FIS Chicago 2022

$1 trillion funds need new incentives and investment styles: CPP

Funds of enormous scale will require a new cross-disciplinary approach, and innovative incentive and rewards schemes to foster the organisational culture needed, according to chief investment strategist at CPP Investments’ Geoff Rubin, as it looks to move beyond a total portfolio approach to a “one fund” approach.

With a number of funds set to cross the $1 trillion threshold in the coming decades, new cross-disciplinary approaches will be needed to tap into investments spanning multiple asset classes and risk categories, according to the chief investment strategist of the investment arm of the $539 billion Canada Pension Plan.

A ‘one fund approach’ that breaks down organisational silos can target investments that don’t fit neat boxes, therefore tapping into outsized risk-adjusted returns, according to Geoff Rubin.

CPP’s total fund approach’ has been picked up by numerous organisations around the world, including Australia’s Future Fund and New Zealand Super. Now Rubin is looking to a “one fund” approach where investments can “span asset classes, span the risk spectrum, [and] might require certain kinds of commitments over time that go beyond the individual, siloed, compartmentalised way that most investing in our industry happens,” Rubin said, speaking at the Fiduciary Investors Symposium held at the Chicago Booth School of Business.

Speaking with Amanda White, director of institutional content at Conexus Financial, Rubin said this could, for example, be an investment that is a combination of equity and credit, or an infrastructure opportunity that involves acquiring adjacent real estate to take advantage of the increasing effectiveness of the infrastructure.

Rubin said it is possible in the one fund approach to allocate funds to an investment with a return of zero or even negative expected return if it is a contributor overall in terms of diversification.

Contrasting the one fund approach to the total portfolio approach that is now in vogue, Rubin said doing this requires a deep change in organisational culture that draws on the skills and contacts of all employees in different teams, and an incentive and attribution scheme that encourages and rewards the required cross-organisational behaviours.

“The total portfolio approach… does not require the tearing down of silos,” Rubin said. “It requires an ability to look into each silo and understand exactly what you have, so you can manage that portfolio.

“One Fund is something different. We actually break down those silos and bring those investment teams together in a way that allows you to invest differently, in a way that allows you to pursue different types of Investments.”

At CPP, incentive compensation is geared to the performance of the total fund, but Rubin admitted that for organisational staff, those results can sometimes “feel somewhat remote from the work they do day to day,” and the organisation is considering more explicit expectations and reward structures “for those who reach out across silos.”

“We’re also going to try to ensure that we’re building a culture where that becomes a reflex…really trying to build a means of encouraging people to connect across their areas and make sure that they’re doing so with real passion.”

He admitted this becomes difficult when you start looking at attribution and incentive compensation. The funds management industry is accustomed to being organised by way of assigning benchmarks to teams who judge performance against their benchmark, “and don’t tell me about what’s happening in the rest of the fund,” he said.

“I think that works really well due to its simplicity, it works really well because we’re all accustomed to it,” Rubin said. “Not at all clear how that construct is going to allow our organisation, or any of these organisations, to address investment opportunities that don’t fit those neat boxes.”

This problem is yet to be fully solved, he said. “We’re going to have to work on driving our organisational culture and incentive compensation and alignment and reward systems, both formal and informal to really encourage that kind of appetite to solve a bigger problem than one that just resides within a group or team.”


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