The Exchanges

Q When you have such a significant internal management effort, you always scratch your head about compensation issues. In the Maple Eight and the large Canadian plans have done a wonderful job of being able to attract and retain talent. Why is it that that seems to work in Canada when it doesn't in a lot of places elsewhere around the world?

A Getting the compensation model right and that alignment of interest right is something that the Maple Eight figured out early on. Ontario Teachers, Canada Pension Plan, and then the others really thought hard about that and realized that the pool of talent we wanted to attract was from asset managers, and so in order to attract and retain that, the idea was we needed to pay at least in the same zone. I would say the pension space doesn't quite pay at the same level as some of those areas, but it's not too far off. We also attract and retain those like me who care about why they come to work every day. So we are able to take advantage of that work motivation and satisfaction piece of really being aligned with pensioners. So that's a bit of an ability to shave a little bit off relative to some other areas in the capital markets. But it's worked in Canada really well because the pools of capital are large and we're able to make the investment in the governance models to have the sophistication of board members that's required in order to understand this alignment. We've also got the strength of governance whereby we're separate from government. It's not political here in Canada. The expertise on the boards is part of what gives comfort into the process, but it's the precedent that really was set early on, and the fact that it has led to strong performance and that alignment of int…

AI assessment note: “we're able to make the investment in the governance models to have the sophistication”

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A At Imco, our implementation of internal versus external is different depending on the asset classes, and it's different because to some degree of the history of the development of those asset classes. We have a combination of internal and external and co-investments and direct investments really across every asset class. Of the private asset classes, infrastructure is the most global and has a very high proportion of direct investments. As a result, we have a very sophisticated team, and that's an evolution. You go from fund investments to co-investments to direct investing in general, and that asset class has evolved quite rapidly over the last 15 years to really having a lot of chunky direct investments across the globe. In real estate, we have a lot of direct investments there as well that were largely focused in Canada, and then over the years, Diversified into more of the developed markets, primarily the US and Europe. And that's a combination of direct and some funds. So that's a complex portfolio with a lot of smaller investments in it. And in private equity, we're mostly funds and some co-investment. That's an evolving area for us. In private debt and loan, we have a strategy to grow, and that's really the impetus behind our New York office. Is expanding our investments in private debt and loan and increasing the proportion of direct investment there. Obviously with dir…

AI assessment note: “our implementation of internal versus external is different depending on the asset classes”

Q As you look back in retrospect, what did you think you knew as a professor not having practiced yet?

A That's a great question, Ted. I knew very little, really. I knew some good theory, and I was standing up in front of undergrads and MBA students and mature MBA students who were doing what in those days was a part-time MBA that used to take many years to complete, and I was 26 years old when I first walked into the classroom as their professor, and I was so nervous the first day about what I was wearing and what I looked like, and I walked into the classroom in the old Sidney Smith building on the campus that I had sat in literally the same classroom as a student. My first thoughts were really around how do I establish some credibility because talk about imposter syndrome. I had it. My practical experience was non-existent. I had gone straight through school. But I had a lot of experience as a research assistant, which I worked on very practical problems, so that was helpful. And the University of Rochester was a great learning ground from a practical perspective of feeling like I understood something about markets. I had that to hang my hat on. So I very quickly learned to learn from the students. And that was what really helped. So in the MBA classrooms in particular, where there were more experienced students, I would get a roster of what the student's job experience was and what their areas of interest were. And so I really quickly figured out, oh, there's a currency trader…

AI assessment note: “I knew very little, really. I knew some good theory”

Q So how have you gone about doing that?

A It began with the consideration of these principles at NAV Canada and at CN and at Hoop, each with a different set of constraints and objectives, and translating those to operating at a larger scale here. I would say the differences at scale are it takes longer to execute when you want to make a strategic change or a tactical shift. You have to plan further in advance. You have many more partners to work with, so working strategically with those partners in order to take advantage of scale and take advantage of scale in the markets and take advantage of scale through negotiations with partners while bearing in mind that sometimes scale can work against you. So there's a lot of thinking about the aspect of scale that impacts execution. It's a much bigger team. So I went from having 45 or so investment professionals at CN to now I have about 175, and we're located across the globe. We have offices in Edmonton, Calgary, Toronto, and London, and we're opening offices in New York and Singapore. So execution with a team that's globally dispersed has its benefits. We have boots on the ground now in locations that I didn't have the privilege of at CN, and we have more ability to choose where we use funds, co-investments, and direct investment strategies.

AI assessment note: “translating those to operating at a larger scale here. I would say the differences”

Q Well, why don't you take me back to your early, early education?

A Well, yeah, unusually, I started university when I was 15 years old. I was able to do that through the help of an amazing guidance counselor in the high school I was at. She spotted me early on as someone with some high potential for a host of reasons and helped me get myself into university early. So starting university young, I was interested in math, I was interested in languages, and started out in those areas. The math courses I took were bizarre. One was a real analysis course that seemed like it was a philosophy course, not a math course. They were the toughest level of math. So I very quickly had to admit to myself I was an applied mathematician, not a theoretical mathematician. So I ended up finding my way after a little bit of stumbling in some other areas into the quantitative side of economics. Finance did a lot of econometrics and statistics. Ended up studying economics as an undergrad with that bent in languages, French and Russian, and linguistics and whatnot as my fun courses, and then I went on to do my master's, but I made up my own master's degree as a combination of Economics courses that I did the PhD course for micro, macro, and econometrics. I did that coursework because I was thinking about doing a PhD, so I thought I'd see if I liked it. And then I did MBA courses out of the business school, and that was my master's degree, and then went on to my PhD. W…

AI assessment note: “unusually, I started university when I was 15 years old.”

Q And how'd you find your time on the street?

A I loved it. And I still love it. I spent the first eight years or so of my career in the trading rooms, two different trading rooms in Toronto. And then from there went to the buy side as a money manager onto other things from there. But I loved the time on the trading floor. Knowing that I wasn't going to stay there for my whole career. I loved the dynamics. I love that I know how the capital market sausage is made. I know the inner workings. I know how the swap desk interacts with the rates desk, interacts with the currency desk, interacts with the debt origination desk when a corporate deal comes to market, for example. And not many people get that exposure. Its value to me today is huge that I understand those dynamics in a much deeper way than I could have through any other role.

AI assessment note: “I loved it. And I still love it.”

Q Along the way in that you took on a couple of more, what looked like full-time roles in those years. How did that come about?

A I got to know Nav Canada that runs the air navigation systems for Canada. I got to know the CEO and the CFO very well and the board, and they had a pension plan, and it was about a three billion dollar pension plan that was fully indexed to inflation because it had been a government plan previously. And they needed help really restructuring that because it had suffered during the financial crisis in 2008 really hurt them. They said, can you help us with that? And I said, well, sure, I can run that pension plan. And so I ended up running that for a couple of years, a few days a week while I was finishing off other projects as well and took them through a transformation with the focus on asset liability management. I had that first taste of managing a pension at Nav Canada. I had no staff. It was very entrepreneurial, and I was working with external managers, running searches, and really made the full portfolio construction decision and that strategic asset allocation decision. So I got really my hands on all aspects of the investment process in that, and running a business, really, of how to staff and how to think through all of the longer-term considerations in running that pension plan and doing it well. And I thought I was actually going to stay there for a while, because there were a lot more interesting things to do in that spot than I thought. I actually got lured away fro…

AI assessment note: “They said, can you help us with that? And I said, well, sure”

Q Along that path of looking at a manager that you can then co-invest and then potentially do it yourselves down the road. How do you navigate the relationship with a manager who understands that down the road you may be a great client who is a former client?

A That's a great question. As long as you're transparent at the outset, those relationships can go really well. They'd rather have you as a client for a short time than not as a client at all. And oftentimes it can go well when you're dealing in a strategy that is a relatively newer strategy where everybody is learning their footing or where there's a lot of technical expertise required. So an interesting example is tail risk hedging. Tail risk hedging is tricky to do as an external strategy, because it's a bit of a no-win situation. It's basically an insurance policy, no matter how it's structured. Unless there's a crisis where the tail risk pays, you expect it to be something that loses money. Constructing that as an external strategy is pretty tough. The alignment of interest is not very strong. It's tough to have the governance model so that the decision makers are willing to stick with the strategy for the right reasons. So that's an interesting example of engaging with some external managers who are Are creative, thoughtful around that for a period of time, learning from that, and they've been quite willing to share expertise and to internalize because it's such a difficult area to maintain a long-term relationship with a client as an externally managed tail risk manager. That's an interesting example that's unique. In other areas, you're investing in funds for the most par…

AI assessment note: “As long as you're transparent at the outset, those relationships can go really well.”

Q How have you gone about organizing that investment team?

A We're in the midst of a strategic shift to open these two global offices in Singapore and New York. We've learned from having the multiple offices already in Canada and then in London. There's challenges and benefits. The benefits include we're able to now search more globally for talent, and we have a terrific team that's based here in Edmonton, and on the investment side, we home grow a lot of our talent here in Alberta from the Alberta Education system, which is super strong, but sometimes with specialized functions, having the ability to do a search more globally is important, and then having some of that local knowledge really matters. So, for example, in Singapore, we've got a new head of Singapore starting in a couple of weeks who's coming to us from GIC, and leveraging that experience that he's bringing to the table will be highly valuable as we build our relationships and boots on the ground throughout Asia. The boots on the ground aspect, the ability to execute, and the talent attraction are really clear benefits. The challenges do include, we spend a lot of time on remote meetings. We have a work our way approach to our employees throughout all of the offices, which means we are really keen on setting clear expectations and accountability. We're less concerned about whether people are working in the office or remotely, and people are quite flexible in where they work…

AI assessment note: “strategic shift to open these two global offices in Singapore and New York”

Q What characteristics are your preferred habitat for external managers?

A With external managers, we look for those relationships in areas where it's difficult for us to have an edge as direct investors, or in areas that are more innovative, areas that are in emerging markets. It's a little more challenging to really cover those areas with a still relatively small team. Um, In some instances, the idea is to learn from those managers and make that progression that we were talking about earlier from partnerships to more co-investments because the economics are better on the co-investment trajectory, and then where relevant to consider building internal teams for that direct investing. And you need sufficient scale, you need sufficient longevity of the investment strategy. And long-term horizon for it to make sense to build an internal team.

AI assessment note: “we look for those relationships in areas where it's difficult for us to have an edge”

Q What are some examples of that innovative approach that a manager might take that's hard for you to do internally?

A Some regional approaches are good ones for us where we may be new to a region. And it makes sense to get into that region with a partner with an understanding that we're going to learn from them and partner with them for the period of time that it makes sense. Private debt and loan was a good example. We're quite sophisticated in that area now, but it was a good example where as that market was evolving and developing, it made sense to work with partners and we still work with partners, but we also expect something like a four to one ratio of direct investment opportunities. For every dollar that we're putting with a partner. And that's evolved. That was not the case a few years ago. So PD&L was a great example of a market building, the expertise building, and starting with working with sophisticated external partners, and then slowly internalizing.

AI assessment note: “Private debt and loan was a good example... starting with working with sophisticated external partners”

Q What do you do in the portfolio to consider those risks?

A For the stagflation risk, having a very well diversified portfolio is principle number one. Principle number two is thinking carefully about the inflation side of that equation and understanding, first of all, our client's liability profile and how linked is that to inflation. For our clients, the link is variable, but reasonably manageable. And then thinking about in each asset class, how well does each asset class do in terms of its inflation hedging properties, and ensuring that we have enough in those asset classes, and perhaps even some tactical positions that are protective there. And a careful example is with real estate. Certain areas in the real estate Book are good inflation hedges for Canadian investors and others less so. The more opportunistic part of the real estate market is less of a direct inflation hedge. So thinking carefully about each asset class in that way and ensuring that our clients, that we advise them for those that have more inflation sensitivity in their liabilities, that they have sufficient allocation to the areas such as real estate infrastructure, inflation-linked bonds, et cetera, that can hedge there. The diversification can include renewables and resources, as an example, where that's diversification into some commodity price risk, and that can be one of the best hedges against inflation. So being thoughtful about each of the asset class are…

AI assessment note: “sufficient allocation to the areas such as real estate infrastructure, inflation-linked bonds”

Q How have you tackled the currency hedging decision?

A The currency hedging decision is one of the most difficult investment decisions at a pension plan, and there's a lot of confusion about it. It has evolved over time. Often, pension plans have ended up in the so-called no regrets, fifty-fifty hedge half approach, which really doesn't make sense. Philosophically, the hedging of currency Should depend on what the intention is of the investments that you're making globally. What role are they playing in the portfolio? Recognizing that whatever your strategic asset mix is, for the return seeking piece, you may invest, for example, in the global equity index, which has, by definition, a certain currency exposure embedded in it. That may or may not be the best currency exposure if you left it unhedged for you as a Canadian pension plan. But how to determine what's right? Is there an optimal currency exposure? The answer is, well, no, there isn't. So what we can do is think thoughtfully about directionally what role does currency play and how does currency volatility fit into the overall risk appetite, both in asset liability terms and in asset only terms. So you need to do the analysis, and it can vary a bit over time. But in principle, there's an important aspect of currency that sometimes is missed by Canadian pension plans, and that is exposure to certain currencies can play a diversifying role and can play a tail risk hedging role…

AI assessment note: “exposure to certain currencies can play a diversifying role and can play a tail risk”

Q So when you did make that transition, what was your vision at the time?

A Well, I made the transition through a few things. I went from the trading floor to the buy side as a fixed income portfolio manager, where my clients were a variety of pension funds and insurance companies, and so I learned about their problems and what they were trying to achieve for the long term while I was on the trading floor working in the fixed income space and in the debt origination space, and then as a portfolio manager for them where my role was mostly Doing the technical stuff, the asset liability management, fixed income, portfolio management. So I learned a lot about what the clients were trying to do over the long haul through that time. And eventually I made my way into having my own consulting business because I wanted to diversify out of just being a fixed income PM for the rest of my career. It was a great role. I loved it, but I was still young. I was still in my early thirties, had a very long career ahead of me. And I thought, oh, I'm going to want to do more in different things and diversify that skillset. So it's hard. This industry doesn't make it easy to To shift asset classes, it doesn't make it easy to shift rules when you've become a specialist in something pretty early on and reached a pretty high level pretty early on. So in the consulting space, I had this unique background of the deep academic knowledge. I had built a really great network becaus…

AI assessment note: “having my own consulting business because I wanted to diversify out of just being a fixed income”