Canada’s TTCPP Pension Plan became a stand-alone entity only three years ago. Top1000funds.com discusses the fund’s journey to independence and the evolution of the hedge-fund heavy investment portfolio with CIO Andrew Greene.
For pension plans exploring how to step out from under their sponsor and set up an autonomous organization, Canada’s TTC Pension Plan (TTCPP), the $7.8 billion defined benefit fund for employees of Toronto’s public transport network, offers a case study in the journey to independence.
Early pivotal decisions on route to creating a separate entity included TTCPP’s board deciding not to fold the plan into OMERS, the $124 billion fund for employees of Ontario government municipalities in an endorsement of its own well-established governance and financial health. In a next step, the leadership team (TTCPP hired its first independent CEO in 2016) worked with sponsors Toronto Transit Commission and the Amalgamated Transit Union (ATU) on the structure and transition of the spin off entity. It took until January 2019 for the new fund to launch.
In the early days, a skeleton team oversaw mostly fund of fund investments with the support of consultants, recalls chief investment officer Andrew Greene, who joined in 2017 from OPTrust as the first dedicated investment person.
Today, TTCPP continues to reduce its dependency on consultants and is growing its internal expertise. The investment team guard a healthy funded status and oversee a growth-orientated strategy that includes leverage and hedge funds in a model that has all the hallmarks of Canada’s much larger Maple Eight.
Greene, who estimates the fund will hit around $10 billion assets under management by 2030 in line with its 6 per cent discount rate, is also pushing into private assets, growing the allocation to 16 per cent of AUM from 10 per cent as per the latest asset liability study.
Elsewhere the focus is on building a new level of transparency, control, and securing better fees with managers. In charge of its own destiny, more resources are also flowing into pension management for the first-time including communication, member outreach and IT, which were a lower priority when the fund was managed by the TTC.
“At first, I relied heavily on the CEO and consultants. We were only able to hire people after two years and the team is now six. The plan is to hire another two to three people over the next 18 months,” says Greene, a Chicago native who moved to Toronto 17 years ago. “Plans that outsource everything to consultants are not as satisfying for staff.”
leaning into Hedge funds
For him one corner of the portfolio that provides particular satisfaction is hedge funds, an 8 per cent allocation that holds a mirror to TTCPP’s evolution. Until recently, the strategy consisted of two fund of funds, but when one fund merged with another, and the other went out of business, Greene changed tack.
He hired a consultant and built a direct hedge fund portfolio that was cheaper and more concentrated, and is managed on a discretionary basis as the team has evolved and grown. The allocation targets high single digit returns, but what Greene particularly likes is the diversification benefits across asset class and geography, allowing TTCPP to invest across the capital structure, take a view on different time horizons and short investments that the team doesn’t like when the rest of the portfolio is long only.
The allocation’s maturity, plus new internal resources, mean restructuring the portfolio is ongoing and Greene is reappraising certain strategies. For example, he is increasingly circumspect of long short equity.
“Long short equity is the biggest part of the hedge fund market, but I find it difficult to navigate as often one is paying alpha fees for beta returns,” he says.
Instead, he wants to lean the other way, favouring fixed income, relative value, and convertible strategies, as well as strategies that can work across the capital structure to find dislocations or take advantage of equities and bonds no longer being in sync.
Restructuring will also involve reducing the number of managers. When Greene took the helm TTCPP invested small parcels of around $5 million across 20-odd funds in an approach designed to open the door with managers, providing the opportunity to top up when a space appeared with sought after partners. It took a number of years, but now TTCPP has a full position with several top tier funds. “By the end of this year we will be down to 14 hedge funds, using fewer managers in a more concentrated portfolio.”
TTCPP typically writes cheques of $20-40 million while the consultant leans on funds to get a discount where ever possible – although Greene says the only managers that really offer a discount are smaller and starting out. Still, he notes some openings to reduce fees. For example, one of the macro managers that was underperforming has lowered its fee until they get back to the high watermark.
It’s a slightly different story away from hedge funds. Greene observes that the investment climate means more managers are open to renegotiating fees. The denominator effect, whereby many investors (particularly endowments and foundations) are pulling back on investing more in alternatives because these portfolios have not been marked down as much as public assets, is creating opportunities to invest with sought-after GPs.
“Names that we had trouble getting in with before are now more open to discussions. It is a good opportunity, and we are buying at better prices. Prices in private markets are still going down and we have better access to GPs and terms than we would normally have.”
Leverage and higher yields
TTCPP uses leverage at a total fund level and can lever up to 10 per cent of the fund. Today the higher cost of borrowing means Greene is paring this back to around 5 per cent. “Leverage is costing me 5 per cent instead of 1 per cent and given our funded status is better because yields have gone up significantly, there is less need to take the incremental risk.”
Leverage is primarily used to invest more in market-neutral, low-beta hedge fund strategies. However, Greene says he doesn’t directly map where the leverage is applied – rather it is an extra 5 per cent to invest across the fund wherever the opportunities arise.
The funded ratio and higher yields are also driving other strategies. For example, he is trimming the public equity allocation to 20 per cent of AUM and in its place, Greene will bump up the allocation to private equity and put more assets to work in public credit, including investment grade, multi asset, high yield and bank loans, where he says it’s possible to tap equity like returns without the volatility.
Growing the allocation is timed around opportunities, he continues. “We are moving into credit, but credit spreads remain tight. When the spreads start to widen, we will increase the high yield allocation, but we will pull it back as the spreads come back in.”
Elsewhere he has lengthened the duration on some of the bond portfolio (from mid to long-term) in response to higher yields. “You can get a 4.5 per cent return sitting on nominal bonds and we like the liquidity too,” he says.
The strategy is a marked change in direction from an earlier decision to reduce the long bonds allocation to zero. As it was, the allocation never got to zero, was only reduced by 5 per cent, and is now being built back up again as interest rates climb higher.
For all his focus on building internal expertise and reducing input from consultants Greene only applies the approach when it fits and doesn’t envisage TTCPP running a large pool of direct investments. Direct allocations comprise a small portion of private equity, a quarter of the private credit portfolio (although he notes the bulk of this comprises one large deal) and some co-investment in infrastructure. In the real estate allocation, where TTCPP invests around 80 per cent of the portfolio directly in Canadian assets, he wants to turn the portfolio on its head.
He plans to transform the real estate allocation into fund of funds or SMA structures and select co-investments with GPs in an 80:20 split respectively. A complete reversal from the current approach where co-investment make up the bulk, and funds the minority. “We have two people working in private markets covering four asset classes and we simply don’t have the capacity to approve every new tenant or budget item. With a small team there are only so many line items we can keep track of.”
But it is a challenge restructuring real estate in the current environment when industrials are white hot, but office is struggling. “We are very hesitant to sell office assets right now. Nobody will buy them unless we sell for a deep discount which we do not think is prudent.”
It speaks of a pragmatic strategy and overarching priority to keep things simple. Greene refuses to chase new asset classes and strategy – he was cynical of Bitcoin from the get-go and TTCPP only has a tiny exposure to crypto though a sleeve in one of the macro managers. The fund has no plans to run other assets or amalgamate with others like the tie up between College of Family Physicians of Canada (CFPC) pension plan and the College of Applied Arts and Technology (CAAT) Pension Plan.
“We are just focused on getting our own ship in order,” Greene concludes.