A Conversation with Jean Turmel

Published in Pension Pulse.

On
Wednesday afternoon, I had the pleasure to meet up again with Jean
Turmel, president of Perseus Capital Inc., and former president of
Financial Markets, Treasury and Investment Bank for the National Bank
of Canada. Mr. Turmel is also the Chair
of the Investment Committee at the Ontario Teachers' Pension Plan.

Mr.
Turmel was kind enough to meet up with me, and I took advantage to have
a thought provoking conversation with him. I've met many people in the
investment world, but very few
stand-up gentlemen like Jean Turmel. This man is part of rare elite in
the investment community. He is old school, very knowledgeable and very
much in tune with what's going on in the markets. Ontario Teachers' is
lucky to have him on their board.

Right off the bat, Mr. Turmel
warned me: "I'm an investment guy, not a governance guy". No problem, I
can talk about markets all day long, especially with someone as sharp as
him.

We started by talking about the recovery going on in the
US. "Most of this is just fiscal and monetary stimulus, once it wears
off, growth will moderate."

On the larger question of inflation
versus deflation: "If you asked me a few months ago, I'd say inflation
is a bigger risk, but with what is going on right now in Europe,
deflation is the bigger concern. Sovereign debt crises are very
deflationary."

While I agree with Mr. Turmel, I told him that the
Fed and the ECB will do whatever it takes to avoid debt deflation. If
the choice is between debt deflation and inflation, they will opt for
the latter, which is why they're still pushing the reflation trade
allowing banks and hedge funds to bid up risk assets.

Mr. Turmel conceded: "You're right, it's very difficult to get out of
debt deflation". But he added: "The Fed's balance sheet is a concern and so is the ECB's. If they start breaking rules, they will
lose credibility, which is bearish for the euro. This is what you're
seeing now."

On the issue of pensions, we went through a series of
topics, which I will share with you in point form:

• Mr.
  Turmel told me that if Ontario Teachers' calculated their pension
  liabilities the same way that CalPERS and CalSTRS does (using the
  expected rate of return of 8% as the discount rate), then they would be in
  surplus, not deficit (scary thought if you live in California!)
• On
  hedge funds, he told me that "most managers are punters" and that he is
  skeptical of "black-box" strategies. "At Teachers', we want transparency
  and liquidity to be able to aggregate and manage risks appropriately."
• On
  private markets, he said that Teachers' uses a spread over public
  markets for the private equity benchmark and CPI+500 basis points for
  the real estate benchmark. He agreed with me that the latter benchmark
  was not appropriate for real estate but added "over longer periods, it
  is an appropriate benchmark, but not for quarterly results." He told me
  that compensation should be adjusted appropriately, taking this into
  account.
• When I mentioned Teachers' outstanding
  results in Fixed Income last year, he told me a lot of that is
  explained by the credit products that were "marked to market" the year
  before, and came back strong in 2009. "You won't have the same stellar
  results in 2010".
• On alpha versus beta at a pension fund, Mr.
  Turmel thinks smaller funds should outsource to external managers but
  larger funds should manage assets internally.
• On revisiting the
  asset mix, Mr. Turmel thinks that it should be done "as often as
  needed". Moreover, he thinks pension funds have to be opportunistic in
  this environment, taking advantage of market dislocations.
• As
  far as allocations to private markets, he told me that pension funds
  that have liquidity concerns should reduce their allocations to private
  markets.
• On managing risk, he said that Teachers' manages
  liquidity risk very carefully, stress testing their portfolio often with
  extreme scenarios (eg., 50% haircut in stocks) and managing liquidity
  risk for the "next 12 months."
• He added that in 2008, many
  pension funds, including the Caisse, did not manage liquidity risk,
  forcing them to sell corporate bonds and stocks at the bottom of the
  market to meet their cash calls. "This exacerbated their negative
  returns."
• On asset-liability management, Mr. Turmel thinks it's
  silly for pension funds to evaluate themselves relative to a universe of
  peers because it's not in the best interest of their sponsors. He
  thinks asset-liability management will take precedence in the future.

One thing Mr. Turmel wanted me to stress in my blog is that it's high
time for financial reforms introducing more transparency in the OTC
market. Mr. Turmel thinks that if we had a clearinghouse for interest
rate swaps, we would use that interest rate as the true discount rate
because "it's a more accurate reflection of the market rate." I agreed
but told him the big banks will fight tooth and nail against such
reforms.

We ended our conversation by talking a little about trading and life. I
told him that it's funny to see trading rooms full of quants where you
can hear a pin drop. Mr. Turmel responded: "Yes, it isn't like the
Chicago pit days where you needed to be a good psychologist to read
markets. Nowadays, it's all about arbitrage."

I said all this arbitrage based on quant models is
leading to great market dislocations allowing discretionary guys like
Soros to capitalize.

"Yes, but those discretionary managers need
staying power to enter these trades."

Finally, I told him that
due to my medical condition, I was thinking of getting into trading full
time. He raised this concern with me: "The last trader I had that
developed Multiple Sclerosis quit because he couldn't handle the
stress."

I told him that my MS doesn't stress me, but "bullshit
office politics" does. I added: "When it comes to markets, I can be be
analyzing them all day long, it's in my blood, it's my passion. I'd like
to come into work with a bunch of people who are keen on making money,
not office politics. We should be asking ourselves how much money can we
make today?"

Mr. Turmel looked at me and said: "Wrong. On any
given day, you should be asking yourself how much money are you willing
to lose."

Lesson learned, Mr. Turmel. I thank you for being kind
enough to meet up with me. You are a class act and a rare breed in an
otherwise shallow and vacuous industry.

Comments

[Grand Supercycle]

The proprietary indicators I use can identify trend changes before they occur and they have been warning of a USD rally since last year.

Just posted a new EURUSD chart: showing long term trendline with important support around 1.2770

http://www.zerohedge.com/forum/latest-market-outlook-0

[jp]

Sovereign debt crises are very deflationary."

[JimboJammer]

We  can  all  see  the  Euro  was  a  bad  idea..

We  don't  want  the  Amero...  

[Tic tock]

I'm having one of those 'Grand Supercycle' moments..this, that and wotnot might happen. Penultimately, the USD could be the flight to safety..yet that would only further erode global financial stability. Sovereign issuance here, there.. can't support a strong dollar, can't support 'comic wealth creation- 'cept as a monetary phenomena - only leaves the right alternative as 'sweeping financial reform'. It does remain possible that financial reform is only feasible if China determines what it is willing to accept. Therefore, politically, it looks likely that the FED must find the chance to bow to China before reform is enacted. Or, widespread rioting occurs before that happens and... financial reform is enacted domestically.

So far, there isn't a clear, bullet point list of the reforms: if there was, and bear in mind this is the reason why a kleptocracy exists.. we probably wouldn't be at all sure if would agree. So I'd like to forward these two: a) ~3% paid on current account balances. b) Assign Sovereign Issuance, in the coming instance, equally, amongst the citizens of the nation -the mother of all CDOs', if you like. ..

It doesn't do much for the pension industry, as such. Maybe they could administer it.   

[Tic tock]

Leo, , the house is falling down..and you stop by to say you've had a pleasant chat..! Muppet. ..discussed financial reform, huh? My aunt is big on Homeopathy, so I looked into it..

Re: multiple sclerosis From Astra2012 [Log on to view profile] on 2005-10-24

Yes -homeopathy helps and unfortunately sometimes allopathic drugs have to be continued for some time along with it.

on Internet find articles by Andre Saine of Montreal, Canada- he specializes in ms.

[Matto]

"which is why they're still pushing the reflation trade allowing banks and hedge funds to bid up risk assets."

Maybe the banks and hedge funds are bidding up risk assets because nobody has stoped them, not because it was "allowed"

If you really wanted inflation you'd encourage lending, not hording. Drop the rate the fed pays on deposits and tell them to "go forth and multiply"

http://research.stlouisfed.org/fred2/series/NFORBRES?rid=19

I believe the bidding up of risk assets is something that has just happened while the central banks were shoring up the balance sheets of their mates.