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Should Pensions Be In The Seeding Game?
I spent the day in Toronto on Thursday visiting pension fund managers with the commodities relative value manager
I met a couple of weeks ago. Went down there by train on Wednesday
afternoon and he gave me a lift back to Montreal after our afternoon
meeting. I was too exhausted to blog late last night so I decided to
write my comment this morning.
Below are my bullet points on this trip (please take the time to read them all):
- I
took the train down to Toronto. Booked Via Rail business class one way
and left Wednesday afternoon. Cost me $246.36. If I planned it in
advance, I could have flown there for less with Air Canada or Porter,
but it was last minute and I like the train (business class was a perk I
treated myself to but it wasn't worth it). - Brought a copy of Dan Ariely's book, The Upside of Irrationality: The Unexpected Benefits of Defying Logic,
which I highly recommend. The first chapter, Paying More For Less, Why
Big Bonuses Don't Always Work, is brilliant. Big bonuses are often not
doled out to the most competent managers who are aligning their
interests with shareholders (or pension fund beneficiaries). - Stayed
with a buddy of mine in Toronto who trades currencies for a living. He
lives out in Oakville, Ontario, about 30 minutes outside Toronto when there is no traffic. I typically stay at the Fairmont Royal York
which is downtown and right across the train station, but he insisted I
stay with him and his family. His wife spoiled me with a nice meal and
had everything ready for me, including a laptop to write my blog and my vitamin D drops which I forgot back in Montreal (thank you Nancy, you're a sweetheart!). - On Thursday morning, I had an eight o'clock meeting with Jim Keohane, Senior VP and CIO at Healthcare of Ontario Pension Plan (HOOPP).
My buddy warned me that we have to leave the house at 6:15 or else we'd
get stuck in traffic. Woke up at 5:30 naturally but didn't feel great
and by the time we left it was 7:00 a.m. - Disaster! The traffic
in Toronto is horrendous! It took us over an hour and a half to come
downtown. I emailed Jim to reschedule for a little later in the morning.
I also emailed Andy Moysiuk, Managing Partner at HOOPP Capital Partners to see if he was available to grab a coffee before my meeting with Jim. Luckily, he was. - Driving
in from Oakville and being stuck on the highway, I noticed a lot of
nice cars on the road: BMWs, Mercs, Porsches, etc. Told my buddy "there
is a lot of money in this city. He replied: " Yup, no thanks to the
Parti Quebecois. There are lots of showoffs too. Torontonians are more
like Americans; they want to display their wealth. Montreal's rich are
more European, they are a lot more low key" ( a point that Andy Moysiuk
reiterated during our meeting). - As we were stuck in traffic, we talked about seeding hedge funds,
business opportunities in Greece (imports to Canada), and listened to
some talk show on why women prefer "bad boys" (LOL!). The radio
commentator read an email from one lady who wrote in "I prefer to have
great sex for one year with a jerk than make love to a nice romantic man
for 10 years." My buddy and I looked at each other thinking how some
women can be so stupid (not that men are any better as many like chasing
skirts with attitude!). - Anyways,
grabbed a coffee with Andy Moysiuk at Mercato, a nice little coffee
shop right next to HOOPP's offices. Andy is a smart private equity
investor. I don't agree with all his views on pension investments but he
knows his stuff, especially in private equity and venture capital. - We
didn't have much time. Our discussion was on seeding funds, not just
hedge funds but funds in general. Andy sees this as a strategic
partnership. "You're nurturing a business, not just a fund. You want to
make sure this will be a success, and you want to make sure the manager
will not pack up and leave at the first sign of trouble leaving you, the
seeder, holding the bag." - This is an excellent point. When you
are seeding a fund, any fund, you are nurturing a business. You want to
make sure the manager is committed to the business (it's not just about
managing money). The pension fund is there for the long-term and wants
to realize gains on their seeding activity. The last thing any pension
fund manager who seeds a fund wants is to pull the plug fast. They want
to realize gains on the business as it grows and eventually IPOs. - I
also talked to Andy about board governance at pension plans. Told him I
know he sits on a board of a fairly large church pension fund along
with Diane Urquhart an several other experts. He told me: "It's a good
board and well managed fund but every board member brings their baggage.
The actuaries tend to be overly-sophisticated, sometimes to the
detriment of the investment process." I can relate. Often, it's best to
keep things simple. - My meeting with Jim Keohane, SVP and CIO
at HOOPP was brief but excellent. Jim is incredibly smart, he really
knows his stuff across all public and private asset classes. Told him
that Andy warned me not to trash derivatives but I added: "I have
nothing against derivatives, only pension fund managers who take stupid
risks using derivatives". - HOOPP is a derivatives powerhouse.
They know exactly how to use derivatives wisely to match assets with
liabilities, do enhanced indexing, overlay and absolute return
strategies which they do exclusively internally (no allocations to
outside funds in public markets and limited ones in private markets). - I
asked Jim why not allocate more to outside funds. He replied: "It's all
about cost of delivery. When I got here 15% was allocated to outside
managers but they were underperforming the market. By indexing using
swaps, we got our beta, lowered the volatility and reduced costs
substantially." - I told Jim that Leo de Bever did the same thing at AIMCo,
substantially lowering the costs, but the media in Edmonton harped on
bonuses he doled out to internal managers (some reporters are so
stupid!). However, Leo de Bever kept managers in public and private
markets that earned their fees, delivering alpha that cannot be
replicated internally. Again, I asked Jim why doesn't HOOPP do the same
thing? If they're worried about risks, they can use managed accounts and
have full transparency and control over the investment portfolios. - Jim
replied: "We are doing a good job creating alpha internally. Maybe that
will change in the future, but right now there is no point of
outsourcing we can can do the job internally at a lower cost of
delivery." This is a bit of a sticking point with me because I believe
true alpha exists in long-only and absolute return strategies and the
best managers are not working at pension funds, they're running their
own fund, charging fees for this expertise. As one pension fund manager
told me later in the day: "If they're that good, they'd be charging
2&20 managing their own fund." - Importantly,
it's in the best interest of pension fund beneficiaries to discover
these fund managers and allocate to them. No doubt about this in my
mind. It's just that most pension funds are not approaching their
allocations to outside managers in an intelligent way, using managed
accounts in public markets or co-investing in private markets,
negotiating hard on fees and extracting maximum knowledge leverage off
their external partnerships using solid investment management agreements
with clauses that list exactly what they expect from the partnership. - Something Jim said about the big private equity funds did make perfect
sense.: "Pension funds investing in these large PE funds are going to
underperfom large cap stocks. Because of their size, these mega buyout
funds are taking out large public companies at substantial premiums. It just doesn't make sense to pay fees and take on illiquidity risk for these large deals. " - Thanked Jim, told him I wish HOOPP was managing the pensions of all
healthcare professionals across Canada, and went off to my next meeting
where I hooked up with the commodities fund manager and the External
Portfolio Management team at a large pension fund. It was an excellent
meeting, I mostly listened and observed the manager and the team that
was evaluating his presentation. The manager covered a lot of ground and
the team asked good questions. - At the end of that meeting, I asked the head
of External Portfolio Management team whether they plan on seeding
funds. He told me that they're looking into it and if "they think it
makes sense, they'll recommend it. Maybe even partner up with other
funds on such a venture." Maybe I was a bit bitchy yesterday morning but
I answered back: "I've sat in your shoes and done many board
presentations. If I'm sitting on your board, I don't want to hear 'I
think it makes sense', I want to hear 'IT MAKES SENSE' and here is the
research from PAAMCO on emerging funds to prove it." - Afterwards,
the relative value commodities fund manager told me "nothing personal,
but it shows you haven't done a lot of marketing, interjecting at times
and telling the guy how to do his job." I replied: "Let's get something
straight, I am here as an independent, not to market your fund. We have
not signed any legal agreement. I believe in you and this fund which is
why I opened the doors using my senior pension contacts and got you meetings in record time. My comment to the head of this team was not
intended in a malicious way but more to make the forceful case for
seeding funds and why it's in the best interest of pension fund
beneficiaries. No offense taken and will take your constructive
criticism and recommend that you speak more slowly during our afternoon
meeting." - We parted ways at lunch as he had to meet someone. I
ate outside, enjoying the sun and exchanged some emails with Colin
Carlton, former Vice President, Investment Research at CPPIB, telling
him I was in the vicinity. Colin was recently replaced by Jean-François L’Her, formerly of the Caisse, but he has consulting mandates to complete at CPPIB. - Colin told me that he was busy writing large parts on CPPIB's 2011 Annual Report.
I appreciate the time and effort it takes to complete these annual
reports and told him one of my former employers, the Business
Development Bank of Canada (BDC), has a whole team dedicated to corporate planning and drafting the annual report. It's a lot of work! - I
praised him for the annual report but did mention that the whole
discussion on benchmarks and value added needs more clarification as
it's overly complicated. Colin said they have simplified it and will do
more. - I also asked him about his future plans and told him I see a huge gap in
pension consulting. He agreed and is looking into some options but told
me he's not interested in expanding a new business and having a crazy
work schedule. "My wife is my boss now." Colin is an intelligent and
nice man and I wish him success in his new projects, wherever they lead
him. - Hooked up again with the commodities relative value
manager and headed to our afternoon appointment with another large
pension fund. In the lobby, I ran into the president, greeted him and introduced the manager. We then proceeded to meet with the VP
of Alternative Investments and his portfolio and assistant portfolio
managers. - In my opinion, this meeting was even better than the
first. The VP of Alternatives couldn't stay long but let his portfolio
manager ask the questions. Before the VP rushed off to his next meeting,
I asked whether their investment policy precludes them from seeding
funds. He replied: "Not at all. If it makes sense and fits in our
portfolio, we will seed a fund." - I asked him if he can let the
CIO know I am in their offices but he was in a rush so I emailed the CIO
myself to let him know I was in a meeting at their offices and would
like to say hello after. To my surprise, the CIO came into our meeting
wearing a golf shirt, holding a cup of Starbucks coffee, introducing
himself and asking if he can sit in. I loved it!!! - The portfolio manager was asking amazing questions. This guy is simply
the best at analyzing hedge funds and strategies (told him to write a
book). The manager answered all the questions and even gave numerous
examples on his strategy and how he mitigates risk (excellent exchange).
The CIO listened carefully and then asked the important business
questions on fees and why they should consider seeding his fund. He got
the answers to his questions and walked out of the meeting after 30
minutes. Before walking out, he told me he liked my last comment on reducing risk
and told me that Roger Martin, dean of the Rotman School of Management
sounds like a "frustrated professor" in his op-ed (totally agree). - We
wrapped things up with the portfolio manager who explained the next
steps. He also stated he likes the relative value commodities strategy,
the liquidity, the fact that it fits on their managed account platform,
but needs to do more background checks. The manager provided him with a
list of references and urged him to call them. - We then proceeded to drive back to Montreal. It was a long drive, we
stopped off at Chalet Suisse for dinner, but I really enjoyed my
conversation with this relative value commodities manager. He's
exceptionally bright, driven, has the entrepreneurial mindset, right
work ethic and values which he and his wife instill in their three
children. We got into a lot of personal discussions during this car
trip and I admire the depth of his character given the personal
challenges he's faced growing up as an orphan at an early age. I
honestly marvel this individual and know the pension fund that seeds him
and his team will not regret their decision just like I have no regrets
whatsoever introducing him to these two large pension funds.
That's the end of my long comment on my trip to Toronto.
I wish you all a great weekend. Enjoy the sun as summer has finally
arrived!
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