A Conversation with PSP Investments' CEO Neil Cunningham
It's very rare that you will see Neil or any senior manager at PSP give an interview like this, so I pounced on the opportunity to listen to this a couple of times.
First, what I like about Neil is what you see is what you get. If he comes across as a solid leader who is nice, thoughtful and down to earth, it's because that's how he is when you meet him and that's how I remember him since the time we worked together back in 2005-06.
Neil knows his stuff, he doesn't need to prove anything to anyone but he's always looking to learn and improve processes and the experience of working at PSP.
He began by stating it was four years ago that the Canadian Club of Montreal interviewed his predecessor André Bourbonnais who discussed expanding PSP's global footprint.
"Since then, we opened New York, Hong Kong and London and have over 100 people total in those three offices and created new asset classes. Obviously, having boots on the ground there makes us more effective in terms of sourcing deals and seeing things before they get circulated to a broader audience."
PSP now has more than 1,000 employees and most of them are based in their head office here in Montreal.
Neil said he can unofficially state that PSP now manages over $200 billion as at the end of March (end of their fiscal year) and that they got "mostly the rebound, not the down" as their fiscal year started April 1st 2020.
"We are in very healthy shape fiscally and financially. We do take a long term view on our expansion globally as well as our efforts on diversity of thought and other forms of diversity."
He added: "We do attempt to be selective across those markets. We are big enough to invest everywhere but small enough (and smart enough) to not have to invest everywhere and compete head to head with people who are much bigger than us."
He noted however that PSP Investments is a young fund that is projected to reach a trillion dollars by 2060. "Unlike a lot of businesses, we really know where we will be in 10 years give or take what Mr. Market decides to give us."
On COVID, he said like everyone else, they pivoted to working from home and they had a "pretty good experience from a balance sheet perspective having learned lessons from the financial crisis, we did not get hit by a liquidity issue like we did back then."
He was very proud of the fact that PSP employees raised almost $1.2 million last fiscal year during two campaigns, one in the spring for COVID relief and one in the fall, their normal annual Centraide campaign.
He rightly noted: "People in certain industries that have not been negatively affected need to pick up the slack because those that were affected couldn't contribute as much, so those of us who were not affected need to be even more generous than in the past so I was very proud of our employees who reached into their pocket to contribute."
PSP's challenges during COVID
Neil once again reiterated that in a crisis, "liquidity is king" and "what we found was our derivative exposure during the GFC, whether it was currency hedging or total return swaps (you have to cover the hedge) hurt us so we made far less use of them and used repos or bonds to cover our collateral calls and were well positioned to raise liquidity during that time."
He added: "We had a special committee of the board which met frequently but we actually didn't have to take action. The board was there standing by us but those are things you build up over time, you can't be ready for a crisis in week, it takes many years of preparation, risk and liquidity management and so on."
Then they turned their attention to employees where Neil admitted they struggled at first on how to train, onboard and communicate effectively with their employees.
He gave all their leaders credit and said they were able to get real time feedback from employees because their engagement survey was moved up to every six weeks not the "chunky" every 2 years.
Luckily, PSP did not lay off any employee during this pandemic and their turnover rate is at an all time low (how times have changed for the better!).
Working with peers on ESG disclosure
Neil also discussed how Canada’s top eight pensions issued rare joint call in November for better ESG disclosures.
He said they call each other "frenemies" as they are mostly friends but they compete on deals.
He said they meet periodically to talk about things where they have common interests. In the area of ESG reporting, they all have different mandates and taken different routes to a certain point but they all agreed that they needed to standardize ESG disclosure using the Sustainability and Accounting Standards Board, or SASB, and the Task Force on Climate-related Financial Disclosures, or TCFD.
He said "anyone in business has to recognize that customers, employees and suppliers are increasingly looking for progressive companies" and "if you're not part of that trend, we as investors have to say that company is going to be left behind. It's pretty much an unstoppable force than anyone in business has to take into account."
PSP Strategy Shift
Neil said their Vision 2021 strategy officially ended a month ago but they started 18 months ago on a new cycle, engaging not just their senior VPs but also another 60 employees under them.
He said they boiled 27 trends they identified over time to 6 or 7 trends and highlighted some of them, like:
- The growth of Asian markets where you need boots on the ground, but mixed with that you have geopolitics.
- He said we are in a low yield environment and even though inflation pressures are picking up, the inflation outlook remains muted.
- There's great competition for assets, huge amount of money in assets so how are you going to compete with those who can write bigger checks and do less due diligence.
- Global competition for talent hence the videos to attract people to PSP but also evolving technologies to give more people flexibility to work from home. He said most employees at PSP can do without the commute to the office (I personally hated it, see this clip from CBS Sunday Morning).
Interestingly, he said they did away with their disaster recovery second site as they found it to be redundant and their employees take the office at home with them. They have a task force trying to figure out what needs to be done at the office versus what can be done at home.
The hard work in the shift in strategy is how to make them into "actionable plans".
He said they have three pillars and ten shifts and it permeates down the organization in terms of business plans.
He also said "the focus has to to be on the total fund as every action has to serve the mother ship".
However, Neil did note the more challenging aspect at PSP is knowledge based decision making using actual data because they have all sorts of data sources that are literally all over the place and they don't talk to each other very well, so "job one is to consolidate all that data” to take actionable decisions (PSP needs to contact Mihail Garchev and the folks at ClearMacro).
Diversity and inclusion at PSP
Lastly, Neil talked about attracting and retaining talent at PSP but paid particular attention to diversity and inclusion.
He said earning the long term returns for beneficiaries is "job one" but they have put a ton of work into diversity and split themselves into 8 affinity groups and are more focused than ever on unconscious biases.
He said he believes than can lead by example and gave an example of an internship program specifically designed for bringing in veterans at PSP since they manage the pension of the Canadian Forces.
"If you think about the qualifications of a veteran, it's completely different from the normal intake of someone coming from a business school who can do spreadsheets and waterfalls of calculations...what they are lacking is experience in leadership, teamwork and being calm in the face of a storm. Plus veterans tend to be older, they have a family and a mortgage, so the onboarding of these employees is very different."
So if PSP is successful in this program, they will share their experience with others.
By the way, a few veterans have disabilities so if successful, PSP can hire more people with disabilities and address another discriminatory factor in the workplace: ageism.
I have a few excellent candidates in mind that PSP can hire (or rehire) to improve their workforce and Neil knows a few of them (others he doesn't).
Alright, let me wrap it up there but since we are on the topic of diversity and inclusion, over the weekend, Kim Thomassin, Executive Vice-President and Head of Investments in
Québec and Stewardship Investing at CDPQ, was kind enough to get back to me after reading my recent comment on CDPQ's 2020 Stewardship Report:
Merci beaucoup d’avoir partagé notre rapport d’investissement durable, c’est très apprécié. Comme tu l’imagines, il s’agit d’un travail qui a mobilisé beaucoup de personnes au sein de l’organisation au cours des dernières semaines, et l’équipe en est très fière.
With respect to your point on people with disabilities, I completely agree with you that it is a crucial topic, and at CDPQ we take it very seriously, both internally and with our portfolio companies.
- Internally, our Action Plan for Persons with Disabilities 2021-2022 is accessible on our website that outlines the measures we are taking and planning to reduce barriers to the integration of people with disabilities;
- Externally, the fund Equity 25^3 aims to encourage organizations to advance diversity and inclusion, broadly speaking. Although its focus is on women, Indigenous people and visible minorities, we leverage this fund to share our convictions on inclusion, including of course, of persons with disabilities.
I thank Kim for getting back to me and I am glad CDPQ is committed to diversity in all its forms, both internally and externally.
I am a stickler on fighting discrimination in all its forms and will not back down on the importance of having a more diverse and inclusive workplace, especially when it comes to groups which our society routinely ignores and marginalizes.
Below, take the time to watch a virtual discussion hosted by the Canadian Club of Montreal between Neil Cunningham, President and CEO of PSP Investments and Abe Adham, Managing Director and Head of Quebec Investment Banking at TD Securities (fast forward to the 19 minute mark).
Also, sixty percent of working Americans say, ideally, they'll work from home or remotely at least part of the time post-pandemic. But will employees be able to decide if, or how frequently, they can skip the commute? And how will we adjust to being co-workers in an office once again? Correspondent Susan Spencer looks at how one company anticipates the challenges of a new work environment, and with experts who say it's important for our productivity, and our mental health, to head back to the office.