Chief executive of HOOPP, John Crocker, has only one more board meeting before he retires, and except for travel plans to the Caribbean and Europe his dance card is empty. After 10 years in the position he leaves a fund in good shape – fully funded, technologically primed and with investments that use innovative, low-cost implementation techniques.
In the past few years John Crocker has overseen the spending of more than $100 million in technology. The systems for both investments and administration have been completely replaced, an exercise the incoming CEO, Jim Keohane, says he is glad “was done on his watch”.
Crocker has not been afraid to make the call on technology, and the result is a sleek operating system for both administration and investments that in the long run will save costs and streamline communication.
In fact, he believes the biggest change in pension management in the past 10 years has been the development in technology.
“Communication to members used to cost $1 per member, per piece of communication, so you would really think about it before you sent anything,” he says. “The systems now in place have meant we have the ability to really expand our footprint with members.”
He says technology has played a similarly huge role in investments.
The fund uses derivatives extensively, and technology means complex investment strategies can be monitored and risk managed.
“In 2001 we had a typical 60:40 portfolio invested in physical assets. Now we have little invested in physical securities and the IT environment is more complex,” Crocker says.
The fund originally indulged in derivatives as part of a strategy to get around a foreign content rule, it quickly realised there were a lot of uses for the instruments and now employs derivatives extensively across the portfolio.
All of the fund’s assets are managed in-house and the 40-person investment team has averaged returns of 6.28 per cent a year over the 10-year period to the end of December 2010
The commitment to technology, not just in monetary terms but also business disruption, has meant ongoing education of the board.
“A lot of boards are very nervous, and there is apprehension generally about derivatives. We engaged in a heavy dose of education and discussion with the board, which didn’t happen overnight but was a journey,” Cocker says.
The HOOPP board is a lay board, but is very clearly a policy-only board. Implementation is left to staff.
“To their credit, our board have been very willing to commit the time and energy, and they have a genuine care for the beneficiaries,” Cocker says.
Similarly to Crocker’s journey, the new chief executive, Keohane, was formerly the CIO of the fund and Crocker says the two jobs require quite different skills.
“Investments is a Darwinian world,” he says. “If you are beating the markets you know about it and so does everyone else. It’s full of type-A personalities; it’s lucrative; and money can be a great motivator. As chief executive you are also responsible for other areas which have a whole different type of personalities, which are not necessarily motivated the same way. It requires a new set of executive skills.”
Under his tenure, Crocker has grown the fund from 150 to 450 employees, and he believes the success of a chief executive depends to some extent on delegation.
“The chief executive is like a conductor. He’s not actually making any noise, but he is responsible for coordinating so the collective noise is pleasant,” he says.
HOOPP, under Crocker, has not been afraid to make decisions that are appropriate for its own set of needs. It wasn’t afraid to step outside its peer group and make decision that were appropriate for its own constituents, regardless of what other funds were doing.
The fund has embraced liability-driven investing, with the aim of better aligning assets with future cash flow requirements. This means a reduction in the exposure to equities long-term, while increasing exposure to long-term bonds, real-return bonds and real estate.
This approach to portfolio construction and management that explicitly integrates the exposure and cash flows of pension liabilities (the benefits owed to members) in formulating investment policies, was introduced in 2007. The result was a move between late October and December of 2007 of about $6 billion from equities to fixed income. The subsequent asset allocation then moved from 60 per cent equities and 40 per cent in bonds to about 44 per cent in equities and 56 per cent in fixed income.
A subsequent strategic shift back into equities during 2009, and the completion of the multi-year strategy to bring all assets in house, resulted in the fund achieving a 15.18 per cent return for 2009, 541 basis points above its benchmark.
This highlights that the combination of assets being managed in-house and the board’s role in setting policy allowed the fund to be nimble, which was beneficial to its members.
Crocker believes that if a fund is going to manage its assets in-house it has to be prepared to pay its people appropriately.
In parting, overwhelmingly, Crocker remains passionate about the defined benefit pension structure.
“It remains the best way to take an earnings dollar and turn it in to a pension dollar,” he says.
“The competition is not even close. But the defined benefit industry needs to do a better job of marketing that.
“I feel passionate about the validity of defined benefit pension model, and in retirement if I can be useful in that, I will be.”