MIPC on the Importance of Impact Investing
Each year, the McGill International Portfolio Challenge (MIPC) tackles a socio-economic issue plaguing our modern economies with an investment question. This year’s question was centered around whether it was possible to design innovative portfolio solutions to address the rise of social inequalities and protectionist tendencies in most developed economies. The focus was on Brexit, and on the launch of a new British sovereign wealth fund: BNSF.
Over the last few years, social inequalities and protectionism have become more widespread. Indeed, across countries, there has not been a uniform convergence in quality of life and income. Within OECD countries specifically, the income ratios between the richest and poorest 10% are up seven times compared to 25 years ago. The UK has one of the highest Gini Coefficient around the world. Additionally, protectionism is on the rise again. With the US’s withdrawal of the TTP and UK’s Brexit, the public opinion is shifting as more concerns are being raised about the consequences of globalization and free trade, and are being fueled by greater inter- and intra- country social-economic inequalities. In light of these changes, financial leaders around the world have started to examine ways to address these challenges, and MIPC 2020 gave them an opportunity to discuss better, more well-rounded strategies that create durable and tangible change in collaboration with the academic community.
This year’s case focused on devising an optimal investment strategy and asset allocation framework for a fictional British National Strategic Fund (BNSF) to best serve the UK’s economic interests following its withdrawal from the EU. BNSF is a brand new sovereign wealth fund with £50 billion of AUM and a complex triple mandate: (1) promote economic independence, (2) promote the long-term well-being of the UK population, and (3) maximize risk-adjusted returns.
This Fall, 93 university teams from 18 countries around the world took up this challenge and designed a long-term investment strategy for BNSF that successfully integrates impact. Many came back with clever ideas.
This year’s edition saw the highest level of quality in proposals in the challenge’s history. Two proposals stood out to the panel of judges: one from Nanyang Technological University in Singapore, and another from Bocconi University in Italy. Here are four takeaways from these top proposals, which could ultimately serve as blueprints that guide the launch of a future British SWF.
First, the winning teams took a top-down approach to formulate and communicate their strategy. They started with an assessment of the UK’s social and economic context, the views of relevant stakeholders, and the overlap between the different objectives. From this, they derived holistic orientations and concrete decision metrics. This top-down approach allowed the teams to make integrated asset allocation decisions that tackle all pillars of the Triple-Mandate at once (i.e. win-win-wins). Moreover, the top-down approach gave the teams a tangible method to track the impact of their proposals across all dimensions beyond just a high Sharpe ratio. Examples of additional decision metrics included gross value added in the UK economy and net carbon emissions by BNSF’s portfolio companies. Having a clearly defined set of objectives provides BNSF with concrete targets to hit.
Another takeaway from the winning proposals was their large allocation to infrastructure projects targeted in under-resourced areas in the UK and in renewable energy (e.g. windfarms). These investments naturally satisfy BNSF’s triple mandate: they generate profitable and predictable streams of income, alleviate regional inequalities, and build sustainable energy sources inside the UK. Over the long-term, such investments can therefore provide a strong foundation for the UK’s future economy.
The third takeaway was the importance of investing in local SMEs. With their Brexit scenario analyses in hand, the winning teams noted that the UK’s SMEs, which represent the backbone of the British domestic economy and employment, would be hit hard by cuts in funding, the loss of EU workers, and a shrinking market. Increasing business and financing support to local SMEs was therefore a key component of BNSF’s investment strategy. Special attention was given to SMEs located in traditionally underfunded regions. Frameworks were designed to bring the right partners on board and give incentives for empowering underprivileged or underrepresented groups. The teams created a holistic SME investment strategy that aims to future-proof the UK’s industries, create national champions, and alleviate socio-economic issues.
The fourth takeaway had to do with the timing of BNSF’s investments. The bulk of the allocation for the early phases was directed at stabilizing the economy in a post-Brexit context, that is even more challenging given the COVID-19 pandemic. Sectors and regions most vulnerable to hard-Brexit scenarios were given priority. Later phases were structured to tackle structural unemployment and inequalities. These investments included projects in infrastructure and smart manufacturing plants. Final phases were focused on financing high-potential projects geared towards renewable energy and the digital economy. This design choice of changing priorities over time allows BNSF to better target all facets of the triple-mandate while focusing on a narrow and feasible set of projects at each phase.
This year’s virtual challenge
As in past editions, MIPC 2020 has been rich in experiences and lessons. Actionable solutions to a complex and critical issue were provided and gave all those involved a much better understanding of what it takes to successfully integrate impact into a large institutional portfolio.
An additional lesson from this year’s Challenge is that a virtual format brings plenty of new opportunities. In the past, the event week-end used to take place in Montreal. However, with COVID-19, the organizing team redesigned MIPC 2020 to take full advantage of the virtual format. Many new components, such as a new mentorship program and a five-day speaker series, were added. The virtual format made the Challenge more accessible to student teams outside of Canada, and a record-breaking number of teams participated (read more about MIPC’s efforts on inclusion and accessibility here).
Guidance from the Canadian pension industry
MIPC wouldn’t be what it is today without the involvement and expertise of the Canadian pension industry. Although MIPC partners with sponsors from a variety of industries that operate globally, the Canadian pension industry has been one of MIPC’s greatest contributors. Pension funds such as Ontario Teachers (OTPP), La Caisse de Dépôt et de Placement du Québec (CDPQ), CPP Investments, and PSP Investments have sponsored many cash prizes, actively participated in recruitment, and provided panels of remarkable executives for mentoring, judging and knowledge-sharing. The Canadian pension model, with a combination of independent governance, professional in-house management, scale, and extensive geographic and asset-class diversification, ranks first amongst global peers in asset performance and liability risk hedging. Hence, given the complexity of this year’s case and the brand new design of a sovereign wealth fund, the expertise and insight of Canadian pension fund leaders was much welcome.
What is next?
Digital and interactive versions of MIPC cases will soon be made available to the public. Past cases include the (1) the rescue of an underfunded Canadian corporate plan, (2) the severe underfunding of large U.S. public pension plans, (3) the design of a long-term environmentally sustainable investment strategy for a large Canadian asset manager, and (4) most recently, the incorporation of impact into the design of a brand new UK sovereign wealth fund.
In early 2021, MIPC will start to plan its fifth edition of MIPC which will take place in the Fall. What should the next Grand Challenge be?
I want to first thank Tania Kuoh, Co-Executive Director of the McGill International Portfolio Challenge (MIPC), and the entire MIPC team for sending me this comment.
A few weeks ago, I had a Zoom web conference call with Tania and Sebastien Betermier, an Associate Professor of Finance at the Desautels Faculty of Management at McGill University who devised the MIPC, oversees it and guides the students.
Sebastien teaches a course on pensions and does ongoing research on pensions.
Together, the authors of this paper understand why Canadian pension funds perform better than most other pensions and registered savings plans but they too wonder:
“The years ahead will put the Canadian model to the test, as the severe impact of COVID-19 on commercial real estate, equities, and corporate bonds will undeniably hurt the funds’ assets in the short-run,” said the paper. “How resilient is the Canadian model to a pandemic? Will two-pronged strategies that increase asset performance and hedge against liability risks change in the post-pandemic world? We leave these questions for future research.”
Part of the answer to this question can be found in the Total Fund Management series Mihail Garchev and I have been discussing over the last few weeks (see our latest Part 6 on TFM capability here).
Anyway, back to the MIPC and the importance of impact. For those of you who are not aware, the MIPC is the pioneer of case competitions that target pensions, innovative portfolio design, and institutional asset management:
In 2015, a small group of McGill students had a compelling idea — bring together the world’s brightest students to Montreal to help solve some of the largest, most complex societal issues in the lens of long-term investment.
Now on its 4th edition, the McGill International Portfolio Challenge bridges the disconnect between academia and the finance industry through our innovative cases which tackle key issues that institutional investors play a critical role in. We bring together hundreds of professional investors, actuaries, and students from a diverse set of backgrounds in order to solve these complex issues.
Normally, top teams come to Montreal to pitch their proposals in front of leading executives from many of the largest buy-side finance firms in the world. Exceptionally this year, teams will pitch virtually due to COVID-19. These judges come not only to determine who will win our challenge, but also to take inspiration from students’ ideas into their daily work as well as hire some of the world’s top student talent. The MIPC is an exceptional platform to apply classroom knowledge to a complex, multi-faceted, real-world case.
We award C$50,000 in cash prizes to our winning teams, a figure that makes us one of the most lucrative university competitions in the world.
I had a chance to view this year's competition and thought all the teams did an outstanding job.
For those of you who missed it, Ashley Rabinovitch of the McGill Reporter reports, Brexit, equality and COVID-19: Finance students tackle topical case study:
When a class of pension investment students at the Desautels Faculty of Management created the case study for the 2020 McGill International Portfolio Challenge (MIPC), they chose to focus on themes of social inequality and protectionism. At the time, they had no way of knowing that COVID-19 was just around the corner. “The topics of inequalities and protectionism are always relevant, but this year has made it abundantly clear that there are new dimensions to address,” said Tania Kuoh, who served as co-executive director of MIPC 2020 alongside Darius Kuddo, a fellow BCom student.
Rising to the challenge of the moment
Devised by Sebastien Betermier, an associate professor of Finance, the MIPC leverages the talents of student teams from around the world to develop strategic solutions for institutional funds. A powerhouse roster of executives – including representatives from the Canadian pension funds Caisse de dépôt et placement du Québec, CN Investment Division, CPP Investments, OTPP, and PSP Investments – judges 25 semi-finalists and five finalists vying for more than $50,000 in prize money.
Every year, the MIPC presents a complex portfolio construction problem that immerses students in an emerging facet of impact investing. Last year’s competition illuminated the complexity of investing in more environmentally sustainable sources of energy. This year presented a fictitious sovereign wealth fund in the UK, the British National Strategic Fund, and asked students to develop an investment strategy and asset allocation framework in the context of the country’s withdrawal from the EU.
The case study featured a unique triple mandate to make the UK more economically independent and equal while generating risk-adjusted returns over the long-term. “We have actually learned of ongoing discussion to launch a real new sovereign wealth fund in the UK that is similar to the BNSF,” shared Betermier. “Now we have a golden opportunity to shape the debate in a time that is especially difficult because of the COVID-19 crisis.”
Omer Juma, a project manager at the Marcel Desautels Institute for Integrated Management, planned the MIPC alongside Kuddo, Kuoh, and their team of BCom students. Juma says this year’s case competition drew record levels of participation because of, not in spite of, the ongoing challenges of COVID-19 and Brexit. “As the COVID-19 pandemic exacerbates existing social inequalities, the topic is already on people’s minds,” he reflected. “Given the added complexity of Brexit, questions of protectionism were also especially timely this year. The themes were a major sell for our participants.”
Instead of postponing the competition, the organizers of the MIPC decided to run the event virtually for the first time. “After hearing from returning universities and sponsors about their goals for the event, we went into design-thinking mode and began to envision unique ways we could leverage technology to maintain the level of interaction our participants had come to expect,” said Juma.
By all accounts, the virtual component of this year’s MIPC went off without a hitch. “The MIPC student team put in an enormous effort to redesign the change in a virtual setting,” Betermier affirmed. “Their hard work paid off.” The organizers of the MIPC went beyond the task of translating presentations to a virtual format as they implemented a new mentorship program, created new avenues for recruitment for both MIPC and McGill students, and organized a five-day speaker series.
One of the speaker series events featured a panel on diversity and inclusion in the world of finance. “Our team has worked hard to make the MIPC more diverse, particularly in terms of gender balance and geography,” said Betermier. “We are still receiving data on the student teams, but we have already noticed an increase in female participation – from 31 to 42 percent – and a greater proportion of teams from developing countries.”
According to Tanya Kuoh, the theme of this year’s case added fresh urgency to the need for diversity in a competition that had previously only included participants who could shoulder the cost of traveling to Montreal for the semifinal and final rounds of judging. “The case itself pushed us to address the inequalities perpetuated by our challenge, and we made conscious efforts to make it more accessible to students,” she shared. “Ultimately, having greater diversity within the challenge created richer discussions, which made for a more impactful experience.”
Regardless of whether the MIPC returns to an in-person format next year, its organizers predict that some virtual elements will remain in place. “A virtual format allowed us to be able to record and publish a lot of the high-quality content we generated, not only to benefit participants in different time zones, but also to expand the reach and the impact of the challenge globally,” reflected Darius Kuddo.
Taking home the prize
Five teams competed in the November 6 finals. In the end, two teams emerged victorious: a team from Nanyang Technological University in Singapore and a solo entry from Boccoli University in Italy. “Both winners created a top-down structure for how to think about the triple impact requirement that was well-integrated and easy to understand,” revealed Betermier. The two winners shared the $30,000 top prize, while another $20,000 went to reward the runner-up proposals, best speakers, and five other team proposals that distinguished themselves in a particular area, including exceptional quantitative analysis, storytelling, and diverse perspectives.
“Thanks to our dedicated student leaders, sponsors, and participants, the MIPC now has a four-year track record of mobilizing student talent and leadership on complex societal issues,” concluded Betermier. “As the COVID-19 crisis continues to make these issues even more complex, we are looking forward to seeing the ways in which our students’ efforts inform the larger conversation.”
I commend the organizers of this year's event, they really pulled through despite the challenges to deliver a great event.
As I end this comment, I can't help thinking back to my McGill days where I majored in Economics, minored in Mathematics and was taking pre-med courses (organic chemistry, physiology and biochemistry) as electives as well as courses in political philosophy with Charles (Chuck) Taylor, Sam Noumoff, James Tully, and John Shingler.
I was in way over my head but I loved it, soaking up knowledge and I'm not going to lie, my favorite courses were taught by Chuck Taylor, Tom Naylor, Sam Noumoff, Allan Fenichel and Robin Rowley.
Basically, I loved professors who challenged me and they all made me think deeply about distributive justice, comparative economic systems, money laundering and ecological economics, and the history of economic thought and moral and political philosophy.
Why am I bringing this up? Because these days, I'm very reflective about capitalism and where we are heading.
David Scudellari, Senior Vice President and Global Head of Credit and Private Equity Investments at PSP Investments recently posted a wonderful opinion piece by Pope Francis on the health crisis where he explains how in order to come out of this pandemic better than we went in, we must let ourselves be touched by others’ pain.
That comment should be read by all but I'm afraid the world is facing massive economic challenges and chief among them is how will policymakers adopt policies which favor a more inclusive post-pandemic recovery.
In my last comment, I went over how Prime Minister Trudeau just named Michael Sabia as the next deputy minister of Finance Canada and why this is great news.
Some people emailed me after I posted it wondering why Michael is accepting lower pay to do this job, answering to politicians.
The answer is he's not doing it for the money, he's doing it out of a deep sense of public service.
And he won't be taking marching orders from any politician, he will be advising them on how to come up with the best post-recovery policies.
These are monumental challenges, especially in a post-COVID world where rising inequality and climate change loom large.
One thing is for sure, I agree with TIAA CEO Roger Ferguson, capitalism must become much more inclusive if we are to address enduring issues like climate change and wealth inequality.
What role will global pensions and global asset managers play in this? I have a few ideas and I'm pretty certain Michael Sabia has some too.
But don't kid yourselves, the pandemic and the forceful monetary and fiscal policy responses have made a terrible inequality situation much worse and it will take decades and really innovative policies, including tax policies, to address this and create more inclusive growth.
Pensions can only do so much but they can play a critical role in shaping a better world.
I'll end it on that optimistic note because I feel the cynical Greek in me wants to end it with a pack of cynical remarks and I won't let that happen.
Below, the fourth edition of the McGill International Portfolio Challenge (MIPC) focuses on how large institutional asset managers can address rising protectionism and social inequalities through innovative portfolio strategies. MIPC 2020 case writers Alex Fonseca and Mandy Wang introduce this year's case which focuses on a fictional British sovereign wealth fund set up in the midst of Brexit and the COVID-19 pandemic. The fund has a unique triple mandate to support British economic independence and alleviate social inequalities while simultaneously achieving required returns.
I also embedded the two winning proposals for the 2020 event (thank you Sebastien for sending me links).
Third, I embedded the Awards Ceremony of the MIPC 2020 capping off two months of hard work by participating teams by awarding C$50,000 in cash prizes to the winning teams.
Stephen McLennan, Senior Managing Director, Total Fund Management at OTPP made me chuckle when he brought up his old econometrics days at McGill. I totally concur!
Both Stephen and Scott Lawrence, Managing Director and Head of Infrastructure at CPP Investments provided great food for thought in the second clip below so take the time to watch it.
Lastly, Mathieu St-Jean sent me a talk Nick Shaxson gave on the Finance Curse. I haven't seen it yet because he sent it to me right after I posted this comment but embedded it here so everyone can watch it.