afternoon CIO discussion:
3:20 PM - 4:30 PM - CIO Fireside Chat: Top Challenges and Opportunities in 2019 and Beyond

Moderator: James C. Davis, CFA, Chief Investment Officer, OPTrust

Fireside Chat Experts: Marlene Puffer, Ph.D, CFA, ICD.D, President & CEO, CN Investment Division; Jean Michel, Chief Investment Officer, IMCO, & François Bourdon, FCIA, FSA, CFA, PRM, Global Chief Investment Officer, Fiera Capital

The CIO panel will discuss how they are navigating their portfolios and organizations in a changing and challenging business landscape. The fireside chat will cover key trends and practical ideas such as asset allocation in an increasingly volatile world, technology disruption, ESG investing, climate change, risk management in a rising rate environment and business management challenges from different perspectives (public sector, private sector and asset management).
James was a wonderful moderator, he said he always had a "hard time following directions," threw out the rules and basically just fired away and got an interesting discussion going.

He started by asking each person to share an interesting factoid about themselves. From what I recall, Marlene Puffer said she's "a quant geek at heart" and loves to sing and dance. Jean Michel said he grew up in Trois-Rivières and finds raising two teenage boys "far more challenging" than investing billions (that made everyone laugh).

Jean then talked about portfolio construction distinguishing between short-term factors like the trade war and rising populism and long-term factors like rising inequality which he admitted we will have a hard time addressing. He once again repeated the world is slowing and rising debt levels are ensuring slower growth ahead.

Marlene said she oversees a very mature $18 billion pension plan at CN where there are 3 retired workers for every active member and she needs to make sure they have the $1 billion a year they need to make payouts every year.

She said she was balancing out liability hedging component with return seeking component. They hedge a lot of interest rate risk and they have their board's approval to prudently leverage their balance sheet (her experience sitting on HOOPP's ALM committee for years came in handy there).

She stated they are trying to generate the same return using less risk using all the tools available and are investing across public and private markets and anything that falls in between but are managing their liquidity very tightly.

For his part, Fiera's CIO François Bourdon said we are in the eighth inning of the economic cycle but only in the fourth inning of the flow cycle in the alternatives mid market space. He was saying how a typical real estate debt loan here with a 60% LTV, you'll get prime + 4% but in Australia, you can get prime + 9%.

Interestingly, John Valentini who I worked with at PSP when he was CFO and later interim CEO is now in charge of Fiera's private markets and they are present in many alternatives, including private debt, real estate and infrastructure.

For his part, Jean Michel reiterated a lot of what he told me the previous day, namely, real estate cap rates are at historic lows, valuations of infrastructure and private equity at historic highs.

But Jean was clear, the future is in private markets, and going forward you need a value creation plan and you need the right team to execute it (that job falls under Nicole Musicco, Head of Private Markets at IMCO). He just feels we need to prepare for lower returns ahead across the board and I completely agree.

As far as ESG factors, all three CIOs said we need more disclosure and they are definitely important. Jean said "ESG has to be part of your process" and Marlene said they do a top down analysis of ESG factors for risk considerations. François said ESG is evolving at Fiera but it is definitely an integral part of the process.

There was an interesting discussion on currency risk and hedging. François said they are bulls on the CAD (I believe Jean-Guy Desjardins is still bullish on Canada's energy sector) but unless you have more than 20% allocated to the USD, you shouldn't worry too much about currency risk.

James Davis asked them about whether US debt concerns them and its impact on the US dollar and Marlene (rightly) answered "no" as those concerns have been around for years. She also rightly noted in a sharp downturn flight to safety will be bullish for the USD as global investors rush to buy US bonds (like me, Marlene did a stint at BCA Research, she really knows her macro well).

At CN, they hedge some F/X risk, on active equity bets and hedge funds, but not on passive equity exposure. Marlene used the example of Nestlea, they aren't buying it for Swiss franc exposure but for the company's long-term economic growth as a global business.

Jean Michel said said with over 50% allocated outside of Canada, he can't ignore currency risk. He's taking the steps to become "a more currency aware firm"(smart move, very necessary but you need to hire currency experts with a track record for printing money!).

A discussion on bonds ensued and Jean Michel called it "the best asset class to diversify risk" (again, totally agree, wrote about this three years ago). He said all assets are pricey, risk premiums are compressed, and "in the next few years, success will depend on getting a lot of different things right," ensuring you have the right value creation plan and fight for each basis point. "Basically, everything has to go right in each asset class to add value."

Marlene agreed but added: "you need to be flexible enough to take advantage of niche strategies" and look at areas others aren't looking at like mid-market private debt.

François Bourdon said he likes agriculture, infrastructure, private debt in Asia, and hedge funds with a differentiating tilt/ model.

Lastly, James Davis asked the panelists what factors contribute to a CIO's success.

Jean Michel said you need to be humble, surround yourself with great people who are specialists in what they do, and trust them. "To be a good leader, you also need to ensure everyone works well as a team."

For her part, Marlene said her experience on the sell-side allowed her to gain important knowledge on how the "sausage factory works" and it prepared her by asking the right questions.

François Bourdon said he believes in the KISS principle (keep it simple stupid) and that every time he overcomplicated something, he created a bigger problem down the road.

I hope you enjoyed reading this comment, I tried to go over some important aspects of my meetings and the pension conference in Toronto. If needed, I will edit this comment to add or remove items.

Below, Michael Denham, President and CEO of the BDC delivered an outstanding speech last week at the Canadian Club of Toronto (March 27, 2019). All you leaders who want to improve your presentation skills, watch this, Michael is a naturally gifted speaker.