Canadian Pension Model Must Evolve?

Bert Clark, the president and CEO of the Investment Management Corporation of Ontario (IMCO), wrote a comment for the Globe and Mail, 'Canadian model' for approaching public pensions must evolve:
For the past 25 years, many public pension funds in Canada have followed what’s globally referred to as the “Canadian model." This approach focused on independent and professional governance, investing in private assets, active management of public equities and internalization of investment activities to avoid high external management fees. By and large, the Canadian model has generated strong results. It put Canadian pensions on the global investing map.

However, significant changes in capital markets are driving a need to evolve the Canadian model. As well, fund managers can’t ignore the success of other institutional asset management models that have emerged outside of Canada. Here’s why:

First, successfully investing in private assets has become more difficult. When pensions first began to invest in private assets, they could count on a significant “illiquidity premium” over the public markets’ equivalent investment. That is no longer true. Today, because so many investors have identified private equity, infrastructure and real estate as core aspects of their total portfolio, the potential illiquidity premium has been diminished.

There are still good reasons to invest in private assets: The returns are less volatile, they represent a growing portion of the investable universe of equity and they offer opportunities to enhance value that would be difficult in a public-market context.

But, successfully investing in private assets today requires both internal teams and external partners with real skill in generating value enhancement. Today, successful investors in private assets, together with their external partners, must be active and engaged owners. And they need to have the sophisticated capabilities required to create value through private ownership.

Second, outperforming in many public markets is difficult to sustain. This is especially true if these market segments are accessed through more expensive external managers. But the choice between either being always “active" or always “passive” is a false one. While many market segments are efficient, there are still public market segments where sustained outperformance through active management is realistic; and there are lower-cost ways to pursue outperformance in the more efficient markets (for example, factor-based investment strategies). The key is to recognize which strategy to employ and when.

Third, the Canadian model hasn’t been the only successful approach to large public fund management over the past 25 years. For example, several northern European public funds have been successful by focusing on total portfolio decisions as a means of driving returns and long-term value for their stakeholders.

There is strong logic to focusing on total portfolio. After all, asset-allocation decisions drive over-all risk and return. Individual investment decisions within asset classes are dwarfed in comparison. Furthermore, if an investor’s goal is to build a portfolio that can perform under a range of macro-economic conditions, it requires diversification at the asset class level.

The Canadian model still has gas in the tank, but its application needs a tune-up.
This is an excellent comment from Bert Clark and it tells you where he and IMCO's CIO, Jean Michel, are steering that ship.

They obviously like aspects of the "Canadian model" but are taking a deeper, more reflective view on it and looking on how they can improve it in private markets by hiring the right internal teams and partnering up with the right external partners with "skill in generating value enhancement" which is just a fancier way of saying "no financial engineering, roll up your sleeves and execute on the value creation plan!"

In public markets, Bert Clark notes there are still segments where "sustained outperformance through active management is realistic" and if they can do it internally, they will to avoid paying high fees to external managers, but where they can't, I'm sure they will search for the right external managers and pay the fees.

The job of managing IMCO's Public Markets falls under Jean Michel and Tanya Lai, Managing Director, Public Markets.

You can now view IMCO's investment team on its website here (click on image below):


Mary Chang is overseeing Infrastructure, Brian Whibbs is head of Real Estate, Sean Macaulay is in charge of Private Equity, Glenn Hubert will manage Private Debt and Frank Stadler is in charge of Tactical Asset Allocation (Note: Most of these investment professionals came from IMCO's founding clients, WSIB and OPB and were at IMCO prior to Jean or Nicole joining the organization).

You should also have a look at IMCO's Executive Team (click on image):


Bert Clark has been busy hiring the right people to help him with running this organization managing $62 billion and growing very fast.

It's clear IMCO isn't flying under the radar any longer, the investment, risk, finance and HR teams are all in place and the ramp-up period is over.

From what my contacts tell me, Nicole Musicco has finalized her strategy in Private Markets and they are moving along nicely.

Last week, I discussed how IMCO's CEO is weathering the storm ahead and I specifically said it can't be "business as usual" in public or private markets. I talked about executing on the value creation plan and having the right partners to co-invest with on larger transactions to scale into privates and lower overall fees.

I also agree with Bert Clark that strategic asset allocation holds the key for long-term success and I imagine that he, Jean Michel, Nicole Musicco, Frank Stadler and Saskia Goedhart, the Chief Risk Officer, will sit down and have long discussions over the total portfolio.

I'm not sure if they will implement an All-Weather approach like Bridgewater does or make more aggressive strategic bets on certain assets over a five-year window.

I was in Toronto last week for a couple of days and was tied up in meetings and didn't really have a chance to set up meetings with key pension people because it was a last minute trip.

The only person I reached out to have a quick coffee with was CPPIB's Michel Leduc but he was very busy with meetings since it was Family Day last Monday.

I would have loved to pass by IMCO's offices to meet Bert Clark, Jean Michel and Nicole Musicco, and met up with many other people from other organizations, but I just didn't have time and these people are all extremely busy so I need to plan ahead.

Anyway, I agree with Bert Clark, the much-touted Canadian model is excellent but it's time to evolve and make it better and that includes recognizing the success of other models.

It's going to be exciting watching how IMCO evolves over the next ten years, they're a relatively young and dynamic team of dedicated professionals with exceptional experience from other organizations and their CEO isn't afraid to try a different approach.

Below, Milton Berg, the founder and CEO of M.B. Advisors, joins "Squawk Box" to give his market calls and explain why he thinks we're in a new extended bull market and won't retest the December lows. Berg worked for Soros and Druckenmiller and he has an exceptional track record.

I hope he's right and my own feeling is as long as the Fed stays put, stocks and other risk assets should grind higher but I remain cautious for a lot of reasons which I'll get into on Friday.

Lastly, Paul Morassutti, the vice chairman of valuation and advisory services at CBRE, spoke at the Toronto RealCapital Conference today and said that tech and innovation could help shield Canada from the worst effects of a looming recession. Take the time to read this article, it's excellent and he shares great insights on how tech has permeated every industry and why that's good.

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