HOOPP’s new focus: Climate change, inflation and innovation

In his first interview since becoming CIO, Michael Wissell tells Sarah Rundell about the plans for developing HOOPP’s portfolio, which includes a focus on climate change, inflation and innovation while always keeping an eye on the total portfolio.

The Healthcare of Ontario Pension Plan, HOOPP, the C$104 billion ($82 billion) plan for Ontario’s hospital and community-based healthcare sector is in the process of developing a new sleeve to its equity portfolio that will have less exposure to the negative consequences of climate change – and more to the energy transition.

It reflects the fund’s ongoing shift to explore how best to build sustainability into its policy portfolio in a change that new CIO Michael Wissell says reflects the type of innovation he wants to guide the fund in the years ahead.

“We continue to build our sustainable program in various ways and are excited to be going down this road.”

Stocks will be individually selected by the public equities team and HOOPP has already developed an internal benchmark. The fund is also working with service providers to help make the selections and may partner with external funds.

“We haven’t decided at this point,” Wissell, who took over the helm last month following three years heading up the capital markets and total portfolio division, says.

The move into climate opportunities chimes with HOOPP’s guiding mantra to identify risk and act before it transpires, a characteristic Wissell believes is the bedrock to the fund’s enduring success, encapsulated in 10-year 11 per cent returns. For example, wary of the risk to its liabilities from the possibility of a long period of very low interest rates, HOOPP built out an LDI strategy in 2007. Identifying the importance of liquidity and the risk of not having enough, ensured ample dry powder to take advantage of low asset prices in March 2020.

As for today, he’s not just readying the fund for “one of the greatest transitions in human history.” Inflation, now more of an issue than at any point in his 30-year career, is also front of mind.

Preparing for inflation

Preparing for inflation, and the risk rising prices poses to HOOPP’s large fixed-income allocation is driving current strategy to scale back the liability matching portfolio and reassess what has been a key part of the fund’s investment thesis for the past 15 years. (See Amanda White’s podcast interview with Jeff Wendling Liability-driven investing 2.0)

“We’ve taken that portfolio down and it is now as small as it has been in a very long time.”

Rather than have a fixed target or notional amount, the reduction is managed relative to HOOPP’s liabilities. The portfolio still includes a large position in index-linked bonds that have outperformed, plus exposure to breakevens that Wissell says has served the fund well.

Still, having less nominals on board is now key. Canadian CPI is running higher than it has for some time and a risk that the fund has always been cognisant of has moved centre stage.

“We have a core view in terms of things that might happen and around which we then prepare accordingly. In this conversation, you have to bring up inflation.”

Reducing the allocation to fixed income to better manage the risk of inflation comes alongside building out the infrastructure allocation. Despite the competition for assets, Wissell says HOOPP is “seeing a lot of interesting opportunities” and the new portfolio is growing “quicker” than thought.

Private assets

Away from inflation, other priorities including continuing to grow HOOPP’s allocations to private assets, where he says an increasing focus will be direct deals. The fund is already a renowned investor in real estate and areas like logistics, and has much dry powder to deploy. As it increases its allocation to private assets – via both new investments as well as re-deploying capital coming off investments made years ago – he doesn’t anticipate a shake-up in GP relationships.

“We feel we have it right; we are not growing our GPs.”

That said, new people bought into the team (HOOPP is currently looking for a new head of private equity) will of course bring new relationships and the fund is growing its GP relationships in infrastructure.

“Some of our peer plans don’t use GPs here but we feel they have a role to play and we are going to continue to do so.”

Despite the equity diversification benefits of investing in China and other emerging markets he questions if the risk is currently rewarded enough: HOOPP’s modest exposure compared to peer plans fits for now.

“We are looking for opportunities, but only when returns are commensurate with risk will we add [more Chinese investment] across our investment platform.”

The push into more private assets means materially boosting HOOPP’s headcount in an expansion that will also require a degree of innovation. Safeguarding the fund’s culture and the elements that have made the fund so successful all the while acting quickly enough to ensure the investment team can avail itself of the opportunities out there requires careful choreography.

A challenge encapsulated in how best to practically house the growing investment team – targeting a January 2022 return to office – but keep the ideas and creativity born from a tight knit group alive.

“As of today, the entire investment management team has sat on one floor which has had real benefits around culture and ideas. Now we are growing, this is not going to be possible anymore,” Wissell says.

The new CIO concludes by outlining his other key priority as he takes the helm. Alongside innovation and identifying risk before it transpires, his focus will be on the total fund: what the plan does in aggregate and the absolute level of return matters most.

“You can focus on the value added, but you must never lose sight of the actual plan return as well. For example, having a total plan return of -5 per cent although you made 1 per cent is not a good outcome.”