Imke Hollander, head of investment strategy and policy at Dutch fiduciary manager Blue Sky Group, has spent most of her career specialising in alternative beta strategies.

“My background in physics does help because I am not afraid of numbers. I can see through numbers to work with the formula, which usually finds the answers,” says Hollander, who holds both a master’s degree and a PhD in physics from the University of Amsterdam. “The difference is that in physics there is only one answer. In investment, there are hundreds of possible answers.”

It is a confidence and familiarity analysing and explaining numbers and complex investment strategies that the Dutch central bank (De Nederlandsche Bank, DNB) is increasingly demanding of the country’s pension fund trustees.

Hollander and her colleagues are spending more time than ever convincing investment committee members from the seven different funds for which Blue Sky invests of the merits of certain strategies.

“Pressure on trustees from the DNB to make them responsible for investment has slowed down our decision-making process.

As long as they are responsible, they cannot put anything in the portfolio they don’t understand. It is difficult and frustrating for us if we are convinced of a strategy,” Hollander says, voicing a widespread irritation in the Dutch pension sector with the tightening regulatory mood, which critics say is slowing down investment decisions and forcing pension funds to be risk averse and bureaucratic.

Get defensive

The task of talking through technical strategies with trustees is top of mind for Hollander. She is working to expand a defensive equity portfolio.

Twenty per cent of the manager’s equity allocation is invested in these low-volatility, maximum-diversification strategies, which she has championed since the allocation was first introduced at the group seven years ago.

“We are currently thinking of extending the universe to emerging market equities, which may take defensive equity to 25 per cent of the entire equity allocation. There is less data available in emerging markets for these kinds of quantitative strategies, but it is there if you know where to find it,” she says.

She characterises defensive equity as “reducing risk but maintaining performance” and a strategy that “is designed for risk management and not return enhancing”.

She points to long-term research that shows the strategy brings “at least” the same return as traditional equity but 25-30 per cent less volatility. It is an allocation that was deemed pioneering when it was introduced at the group but is commonplace now.

“It was more difficult finding managers back then,” she recalls. “Back then, there were not many low-volatility managers, and even fewer you could take seriously.”

It was an experience she likens to the challenge of finding managers for Blue Sky Group’s Dutch residential mortgage portfolio when the fund diversified its fixed income allocation into this asset a few years later, in 2014.

“There is always a limited manager universe if you are using newer strategies,” she says.

Blue Sky Group manages €20 billion ($21.6 billion) on behalf of seven pension funds with more than 100,000 members. The bulk of assets belong to Dutch national airline KLM’s three pension funds – for pilots, cabin crew and ground staff. All assets are pooled and externally managed. Blue Sky has 11 internal manager selectors and about 80 asset managers on its books.

The group employs active strategies in inefficient markets, but Hollander sees active management also “paying” in efficient markets like the US.

In fact, Blue Sky tends to blend active and passive management and Hollander questions hard and fast distinctions between the two strategies.

She characterises defensive equity as an active strategy, and says that although the group’s buy-and-hold approach with inflation-linked bonds is regarded as passive, it is just as easily characterised as active since it is “not doing what the market is doing”. Allocations in emerging markets are active, with a small passive component for liquidity.

Private debt and other possibilities

The pension funds Blue Sky manages typically hold 45-55 per cent of their assets in fixed income. In addition to inflation-linked bonds, allocations include more performance generating assets, such as local currency emerging market debt, high yield and the Dutch mortgage allocation. The manager is considering whether to advise clients to add a private debt allocation, too.

“This would be a new asset for us. We are still investigating how much it would cost and how we would implement it. A final decision hasn’t been taken yet,” Hollander says.

Other than this, Blue Sky has no plans to change allocations, based on an asset liability management study in 2015, she advises.

That’s not to say the manager isn’t preparing for new themes and ideas. One change on the horizon could come if the fund for KLM’s cabin staff shifts from defined contribution to collective defined contribution.

“This might trigger a different asset mix and a fresh approach but it won’t change much,” Hollander says. She also ponders whether pooling assets will continue to work long-term, because of the changing needs of the different schemes.

“We are seeing more difficulties around pooling because schemes want different things; for example, [environmental, social and governance concerns are] becoming more important for some than others,” she explains.

KLM continues to rule out any allocations to hedge funds.

“The reputation hedge funds have is not always fair. But strategies are not always that transparent and we’ve given up looking at it too much,” she says.

It means Blue Sky will have to look elsewhere for investment opportunities, such as the 10 per cent allocation to private equity, which will increasingly focus on direct investments. The team has two skilled in-house investment specialists and is “fully committed” to directs.

“We have enough in-house knowledge to go direct and this will save on fees,” Hollander says.

In the United Kingdom, the financial regulatory body that governs retail and institutional investment markets, the Financial Conduct Authority, is collating feedback on its draft report on the asset management industry. The 207-page document covers many issues, but a golden thread running throughout is the focus on clients’ value for money. At its simplest, for all asset owners, total returns matter and costs dilute those returns. Costs are higher for active investment management than for passive management and it is clear that persistent outperformance of passive management is difficult to identify and maintain.

This issue is in stark contrast to another concern the report tries to grapple with: the persistence of high margins in the asset-management industry. The investment industry as a whole does not appear to have significant barriers to entry and in spite of an extraordinary number of market participants (i.e., asset managers) there appears to be weak price competition. In other words, asset management fees have remained high compared with what you would expect in a crowded, competitive market.

These two points – persistently high margins and questionable value for money – are opposite sides of the same coin. Asset managers’ high margins, and the investment consultants’ cosiness with the asset management industry, cannot be consistent with best outcomes for asset owners. The situation implies that those asset managers and consultants (including those operating as fiduciary asset managers) are failing their clients and not acting in their best interests.

Questionable value and high margins are serious concerns and have lasting, real consequences. They reduce the total returns of asset owners and their ability to meet their obligations, which in some cases are pensions being paid to large portions of the population in states and countries. In a world of low expected returns, which is potentially what we are facing at this stage of the economic and market cycle, these issues take on an even greater significance, as asset owners increasingly look to maximise wealth through cost-cutting as well as by managing total returns.

It should be no surprise, then, that asset owners continue to shift towards passive investing over active. This trend is set to continue and active managers remain, rightly, under large pressure to amend their fee structures and reduce total costs.

Active, when appropriate

This does not, however, mean that active management should be expected to disappear; instead, we should expect to see its definition change. For instance, passive allocations in equities make sense, but some important markets, such as private debt, are relatively esoteric and can’t be accessed without a competent and careful investment manager. Real-estate portfolios are probably better managed when directly owned. Other asset classes, from shipping to infrastructure, cannot have their asset exposures replicated by a tracker fund. In these cases, active management is not better or worse than passive management. Rather, it’s a question of whether active or passive investment methods are appropriate for the asset.

When markets have total-return streams and risk exposures that can be easily packaged into a single security (like an exchange traded fund) at very cheap cost, that approach should be preferred. When markets have idiosyncratic return streams and demand more careful management of risks, use of managers is probably more appropriate. The idea for this approach is that cheap, indexed management balances more expensive investment managers that provide access to total returns that can’t easily be purchased in an indexed fund – this is called a ‘barbell’ approach. The corollary is that expense ratios should be driven as low as possible in liquid markets, such as equities, but would be expected to be higher in markets that clearly require more skill in portfolio construction.

Passive investing is equivalent to the democratisation of investment implementation for asset owners: it allows asset strategy to be implemented cheaply, transparently, effectively and in a timely way. It is simple and cheap to monitor. It allows asset owners to focus resources where investment managers can and should add value – in relatively esoteric asset management. It is, in other words, the best value for money.

 

Stefan Dunatov is chief investment officer at Coal Pension Trustees Services. The views expressed here are personal and do not necessarily reflect those of Coal Pension Trustees Investment Ltd

Mark Delaney sees an opportunity to make money from Brexit and a bright side to the tumult of US President Donald Trump. Having recently put the brakes on a real-assets shopping spree, AustralianSuper is now topping up on equities.

This comes as the $109 billion fund looks to more than double the proportion of capital its growing in-house team manages.

Last year marked a decade since Mark Delaney, then chief executive of Superannuation Trust of Australia (STA), and Ian Silk, then chief executive of the Australian Retirement Fund (ARF), pulled off a merger to form the country’s largest industry super fund, since known as AustralianSuper.

Silk was named AustralianSuper chief executive, while Delaney, who had been promoted from investment manager to chief executive at STA three years earlier, became his former rival’s second in command, with the dual titles of AustralianSuper deputy chief executive and chief investment officer.

They have proved a formidable duo in their respective roles ever since.

At a time when the Australian Prudential Regulation Authority is nudging sub-scale and troubled super funds to find merger partners, and the slow pace of industry consolidation has been widely blamed on self-interested executives and directors not wanting to cede lucrative positions, it is worth reflecting on the fact that had Delaney not been prepared to give up the mantle of chief executive, AustralianSuper might never have come into being.

Reminiscing on the negotiations, Delaney says he always hoped the deal would leave him in a good position, but was prepared to forge ahead regardless.

“When the STA-ARF merger was being discussed, it was just such a good idea for the members,” he tells Investment Magazine. “I thought to myself, if you’re looked after, well good. If not, no matter, you’ll find another job…and at least you will have achieved something.”

Being prepared to give up a little bit of status in the short-term in order to be a part of something bigger is a trait Delaney credits with shaping his career.

In 1981, the economics graduate started out in the banking division of Federal Treasury. In 1986, he left Treasury and moved back home to Melbourne for a job as an economist at National Mutual.

While still at the firm, which later became AXA, Delaney discovered an interest in investment strategy, qualified as a Chartered Financial Analyst, and made a move into the firm’s funds management division. By the time he left in 2000, Delaney was head of investment services.

It was Paul Costello, who later went on to become the inaugural chief executive of Australia’s sovereign wealth fund, The Future Fund, who hired Delaney to be the lead investment manager at STA in 2000.

The move to the industry super sector was a calculated one.

“Around about the time I was thinking about leaving AXA in the late 1990s, I was doing some work on corporate planning that exposed me to some projections of how big the superannuation sector, and industry funds in particular, were going to become,” he says. “A lot of people focus only on what seat they’ve got on the train, their title or whatever. Probably my strongest piece of career advice is to think instead about where the train you are on is headed. A growing organisation creates opportunities, while a contracting one is very difficult to work in.”

In 2000, Australia’s pool of compulsory retirement savings was worth $484 million, today it is valued and $2.1 trillion and is forecast by Deloitte to hit $9.5 trillion by 2035.

The idea of working in a system with mandated contributions was also attractive because of the opportunity it created to pursue long-term investment goals.

“I liked what industry funds were trying to achieve,” he says.

In 2006, at the time the STA-ARF merger was inked to form AustralianSuper, the combined entity had $18 billion in funds under management. Over the last decade, that has swollen more than sixfold, to $109 billion. It is the largest industry fund in the country.

“Scale brings lots of advantages,” Delaney says.

A worldly strategy

In 2013, he began bringing responsibility for some of the fund’s asset management in-house, starting first with unlisted property and infrastructure before dabbling in large-cap Australian shares. It is an experiment that is paying off. By mid-2015, it was forecast the strategy would save the fund $150 million a year in costs by 2018.

The proportion of funds managed internally now stands at 22 per cent, a figure Delaney hopes to get to 50 per cent within the next five years. Total funds under management are projected to swell to about $200 billion by 2022.

Internal investment teams are now in place across all major asset classes: property and infrastructure, Australian equities (large and small caps), fixed income, currency and, most recently, global equities.

“We have a target of running internal management to be at least one-third or even a half of members’ assets over a five-year horizon,” Delaney says.

Each team is allocated more capital progressively as they prove themselves. It has been just six months since the new global equities team, headed by Christine Montgomery, got its seed capital, and Delaney is happy enough with their performance to be ramping up their funding.

“We brought global equities in-house last because they were the hardest…but if the team proves to be skilful, then allocating them a large amount of money makes sense.”

Among other large Australian superannuation funds that have been busy building in-house investment teams in recent years – such as UniSuper, Cbus Super, First State Super, and more recently HESTA – there has been a reticence to dive headlong into picking global stocks.

It is often said that Australia’s geographical isolation and out-of-whack time zone puts home-based global equity managers at a disadvantage to those operating in offshore markets.

Delaney thinks such fears are overblown in an era of online updates and webcasting.

“There is a matter of distance, and the global team will have to do a bit of travel, but for a lot of companies, the information comes down through the web. So, they are at no more of a disadvantage than anyone else,” he argues. “And when you’re taking a long-term approach to investing, getting the news six hours late doesn’t make that much difference.”

The sheer scale of opportunities in global equity markets, compared with the local market, is exciting.

“Global markets are very deep, meaning we can run lots of money without running into any capacity constraints,” he says.

Musings on leadership

Delaney says the biggest challenges in implementing the in-house strategy have been on the people management side of things, rather than in investment management.

“Just before this interview, I was eating my lunch and reading the Harvard Business Review’s leadership edition thinking, ‘I’ve got to get a bit better at some of this stuff,’ ” he says.

AustralianSuper chair Heather Ridout is satisfied he’s got it covered.

“The leadership Mark has shown in building that internal team has been very impressive,” she says. “He’s got a great eye for hiring good people and has been strong at bringing the whole team along with him on what has been a step-change for the organisation.”

Delaney may have been indulging in a bit of false modesty about his leadership skills, but was clearly sincere when crediting those mentors who have helped him.

“Geoff Ashton, who was my chair at STA and then the inaugural chair of AustralianSuper, was the guy who really taught me how to be a C-suite executive. How to manage upwards and downwards,” he says. “Ever since, I’ve tried to emulate his combination of blunt feedback and practical advice.”

Another important mentor was former Reserve Bank governor Bernie Fraser, who chaired the AustralianSuper investment committee for the first 12 years of the fund’s life.

“Bernie taught me a lot about how to understand economies and markets, think about issues and come to decisions,” Delaney says.

“He wasn’t a theoretician, rather he was always big on the importance of seeing what was there, rather than looking for what you hoped to see.”

It’s a mantra Delaney has been coming back to a lot in recent months.

“Volatility is nothing new,” he muses. “Since 2014, global equity markets have had three moves of almost 20 per cent. The Trump phenomenon has really only corresponded to the last half of the last move. But, potentially, he could be more important.

“The orthodoxy of the period since the global financial crisis has been one of very low interest rates, very tight fiscal policy, a free-trade approach, and re-regulation of financial markets.”

Trump wants faster US economic growth, increased fiscal spending, less regulation, and big corporate tax cuts.

“All those things point to an environment that will tend to favour equities,” Delaney says.

Shifting the burden away from monetary policy onto other instruments will, other things being equal, put upward pressure on interest rates, he says.

Trump’s plans to repeal portions of the Dodd-Frank Wall Street Reform and Consumer Protection Act could also be a boon for markets, if done right, he argues.

“I am no expert on Dodd-Frank, but there are undoubtedly parts of it that could be done better,” Delaney says. “After the financial crisis regulators prioritised system stability above system efficiency and capital allocation. We may now be seeing a righting of that.”

Delaney is unfazed by the wildcard element of some of Trump’s unpredictable foreign policy stances.

“The rest of the world is going pretty well. China has bounced off the bottom. Europe is going quite nicely and Japan’s going pretty well. Equity markets were up in 2016 because the world was recovering. In retrospect, we might view 2015 as a classic midcycle slowdown,” he says.

Another market shock of 2016, that on first take seemed likely to be negative for markets but has played out in unexpected ways, was the United Kingdom’s vote to leave the European Union.

“Brexit has had a material impact on the UK economy, the financial services sector in particular. But given the 20 per cent fall in the exchange rate, the competitiveness gains from the change in the currency may compensate for, or even swamp, the competitiveness losses from no longer being part of the EU trade zone,” Delaney says.

“The most important thing about Brexit was that it was the first really large cannon shot about the change in orthodoxy of how to do things. Trump was the second one. Our job as investors is to be opportunistic about how to make money in the world we are in. You can’t wish things were different.”

The fallout from Brexit is important for AustralianSuper’s small London office, which manages its UK property portfolio. In January 2016, the fund took a $900 million majority stake in a 27-hectare mixed-use Kings Cross development.

In October, AustralianSuper in a consortium with IFM Investors, lobbed a $16.2 billion unsolicited bid that the NSW Government accepted in exchange for 50.4 per cent of the state’s electricity poles and wires operator, Ausgrid, on a 99-year lease.

Now Delaney is putting the brakes on what has been a three-year long shopping spree for unlisted property and infrastructure, trimming the fund’s fixed-income holdings, and topping up on equities.

“We were large accumulators of unlisted assets for the period from 2013 through 2016 and we are slowing that down now,” Delaney says.

A combination of unlisted assets being relatively more expensive than they were and low interest rates already being priced in has made the sector less attractive than as it was three or four years ago.

The beauty of having stocked up on property and infrastructure when the price was right is that it can now be held for a long time, providing a source of diversification, capital growth and income.

An ability to give ordinary workers the chance to own a stake in things like Hawaiian shopping centres, international ports, and office towers is one of the things that gives Delaney the most job satisfaction.

“When I started at STA 17 years ago, I put all my super in the fund’s balanced option (which rolled into AustralianSuper’s balanced option following the merger). To this day, that’s the only place I’ve got super and I’ve never once made a single switch.”

And he plans to stay there for a long time yet.

Delaney is a vocal advocate of the need for older members to retain an exposure to growth assets into the retirement years.

“Someone retiring at 60 probably still has an investment horizon of 20 years. They need capital and growth,” he argues.

The imperative to help retirees keep building their balance is huge, given the average AustralianSuper member has a balance of just $47,000. Luckily 98 per cent of them are still in the accumulation phase.

This article first appeared in the March print edition of Investment Magazine. To subscribe and have the magazine delivered CLICK HERE. To sign-up for our free regular email newsletters CLICK HERE.

How leaders are defined and identified needs upgrading in a world that has shifted from a mono-culture to nomadic leadership, says Gianpiero Petriglieri, an associate professor of organisational behaviour at INSEAD.

“We are still using an idea of leadership developed in the mono-culture, but we have a different world; now leaders struggle most with connections,” he told delegates at the Fiduciary Investors Symposium at INSEAD. “As a leader, you have to show you’re more than devoted; however, now we live in an age of nomadic professions, so leadership is not about how you stand out but how you have enough connections. People are more devoted to their work than to the organisation.”

Petriglieri, who is the academic director of the INSEAD Initiative for Learning Innovation and Teaching Excellence, suggested a different definition of leadership in an enterprise that reflects many cultures.

“[Leadership is] the courage, capacity, curiosity and commitment to work with, learn from and give voice to the other,” he said. “It’s a lot harder to have that type of skill. The commitment to a counterculture always puts you on the edge. It’s difficult.”

Petriglieri said we exist in the context of a leadership bubble.

“Leadership has become the single explanatory factor for everything that happens in the world. When things go well, we say there’s a good leader, it is a synonym for causality. Either there was good or bad leadership or no leadership.”

He also said Fortune 500 companies spend $145 billion a year on leadership development.

“They invest so much in something and we spend so much time on it. How can we be so attentive and get a result like 86 per cent of people at the World Economic Forum saying they don’t have the leadership they need? This is not just a theoretical problem, it’s a practical problem. There is a great disconnect, lack of meaning, lack of trust.”

While some explanations for this include incompetence or malevolence, Petriglieri’s work suggests a scenario in which neither of those are true, rather the outcome of what we understand and practise as leadership is no longer a good fit for the world in which we live.

“Good leadership is hard to define,” he explained. “There is no empirical evidence of leadership – just as there is no empirical evidence of love. They manifest themselves when you see some kind of behaviour.”

Leaders, he said, have such a sense of ownership over a community to improve or change it; they have a committed vision. Leadership, then, can be explained as an exchange of meaning for trust.

“If you observe a leader, look at whether they get stuff done, and whether people trust them,” he said.

Transformational change among asset owners is a rare beast, said Roger Urwin, head of investment content at Willis Towers Watson, because funds prefer incremental change.

Speaking on a panel at the Fiduciary Investors Symposium at INSEAD, Urwin said investors needed to differentiate between the operating model – which involves culture, leadership, talent, reward and technology – and the investment model, which is how and where assets are allocated.

He identified five funds worldwide as exemplars of transformational change – the Future Fund, RPMI Railpen, PSP Investments, the Canada Pension Plan Investment Board and the California Public Employees’ Retirement System.

Panellist Daniel Garant, chief investment officer of PSP Investments, said the fund made changes after looking at allocation in the context of the total portfolio.

“We realised the silos you end up with are a collection of different assets that aren’t optimised at the total portfolio [level], so we changed that a couple of years ago. We were faced with great investment opportunities but they didn’t fit anywhere. The principal I came up with is if it’s good for the fund then we’ll find a way to make it fit. We still do strategic asset allocation and asset liability modelling but if we come across a strategy that is good, we make it fit,” he said.

One example of that is a private debt investment to which the fund allocated $1 billion.

“For the private debt asset class, it didn’t make sense,” Garant explained. “It was too big for one deal. But we decided to do it because on a total fund basis it made sense. You need to look at what moves the dial for the total fund.”

He said the investment teams see the good transactions in their asset class, but they need to keep the total fund in mind.

Urwin said he thinks there is a sweet spot of between 50 and 70 professionals in an investment team where they are able to practise the one portfolio approach.

Also speaking on the panel was Gianpiero Petriglieri, associate professor of organisational behaviour at INSEAD, who discussed the concept of leadership in transformational change. He said true leadership transcends the difference between personal and organisational change.

“Leadership erases that distinction,” he argued. “Personal change for leaders will result in the organisation adjusting, and vice versa. The most significant quality the leader can have is to deal with ambivalence. Most of us like the idea of change but not the practice of change.”

Garant said a change in leadership a few years ago at the chief executive level was an impetus for transformation at PSP.

“We felt that, compared with our peers who were trading in private equity, we didn’t have a global presence or portfolio, and we didn’t have private debt. A few months after the new chief executive joined, we opened a New York office dedicated to private debt. This was a big plus, as you hire experts who have been doing it for decades. But you also have the complexity of adding people who have never worked at PSP before; that’s much tougher than people believe to bring together. We also opened a London office focused on private equity and it was all done within a year, because people wanted results quickly and wanted change to be permanent and dramatic.”

Susan Doyle who is chair of the investment committee at the New South Wales Treasury Corporation and was one of the founding board members of the Future Fund, said culture and the organisation have to be in sync.

“The strategic side of investments was straightforward,” Doyle said. “But the culture side of it was not as straightforward. How you assess and seek [good culture] is not straightforward and is a challenge for our industry. Very costly for organisations to figure out culture.”

But Petriglieri said culture doesn’t exist.

“Look at the people – they are the culture. Look at how you allocate resources and what you reward positively and negatively. If you change those things, then you are changing the culture. Everything else is rhetoric,” he argued.

Urwin pointed out that asset owners have the distinction of having a strong purpose, but that it is a motivation that probably hasn’t been marshalled enough in organisations.

Garant said PSP is using that sense of purpose as a tool to distinguish the fund from different actors in the financial markets.

“Adding a local presence in London has increased our access and talent pool,” he said. “But…it’s expensive, and you get a sub-culture. So you need a mix of local talent and people from head office, so you have one culture, not many cultures.”

 

The Toronto-based Colleges of Applied Arts and Technology Pension Fund, (CAAT), a scheme for employees in colleges across Canada’s Ontario province, celebrates its 50th anniversary this year. Yet much of the defined benefit fund’s most important milestones have occurred in more recent years.

In 1995, the plan spun out from the Ontario Municipal Employees Retirement System, which acted as trustee, to assume a jointly-sponsored pension plan governance structure and invest on its own. Back then, CAAT had only $3 billion in assets under management but now manages $C8.1 billion ($6.1 billion) and boasts an enviably healthy funded status, recently up from 110 per cent in 2016 to 113 per cent today.

“I think you can read from this it’s been a good year,” says chief investment officer Julie Cays, who joined CAAT 11 years ago from the Healthcare of Ontario Pension Plan, where she looked after the external manager program, now run in-house.

“We have had strong returns from public equity as well as private equity and infrastructure. Commodities and real-return bonds haven’t done so well, but these assets are an inflation hedge, and there hasn’t been much inflation,” Cays says.

Under her leadership, CAAT is continuing to evolve as it prepares for another significant shift in strategy. Fifty seven per cent of the portfolio is invested in return-seeking allocations to public and private equity, and 43 per cent is in liability hedging assets, comprising nominal and real-return bonds, infrastructure, commodities and real estate.

“These categories are not perfect. Real estate and infrastructure blur the lines between return enhancing and liability hedging,” Cays says of the asset classes that have characteristics and risk factors that fit into both parts of the portfolio.

Following the completion of a long-term asset liability study last year, which Cays says, “updated our return assumptions for the next 20 years”, CAAT plans to take 15 per cent of its assets out of public equity. Ten per cent will be invested in private equity, and the remaining 5 per cent will go into the real assets of infrastructure and real estate, increasing the real asset allocation from 15 to 20 per cent.

It’s a change of tack born in part from public markets’ focus on results, rather than on the long-term value creation CAAT favours, Cays explains.

“Public markets are increasingly short term and we have a long-term strategy,” she says. “It’s one of the reasons we like illiquid assets. We have a long-term investment horizon and a funding reserve and yes, I would say, our appetite for short-term volatility is fairly high.” CAAT has no tactical risk-allocation program.

Three-quarters of CAAT’s assets are actively managed.

“The active program has outperformed over the past 10 years, so it has been successful,” she says. Passive management “helps with the fees” but is also an important component of the fund’s portable alpha strategy. Passive investment is confined to part of the Canadian bond portfolio and a US S&P 500 equity exposure, with the beta from the US allocation underlying a portable alpha strategy.

“We use passive strategies structured within asset classes to manage the level of active risk exposure. We target beta like US equity, and then put hedge fund alpha on top.”

 

Small in-house team

Cays, who has an internal team of only six, outsources all the public allocations to external managers, counting about 15 mandates. The fund has a low turnover of managers and tends towards “larger mandates to help bring down fees”.

Some managers on the public side have been on CAAT’s books for the last 10-15 years and the fund shares a “broader relationship and ongoing dialogue” with a select few. The scheme has also employed an advisory firm to specifically help access the best GPs in private markets, a crucial part of reducing manager selection risk in building the allocations to private markets, she says.‎ Here, CAAT invests either via funds or, increasingly and particularly in infrastructure, via co-investments.

“We like co-investment because of the cost benefits and not having to pay the fees we have to pay with fund investment. It also allows for more targeted investment. For example, we can look for inflation protection in our infrastructure portfolio,” she explains.‎

The real-estate allocation is largely Canadian, accessed through funds, although Cays says CAAT is branching out into real-estate funds in Europe and the US now, too.

 

Sharing ideas and governance

CAAT’s governance structure is shaped by its status as jointly governed and is, Cays says, another pillar of its success. It means employers and employees share responsibility for the stability and security of the scheme, in a model that fosters co-operation and flexibility, and encourages prudent and responsible decision-making.

“Our board of trustees is appointed from the employer and employee side and some of them do have an investment background and are a huge help,” Cays explains. “They ask excellent questions and allow us to be nimble in terms of approvals.”

Cays also says sharing ideas with other Canadian pension funds, facilitated particularly by the active role of the Pension Investment Association of Canada, for which she is a past chair, is a contributor to CAAT’s investment success.

“We all know one another; we share ideas and collaborate. The difference between CAAT and other plans, I suppose, is that many Canadian corporate plans are worrying more about solvency and are more liability driven than we are. We have funding reserves, and can do more in the long term.”

What do the next 50 years hold? As the fund grows, Cays says, it will start to build internal expertise, rather than use external managers. But rather than be drawn on what global investment hazards lie in wait, her focus is on the risk of changes in contribution levels – such as beneficiaries living longer, trends towards part-time work and the shift towards defined contribution plans – affecting the plan.

“This is what we have our eye on going forward,” she says.