Trans-Canada Capital Open For New Clients

Last week, I had a web conference call with Vincent Morin, Marc-André Soublière, Nelson Lam and Simon Guyard of Trans-Canada Capital (TCC).

A few weeks ago, I listened to a webinar featuring Vincent MorinPresident, Trans-Canada Capital, being interviewed by Caroline Côté, Managing Director, Funds, Private Markets, Quebec and International Venture Capital, CPDQ, and decided to follow up on TCC.

Let me first thank Claude Perron, founder of FiaMTL, for organizing this year's virtual  Mechoui  (7th Edition) and inaugural Montreal Investment Forum on August 20th 2020 and for posting a replay online (embedded main clip below).

Let me also thank Vincent, Marc-André, Simon and Nelson for taking the time to talk to me via Microsoft Teams (not bad, first time I tried it and it went well).

Now, before I get to my discussion with the fellas at TCC, please take the time to read this 2019 comment of mine to help situate yourself. 

Basically, Trans-Canada Capital (TCC) is a new asset manager whose senior team was successfully managing Air Canada Pension.

It still is. Their main client remains Air Canada (it's the seed investor with 99.5% of the assets as of now) but in December of last year, right before the pandemic hit, the unit set its radar to find external clients:

The investment team for Air Canada’s C$21 billion ($15.9 billion) portfolio have taken a novel approach to remain in growth mode as the pension plans continue to derisk.

The 65-person team, formerly known as Air Canada Pension Investments, now manages money under a new entity, Trans-Canada Capital Inc., according to Vincent Morin, president of Montreal-based TCC. The firm operates as an investment manager, allowing the team to manage external clients’ assets.

The team is half composed of investment staff, which internally manage about 80% of Air Canada’s portfolio, with the other half including individuals in operations, accounting and other roles, Mr. Morin said. All ACPI team members transferred to TCC on Jan. 1, he added.

The launch of TCC comes as Air Canada seeks regulatory approval to form its own life insurance company, which would position the team to also manage insurance assets as Air Canada looks to buy annuities to offload pension liabilities.

Air Canada aims to annuitize about C$10 billion of its total portfolio, Mr. Morin confirmed. Buying annuities from a new Air Canada insurance company would essentially transfer assets and liabilities to one entity from another but would allow TCC to retain the assets under management, Mr. Morin said.

TCC is currently focused on managing Air Canada’s pension assets as well as the assets of other institutional investors. But in the future, the money manager might offer its services to retail clients “when the time is right,” Mr. Morin said.

Air Canada administers eight defined benefit plans that are all closed to new entrants, excluding three plans that are offered as a “hybrid structure combining a DB and DC component,” Mr. Morin said.

Air Canada’s request to create a life insurance company is still under review by the Office of the Superintendent of Financial Institutions, though the company hopes for approval in the next few months, he said.

In August 2018, Air Canada announced it would create a life insurance company, noting that the large size of the pension fund “dwarfs the ability of the Canadian annuity market to absorb such a large investment and the associated risk,” Christopher Hiscock, chairman of the International Association of Machinists and Aerospace Workers Air Canada pension committee, wrote in a memo to IAMAW union members at the time.

Benoit Labrosse, a Montreal-based partner and vice president at Morneau Shepell’s asset and risk management consulting practice, said that in 2019, insurers’ appetite for such annuity purchase deals in Canada was about C$5 billion.

“If they wanted to offload to an insurer, there is not enough demand among insurers to take on these liabilities that Air Canada has. They are in the process of creating this insurance company to do it themselves,” Mr. Labrosse said. Air Canada’s pension plan had about C$21 billion in assets as of Sept 30.

Prior to 2012, annuity purchases were a C$1 billion market in Canada, and have since grown to $C5 billion, “which is quite amazing growth,” though it will still take time until insurers are able to deploy capital to handle a transaction to meet Air Canada’s needs, Mr. Labrosse said in a follow-up email.

“The largest transaction to be handed to a single insurer is approximately C$550 million. The largest single-day transaction is close to C$900 million spread among multiple insurers. We are still far from the volume required to absorb Air Canada. Again, it’s a question of prudently deploying capital for Canadian insurers,” he said.

Now that Air Canada’s pension investment team is operating under a separate entity, TCC staff will be able to manage insurance assets as well as other non-traditional investments by opening their investment management services to external clients, Mr. Morin said.

“We wanted to look at ways to continue our growth,” he added.

Air Canada’s pension fund now has a C$2 billion-plus surplus on a solvency basis — a major turnaround from the $2.6 billion deficit it faced when Mr. Morin joined the investment team in 2009.

As for its headcount, TCC is also aiming for growth in a “controlled” fashion, according to Mr. Morin. “We are slowly growing the team as the needs appear. We’ve been (hiring) in 2019 and have continued to grow our team to serve our clients and future clients,” he said.

With a portfolio increasingly moving to bonds, leadership for the Air Canada plan would have been challenged to attract and retain the best talent, Morneau Shepell’s Mr. Labrosse said. “If you have a group of people managing a portfolio that will slowly become a fixed-income portfolio over time, then your talent will most likely be seeking a place where there is a better opportunity.”

As of Sept. 30, 85% of Air Canada’s portfolio was invested in bonds, 20% in alternatives, 10% in equities and 10% in a portable alpha or hedge fund program, according to Mr. Morin, who noted the allocation totals 125% due to the fund using leverage.

Air Canada’s decision to retool its internal pension investment team into a money management firm is a rare move, but one that has occurred before at another airline.

Founded in 1986, American Beacon Advisors Inc., Irving, Texas, manages the retirement fund assets of American Airlines. The company was launched as an asset management subsidiary of AMR Corp., then parent company of American Airlines, but was sold in 2008, with AMR retaining a 10% equity stake in the firm and later selling the remaining stake.

As of Dec. 31, 2018, American Beacon Advisors managed approximately $10.5 billion in defined benefit and other health and welfare plan assets for American Airlines, as well as “certain underlying investment options” in American Airline’s 401(k) plan, a spokesman for American Beacon Advisors said.

At TCC, the firm offers four investment strategies to external clients: a multistrategy hedge fund — available to global institutional investors, including pension funds, endowments, foundations and family offices — as well as two fixed-income strategies and a hedge fund of funds available to Canadian institutional clients, Mr. Morin said.

So far, TCC has one Canadian institution invested in its flagship internally managed multistrategy hedge fund, which Mr. Morin declined to name. The manager is also planning to launch additional investment strategies and is working on an active equity fund and alternative private market fund, he said.

The minimum investment is C$5 million, and fees will be “very competitive,” Mr. Morin said, declining to provide further fee information.

According to Morneau Shepell’s Mr. Labrosse, TCC will “have no choice but to charge competitive fees” to attract clients because it is “still a relatively small manager when you compare them with the other big asset managers in Canada.”

Jana Steele, a Toronto-based partner in the pensions and benefits group at law firm Osler, Hoskin & Harcourt LLP, said there is “an assumption of risk” involved with the Air Canada subsidiary taking on external clients, such as being aware of the fiduciary duties of other pension funds.

Furthermore, Julien Ranger, a Montreal-based partner in Osler’s pensions and benefits group, said one area that TCC would need to be mindful of from a fiduciary perspective is hiring a third party to advise the company.

If the third party, for instance, is related to or already working with parent company Air Canada, TCC would “need to consider their fiduciary obligations” as a money manager, he said.

Alright, good article, it helps set the foundations for my comment below. 

I think the main point I want to get across here is Trans-Canada Capital is a new asset manager run by a highly experienced team which continues to manage Air Canada's pension assets very diligently. 

More importantly, it's open for new clients and can offer a lot to even the most sophisticated clients who have access to the world's best hedge funds and add a meaningful, uncorrolated source of alpha.

I can't stress that last point enough. Yes, large and small Canadian and US corporate plans should approach TCC to meet their investment targets, but I also think the CPPIBs, OMERS,IMCOs, OPTrust, BCIs, PSPs, CalPERS, CalSTRS, etc. of this world should strongly consider allocating to their multi-strategy hedge fund (and even their fixed income funds but the big shops do that internally).

Why not HOOPP? HOOPP already does a lot of these strategies internally. In fact, I remember having a conversation with HOOPP's former CEO, Jim Keohane, on Air Canada Pension and he told me: "We know them well, they're very good."

Jean Michel, IMCO's current CIO, was the former President and CEO of Air Canada Pension, and he modeled a lot of the changes at Air Canada Pension post-2009 based on HOOPP's approach.

Vincent Morin and his team have taken it to another level and now want to broaden their expertise to offer their asset management services to external clients. 

The fact that their corporate sponsor, Air Canada, backed this new entity tells you a lot. They did their homework and they trust these managers can continue delivering on their mandate and grow their assets by attracting new clients.
It's critically important to note TCC are asset managers, they're not competing with CAAT's DB Plus or OPTrust Select by offering DB plans to new members. 

Instead, they are offering their asset management expertise to clients looking to bolster their risk-adjusted returns in a meaningful way. 
Below, you can see the TCC story and key highlights:

Now, they are pension experts, can offer some expert advice on plan design and how to better manage assets and liabilities but they're not competing with consultants and actuaries even though two of their senior members (Vincent one of them) are actuaries who previously worked at large consulting shops.

Just look at the bios of the four gentlemen I spoke with:

Simon Guyard, Senior Portfolio Manager, works with Marc-André Soublière, SVP Fixed Income and Derivatives, scanning volatility curves all around the world, to look for great relative value trades.

I used to work with Marc-André at PSP Investments years ago and can tell you he is one of the best tactical asset allocation managers in Canada. He really understands macro trends and vol regimes extremely well and knows when to buy and sell vol.
He and Simon Lamy, former senior fixed income portfolio manager at CDPQ, are two of the best fixed income managers I've ever met, they really understand how to find the best risk-adjusted trades using al financial instruments and they understand the Canadian and US markets extremely well.

In fact, I told the guys they should hire Simon if he's interested.

Anyway, the multi-strategy fund manages a little over $1 billion and there's a committee overseeing all the positions there.

For example, out of 130 positions, 90 are relative value trades and 40 are systematic/ discretionary.
They gave me a some trade examples in their multi-strategy fund:


Just like HOOPP and OTPP, they use derivatives extensively to express their trades, and have a strong front, middle and back office to monitor all these trades.

Vincent Morin told me they wanted to make sure everything was extremely tight from a governance and compliance point of view prior to accepting new clients.

How good is their performance? Well, their fixed income funds deliver 3% above benchmark and that's without being overexposed to credit risk (top decile performance). Most of this alpha is added in Canadian markets.

Their multi-strategy fund has delivered 4-5% annually with less than 10% volatility and only had one down year over the last seven years (2018):

Marc-André told me "you're not always going to be right" which is true but they have managed to deliver a really solid performance that can rival that of any top hedge fund or alpha shop.

What else? Nelson Lam, SVP Equity and Alternative Investments, told me their external hedge funds have delivered 14% net annualized over the years and he has two managers who strip out "residual beta" from other managers (see update at the end on this comment, figures were for external private markets managers).

On private equity, they do a lot of co-investments and Vincent explained to me they have a super fast turnaround time (2-3 days) which makes them the partner of choice when GPs are looking for a co-investor.
At one point, Marc-André told me when Air Canada Pension went from a $2 billion deficit to a $2 billion surplus, "only $1 billion of that was LDI" and the rest was from investment gains. 

It shows you they really know what they're doing internally and with their external managers.

Lastly, I asked Simon Guyard who was a bit quiet to describe to me the atmosphere at TCC.

Simon told me it’s "very collegial and there's no hierarchy, anyone can bring ideas forth."

I said there's no room for conceited jerks when managing billions.

Vincent Morin interjected: "No, we are short egos here."

Anyway, I thank all these gentlemen for taking some time to talk shop with me and would ask my readers to reach out to Vincent Morin ( or Nelson Lam ( if you want to see the presentations and set up a more detailed discussion.

Again, these are experienced pension managers and asset managers, they really know what they're doing and it is well worth your time to reach out to them. 

Below, this year's virtual  Mechoui  (7th Edition) featuring a discussion between Vincent MorinPresident, Trans-Canada Capital, and Caroline Côté, Managing Director, Funds, Private Markets, Quebec and International Venture Capital, CPDQ (fast forward to minute 36 to listen to their discussion but all presentations are worth listening to).

Bravo to Caroline Côté and Vincent Morin, they did a great job! 

Update: Nelson Lam, SVP Equities and Alternative Investments at TCC, was kind enough to share some feedback and correct some things after reading this comment:

That was a fantastic article on TCC filled with facts and complemented by your relevant observations. That is why you got so much respect from the investment community, bravo. 

During the call, lots of information have been thrown at you and at light speed so it's totally normal that some numbers might have been mixed up. Here are two of them: 

  1. The AC pension went from a $4.2B deficit to a $2B surplus, a swing of $6.2B vs liabilities of which $4B+ is coming from the team's alpha and the rest is attributed to the benchmark performance (LDI) 
  2. The 14% return does not belong to the hedge fund of fund program managed externally but to the $4B Private Markets program comprised of real estate, infrastructure, private equity and private credit. It is a 14% net IRR since inception dating back to 2009. We have reached that performance by being nimble and opportunistic over the years. Let me explain. We set an overall target of 20% (now increasing to 25%) 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. We pursue niche and off-the-run investments to allow us to find untapped sources of risk/return, exposure to less crowded strategies that are hard to access, complex and have high barriers to entry. In addition, we invest significantly in co-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. 
For your information, the hedge fund of fund program did 4% annualized return with a vol of 4% since 2010 and no down year. It is a pure alpha program ported over the total plan that currently runs with 14 external managers diversified by region (US, Asia, EM, Global) and strategies (global macro, credit, trend follower and quant strategies and the 2 vol traders you mentioned that takes out the residual beta of the program).

I thank Nelson for getting back to me so quickly and setting the record straight, I truly appreciate it.