Michael Sabia Gets Real on Real Assets
Changes in leadership in the investment industry rarely make headlines beyond the financial press but Michael Sabia’s appointment as chief executive of one of North America’s largest institutional investors caused a political storm.I enjoyed reading this comment, it's a fair portrayal of Michael Sabia's tenure at the Caisse.
The selection of Mr Sabia in 2009 to run the C$327bn ($245bn) Caisse de Dépôt et Placement du Québec, which manages the assets of about 40 Canadian pension funds and insurance plans, raised the hackles of Bernard Landry and Jacques Parizeau, two former premiers of Quebec.
They criticised the move as being a “takeover” of the institution by the national government in Ottawa. They added that the appointment of the Ontario-born Mr Sabia, as a relative outsider in the French-speaking province, was a “provocation” to Quebeckers.
The criticism highlighted the concern among Quebec sovereigntists that an English-speaker was taking over at an institution cherished as a jewel of Canadian francophone business.
“When I got the job it wasn’t universally acknowledged that I was the best thing since sliced bread,” says a deadpan Mr Sabia 10 years on.
He was fluent in French when he joined the institution but it was a difficult moment. The previous year it had returned a loss of C$39.8bn, its worst result, partly due to the effect of the global financial crisis but exacerbated by its exposure to asset-backed commercial paper.
“CDPQ at the time was a kind of poster child of what was wrong more broadly with finance and the financial sector,” Mr Sabia says, speaking from Montreal. “We had become somewhat seduced by highly complex derivative products. We had lost the fundamental discipline of ‘you don’t invest in things you don’t understand’.”
“We needed to build up a plan based on investing in the real economy. We’re not going to invest in a lot of derivative products,” he says.
CDPQ is now an example for what has proved a more successful model. As with other large Canadian asset managers and owners, its strength lies in investing, often directly, in tangible areas such as apartment blocks, offices and transport systems.
For Mr Sabia, who was a civil servant before working with Canadian National Railway and then the telecoms group Bell Canada Enterprises, this focus is a good fit.
He says his first job in CDPQ was to recruit executives to lead a turnround, cut the group’s exposure to Canada and, more fundamentally, “make sure we fully understood what we we’re investing in”. He uses the term “real assets” when praising the easy-to-understand virtues not only of physical entities such as real estate and infrastructure but also standard-issue company shares.
The group’s activities in real estate and infrastructure are so significant that it has three subsidiaries to manage them: CDPQ Infra, Ivanhoé Cambridge and Otéra Capital.
Their assets include a 13 per cent stake in London’s Heathrow airport, a 30 per cent holding in Eurostarand numerous residential developments, shopping centres and office blocks worldwide.
CDPQ returned 4.2 per centlast year. This was half its annualised five-year average return of 8.4 per cent but was in line with other large Canadian pension fund managers, which also suffered from 2018’s market volatility.
It has not been plain sailing this year, either. CDPQ was rocked in February over a media report that the partner of a vice-president at Otéra Capital, which specialises in commercial real estate lending, had done business with alleged members of the Montreal mafia.
An independent investigation concluded Otéra’s portfolio had not been subject to fraud or embezzlement but said there had been separate ethical breaches “linked to personal activities” such as having undeclared interests in companies and conducting personal business using office email.
The affair resulted in the departure of four staff members. Alfonso Graceffa, the unit’s former chief executive, has challenged his dismissal.
“There is work to be done with renewing and repairing a culture where people act carefully as stewards,” says Mr Sabia.
Others have expressed concern that private, less liquid assets could prove a problem in the event of a global economic downturn.
Mark Machin, the chief executive of the Canada Pension Plan Investment Board, has warned that some investors have been too enthusiastic over assets such as infrastructure, real estate and private equity. They have piled into the asset classes to seek better returns and beat low interest rates.
About a third of CDPQ’s portfolio is in areas that Mr Sabia deems less liquid. “We’re fine with this,” he says. “We do find these assets deliver reasonably dependable returns. You need to be highly selective about what you’re doing.”
CDPQ Infra’s sales pitch is that it has the expertise to design, build and operate projects as well as own them. It is currently building the Réseau Express Métropolitain, a mass transit system in Montreal.
“We have the skills to complete and deliver [green]field projects. Other pension funds don’t do that,” Mr Sabia says. “You need to find a way to differentiate yourselves.”
“It’s a good time to be a Canadian pension fund,” he adds. “There’s a recognition of the expertise that these funds have. We are seen to be sources of patient capital. That opens doors. That model is functioning well and is distinctive in the world.”
About C$18bn of CDPQ’s portfolio is exposed to fossil fuels. Two years ago the group announced a strategy to tackle climate change, though Mr Sabia sees the issue as both an opportunity and a risk.
The group is curtailing its exposure to companies involved in Canadian oil sands while increasing investment in low-carbon areas such as renewable energy. It is also setting carbon budgets for investment teams, the goal being to reduce carbon exposure overall.
Its investment professionals are penalised if they fall short: those who miss the target would lose up to 35 per cent of their bonus.
Natural gas is an exception. “Gas is the least worst from an environmental point of view,” Mr Sabia says.
Having told the Financial Times last year that the group was taking a “surgical” approach to further investment in the UK because of Brexit, Mr Sabia says the approach has now “become microsurgery”.
“There is so much uncertainty that we would be very, very cautious about allocating additional substantial capital to the UK at this point but we’re not rushing to sell assets.”
Asked about the UK’s political future, including the likelihood of a no-deal Brexit and whether there could be a Labour government following a snap election, he is noncommittal: “We’ll see what happens. You have to see what people actually do, from what they say they’re going to do. Making bets on who wins elections is a risky business.”
Michael Sabia’s CV
Born September 1953, Ontario
Total pay C$3.9m ($2.9m)
Education
1976 BA political economy, University of Toronto
1977-81 MA and MPhil, political economy, Yale University
1981-83 PhD studies and teaching, Yale University
Career
1986-90 Canadian department of finance, tax policy
1990-93 Privy Council Office, deputy secretary to the cabinet
1993-95 Canadian National Railway, vice-president (corporate development)
1995-99 Canadian National Railway, chief financial officer
1999-00 Bell Canada International, chief executive
2000-02 Bell Canada Enterprise, executive vice-president and chief operating officer
2002-08 Bell Canada Enterprises, chief executive and president
2009-present Caisse de Dépôt et Placement du Québec, chief executive and president
Caisse de Dépôt et Placement du Québec
Established 1965
Assets C$327bn ($245bn)
Employees 1,178
Headquarters Quebec City, with main business office in Montreal
Ownership Public investor that operates independently from government
The truth is being the president and CEO of the Caisse isn't always a fun job, you're continuously under the spotlight, and in Sabia's case, he hasn't always had it easy and has more scrutiny than any other pension CEO.
Unlike his predecessor, Sabia didn't have a coronation ceremony or even a honeymoon period, he had to go through a tough exchange with my former PSP colleaugue, Jean-Martin Aussant, who was then an MNA grilling him at Quebec's National Assembly:
One MNA, Jean-Martin Aussant, recalled that Mr. Sabia, as chief executive officer of BCE Inc., had orchestrated a deal to sell the telecom giant to the Ontario Teachers' Pension Plan (which eventually fell through). "Maybe someone who tries to sell a Quebec jewel to Toronto does not have the same understanding of Quebec's interests as most people," Mr. Aussant said.
That's all. It is to these words that the new Caisse CEO replied by emotionally underlining his Quebec roots - his grandfather arrived in Montreal a century ago - his understanding of Quebec society and his commitment to the pension fund manager.
It is true that when Mr. Sabia's nomination was announced, not a few Quebeckers - including this writer - reacted with dismay. What, an anglophone from Ontario to head Quebec's most important financial institution? Are there not Quebec francophones competent enough?
It's funny, it's widely acknowledged that Claude Lamoureux, a "pure laine Québécois" (whatever that means) who ran Ontario Teachers' Pension Plan successfully for 18 years and was recently inducted into the Canadian business hall of fame, is the pension pioneer who changed the Canadian pension landscape forever (with help from Gerald Bouey, OTPP's inaugural Chairman of the Board).
I didn't hear anyone in Ontario questioning his appointment as the inaugural President & CEO of OTPP because he grew up in a farm in Quebec and didn't speak English like the bankers on Bay Street.
Anyway, don't get me started on that, I'd rather focus on Michael Sabia's accomplishments at the Caisse.
First and foremost, Sabia was appointed to clean up house and get back to basics, which is exactly what he did. The focus was on risk management, governance and focusing on the long run. The recent scandal at Otéra Capital was dealt with swiftly and proves he has zero tolerance for anything remotely shady.
But Sabia had more ambitious plans than just cleaning up the Caisse, a longer-term vision which came to fruition with the Réseau express métropolitain (REM), a new integrated network linking downtown Montreal, South Shore, West Island, North Shore and the airport.
That project, a greenfield project and a first of its kind among any pension in the world, is Michael Sabia's "baby" and it will remain his legacy for decades to come.
He had the good sense to appoint Macky Tall as the Head of CDPQ Infra to launch this project and Macky hired the right people who are now running it as he focuses his attention on Liquid Markets.
Once completed, REM will greatly enhance the ability of people living on and off the island to freely move around the city in a very short period.
The fact that Michael Sabia personally devoted enormous time to this project and appointed the right people to work on it says a lot. He believes in infrastructure and wanted to build something he can then export throughout the world.
Sabia has firm views on a new paradigm for growth and it involves pensions and other institutional investors investing to help governments attain their objectives to transform and modernize infrastructure to bolster their economies.
Related to this is another big focus of his, climate change and the risks and opportunities it presents. He has firm views on doing sustainable investing right and backs those views with concrete actions.
Two years ago, the Caisse announced it wanted to cut its carbon footprint by 25% in 2025, and it's already well on its way of attaining this goal.
So, all in all, I'd say Michael Sabia has done a great job at the Caisse focusing on growing real assets and even though he has his share of critics and has done some blunders along the way, I'd say he has done things nobody else in the institutional investing world has dared to do, and done them right.
Below, Michael Sabia, CEO of Caisse de dépôt, talks with Bloomberg's Erik Schatzker ahead of the Group of 20 summit in Buenos Aires (November, 2018).
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