CN Investment Division's Hunt For Talent?

Sarah Rundell of Top 1000 Funds reports on how CN Investment Division is taking on tech in the hunt for talent:
Montreal-based CN Investment Division’s recent search for a quantitative analyst in its absolute return team is a timely reminder that pension funds must now align with the tech sector on compensation, culture and work environment to secure talent.

When Marlene Puffer, president and chief executive at the division which manages the $18 billion pension fund for Canadian National, Canada’s freight rail group, reached out to her network enquiring after candidates she was more conscious than ever that she was going head to head with the tech and start up sectors.

“They recruit for similar talent,” she said. “The financial sector is not as obvious a draw for a business school or STEM graduate as it used to be, but it should be. We need to explain the great opportunities in order to be able to attract and retain talent.”

Puffer, whose role spans everything from using her network to help field candidates for the 40-strong investment team to writing the annual report or getting into the weeds of a private equity decision, believes CNID has that pulling power.

Compensation involves a “competitive salary plus a variable component where investment professionals get paid well when performance is strong” in a model, she says, that keeps “reasonable pace” with top-paying Canadian peers.

Montreal’s ability to compete with global financial or tech centres is bolstered by locals returning home after pursuing careers elsewhere. As for culture, she believes CNID’s size, sophistication and long history of internal management offers a sweet spot that allows the investment team to evolve, ensuring individual portfolio managers can really have an impact.


CNID’s ability to recruit top talent also comes down to governance. Much of its ability to ensure good ideas are implemented without lengthy and arduous processes (at least in public markets – it takes longer in private markets) comes from the board.

It’s an area where Puffer has real expertise following a nine-year stint as chair of the asset liability management committee at $74 billion Healthcare of Ontario Pension Plan (HOOP).

It meant investment decisions and investment-related initiatives come through her on route to going to the board for approval. The experience has given her inside knowledge on how boards work – particularly the investment approval process – and left her convinced that open and transparent communication between the board and investment team is one of a pension fund’s most important pillars.

“I am bringing all my experience on the board at HOOP to bear in the context of reporting to the board. I am very familiar with board concerns and I have a pretty good idea how to be proactive and provide the right information for them to make informed decisions.”

At CNID, board education resides with the investment team. When something is new and different, like the quant strategies in the absolute return fund, it can require several steppingstone meetings ahead of any decision, she says.

Set up in 1935, serving 50,000 members most of whom are retired, CNID is one of the most mature, open pension funds around. The asset mix and risk profile are shaped around the constraints of paying out around $1 billion a year in benefits.

It means the backbone to Puffer’s asset liability and risk management strategy resides in a large bond portfolio that provides a liquidity pool on an ongoing basis.

“Because our plan is very mature, our portfolio is probably a little lower on public equity and private and illiquid return-seeking assets than other plans, and higher on fixed income, and we include absolute return strategies as a core part of our long-term asset mix, ”she says.


CNID’s equity allocation, all actively managed, has seen some of the biggest changes in recent years. Geographic silos in five portfolios (Canada, US, Asia, Europe and emerging markets) have been shifted to one global benchmark, MSCI All Country World Index, while bottom-up research is organised globally by sector.

The old system based on geography was a legacy stemming from when Canadian pension funds’ foreign investments were restricted prior to 2004, she explains. Although Canadian asset managers have run their equity allocations globally for a while, pension funds have been slower to change.

“It’s more efficient because we are not duplicating efforts within sectors, and the focus on the total equity portfolio outperforming its benchmark is clearer.”

Elsewhere she notes that current portfolio strategy is erring on the defensive side given today’s market conditions. But rather than adjust the long-term asset mix in response, she prefers to tactically position within asset classes. For example, CNID’s actively managed, bottom-up, fundamental analysis of individual companies with a long investment horizon has a very successful track record, and still offers exciting opportunities.

“We can always find some value in individual businesses with a long-term view,” she says.

She is also examining the diversification benefits of private equity in light of current markets. CNID currently has a small allocation to private equity, mostly because of its liquidity priorities.

“My view of private equity is to focus on its ability to offer some access to different business models currently unavailable in public markets, rather than seeing it as a distinct asset class. But that opportunity set comes with a heavy fee structure, and you have to wade through this very carefully.”

She also continues to see opportunities in private debt in the US as bank disintermediation continues to play out.

“There are opportunities within private debt resulting from the regulatory change since the financial crisis such as leveraged loans, SME enterprise lending, peer-to-peer lending.”

Internal management

CNID’s long history of internal management means the bulk of assets are now internally managed, setting the fund apart from peers.

“Most peers of our size in the North American market would either be primarily externally managed or may manage their fixed income or foreign exchange internally.”

Much of CNID’s internal expertise has been drawn from its manager relationships over the years, all shaped around CNID’s quest for strategic advice and knowledge sharing.

“When we have a new idea, we may engage our external managers and build parallel internal strategies. We may eventually wholly internalise the strategy. We are transparent about our needs and have positive, constructive relationships.”

Currently visible in building out the diverse, factor-based quant team which she very much considers “our own,” but which has also been developed and crafted with the help of external managers relationships.
Marlene Puffer is a very sharp cookie, one of the few female CEOs leading a major pension in North America (unfortunately there aren't many women at the top).

She is also down to earth, very nice and cares a lot about the culture of her workplace. She doesn't just want to attract talent at CN Investment Division, she wants to make sure they have the right attitude, are acutely aware of the organization's mission and will work well in a small, nimble, innovative and collaborative team.

Established in 1968, CN Investment Division (CNID) is based in Montreal, manages one of the largest single-employer defined benefit pension funds in Canada and holds a long track record of solid performance.

Approximately C$18 billion is actively managed in-house by about 80 employees for the CN Pension Plan’s approximately 50,300 pensioners and pension plan members. CNID also manages the assets of the CN Pension Plan for Senior Management and the BC Rail Pension Plan.

[As a side note, Peter Letko and Daniel Brosseau of Letko, Brosseau & Associates, the two founders of one of the most successful money management outfits in Canada with a very long track record met at CN Investment Division before starting their own firm (read my comment on resilience according to Boivin and Letko).]

CNID always had a great reputation from the time it was being managed by Tullio Cedraschi. I never met Tullio but saw him at conferences and CFA award presentations. He has a stellar reputation and now enjoys traveling and playing tennis.

I did meet his successor Russell (Russ) Hiscock who is a gentleman and very knowledgeable on corporate and pension matters (he'd be a great board member).

Marlene took over the helm when Russ retired a few years ago and she has done an outstanding job managing one of Canada's best and most mature corporate pension plans.

I last met Marlene at the Toronto annual spring pension conference where she shared this:
[...] 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.
As she states above, because their plan is very mature, their portfolio is a little lower on public equity and private and illiquid return-seeking assets than other plans, and higher on fixed income. They also include absolute return strategies as a core part of their long-term asset mix.

My hunch is they engage in portable alpha strategies, swapping into a stock or bond index and adding an alpha overlay by allocating to top-notch external absolute return managers (see my recent comment on the best and worst hedge funds of 2019).

The article above rightly notes board engagement, education and governance as key elements for success and I totally agree.

It also mentions that CNID is looking to allocate more to private debt, a very hot asset class which I last covered here.

Given the plan's maturity, I think it's wise to invest in private debt but CNID needs to choose its partners wisely because returns are coming down in this asset class and we are late in the cycle. I also believe that even though it is mature, it has to look carefully at some private equity funds and take more illiquidity risk.

Anyway, Marlene knows what she's doing, I have no doubt about that and trust her and her colleagues are doing a great job managing CN's pension assets.

As far as competing with tech for the hunt for talent, in our last conversation, Ron Mock, the former CEO of OTPP, emphasized two critical elements: technology and talent. "If you don't have the right technology, you won't attract the requisite talent. Our organization needs to be agile or else we risk becoming stale and will be left behind in a world which is changing fast." He also added: "We need to invest in our business and IT is a critical part of that investment." In fact, he said IT is "very sizeable" at Teachers' and "extremely critical" in all aspects of the operations (it's the same everywhere).

Lastly, when people tell me the corporate DB model has failed in Canada, I say "nonsense", just look at CNID, Air Canada Pension (now Trans-Canada Capital) and Kruger's Pension Plan (run by Greg Doyle and overseen by Mr. Kruger himself). I'm sure there are others doing well but not many and I know these corporate plans since they're based here in Montreal.

Below, Howard Marks, co-founder and co-chairman at Oaktree Capital, explains why now is not a good time to “probabilistically” be investing in markets and discusses the contents of his latest memo titled, “You Bet!.” He speaks with Bloomberg’s Erik Schatzker on "Bloomberg Daybreak: Americas."

Listen carefully to the entire clip, especially the end where he discusses CLOs, banking regulations and what will happen to direct lending "if everyone rushes in".

Why does this concern me? Private credit has boomed globally as banks have pulled back from lending to smaller, potentially more vulnerable companies. The private credit market has expanded to $787.4 billion, from just $42.4 billion in 2000, according to London-based research firm Preqin. Family offices - mini-investment firms set up by the super rich to manage their personal wealth - have poured more and more cash into direct lending, Preqin says. Bloomberg's Kelsey Butler and Lisa Abramowicz discuss the trend.

Lastly, private equity firms are increasingly turning to an obscure type of loan, once almost exclusively used to finance smaller deals, to fund larger and larger buyouts. Yet a growing number of analysts and investors warn the debt may be riskier than it appears. Bloomberg's Kelsey Butler, Brian Chappatta, Craig Giammona and Lisa Abramowicz discuss the recent headlines in the private markets on "Bloomberg Money Undercover".