One of the biggest institutional investment managers in Canada is sharpening its sales pitch.Earlier today, I had a chance to talk to Bert Clark, IMCO's president and CEO, and go over this article and much more.
The Investment Management Corp. of Ontario only became fully operational in July 2017, but when it came online, it did so as the ninth-largest institutional fund in Canada. The organization has more than $60 billion in assets under management courtesy of its first two clients, the Ontario Pension Board (OPB) and the Workplace Safety and Insurance Board (WSIB).
Now, IMCO is getting ready to try to attract new members from the patchwork of funds that invest on behalf of the province’s public-sector entities. According to the head of the fund, there is “a huge potential client list” for IMCO to go after.
“We believe we’ve got a very compelling value proposition,” said Bert Clark, president and chief executive of IMCO, in an interview. “What we’re building is something that none of them could replicate at the same cost.”
Created by the provincial government (although it is an independent firm), the intent was for IMCO to try to pool funds and offer public-sector pension plans lower costs with economies of scale. It is similar to outfits in other provinces, such as the Alberta Investment Management Corp., although participation in IMCO is voluntary.
“There are many, many public funds in Ontario,” Clark said. “Every university has its own pension fund. Crown agencies have their own pension funds. There are various pools of capital in the province itself, and all of those right now are being administered separately.”
Under its model, IMCO offers advice and makes the day-to-day investing decisions for clients, but members retain responsibility for their liabilities (such as pension payments) and control over the asset allocation strategy.
Since coming into the world under an act of provincial parliament in 2016, Clark said the fund has been busy working on its risk-management system and front-office operation. Come early 2019, IMCO will ratchet up its recruitment efforts.
“We haven’t been out aggressively telling our story yet, because we wanted to have all the foundational capabilities in place,” said Clark, who was formerly the head of Ontario’s infrastructure agency, Infrastructure Ontario.
“In January, we will go out and say, ‘This is who we are. This is what we can do for you. These are our costs. This is the value proposition. And this is the process for joining.’”
IMCO’s name is starting to turn up in some interesting places as well. That includes the announcement last week that the fund was part of a consortium that purchased a 25-per-cent stake in a 413-megawatt portfolio of Canadian hydroelectric assets owned by Brookfield Renewable Partners LP.
“It underscores our capability to provide our clients with access to high-quality investment opportunities and aligns with our strategy of creating strong partnerships with leading, global infrastructure firms,” said Jean Michel, IMCO’s chief investment officer, in a press release announcing the transaction.
IMCO is also teaming up with commercial real estate company Cadillac Fairview to build an $800-million office tower in downtown Toronto, an investment the fund noted was “well-aligned” to the Ontario Pension Board’s return objectives.
“The management fees for some of these asset classes are really high,” Clark said. “But again, if you pool the assets together, and we’re doing that as a $65-billion or bigger organization, we have a different bargaining power. We can establish strategic relationships with funds. And so the costs are a heck of a lot less.”
IMCO, being only a few years old, has no legacy IT systems to update, which Clark called a “huge, huge advantage.” The fund has the benefit of hindsight and history as well.
“What were unique strategies 25 years ago have become much more commonplace,” Clark noted.
IMCO has already reached a “critical mass” with its current mountain of assets, its CEO says, and the fund booked a total return for 2017 of 10.3 per cent.
Existing clients are expecting their membership to pay further dividends. In its 2017 annual report, the Ontario Pension Board, which administers the Government of Ontario-sponsored Public Service Pension Plan, said that its 2018 operating expenses were “expected to decline due to the outsourcing of OPB investment operations to IMCO.”
And with every additional client, Clark added, the costs of doing business are spread over an even wider base.
“I’d like to think that within five years, we’re at $100 billion,” in assets, Clark said. “But in order to hit $100 billion, we’d need to have pretty good growth of the existing assets we’re managing, and new members.”
Clark has no illusions about the challenge ahead in getting those members to sign on.
“These will be big decisions for our clients,” Clark said. “I think there’s a long sales cycle to this, but it begins in January.”
First, let me thank Neil Murphy, IMCO's Vice President, Communications, for setting up this conference call and sending me some material to read to prepare, including Bill Morneau's October 2012 report, Facilitating pooled asset management for Ontario’s public-sector institutions.
Take the time to read the full report here and below, I note the passage that struck me (click on image):
This is an important passage, one I will come to later.
Second, let me thank Bert Clark for taking the time to speak with me. It was the first time we spoke and he struck me as an extremely nice, bright, focused and humble guy who really knows what he's talking about.
Bert is a lot younger than his peers but what he lacks in experience he more than makes up for in passion and knowledge. I got the sense he's learned a lot since taking over the helm and enjoys learning and is very focused on delivering the very best value proposition to IMCO's current and potential clients.
He began by giving me a quick backgrounder on IMCO. The image below is taken from the website (click on image):
He explained there are many pools of capital in Ontario that are too small and their investment management is either being outsourced to external consultants (outsourced CIOs) and actuarial firms or is not benefitting from the size and scale of an IMCO.
Bert told me by onboarding and now fully managing the assets of the Ontario Pension Board (OPB) and the Workplace Safety and Insurance Board (WSIB), they were able to achieve "critical mass right out of the gate."
It's important to note that IMCO is a large investment manager like CPPIB, PSP Investments, AIMCo, BCI and the Caisse and only handles the investment side of the equation. Unlike OMERS, OTPP, OPTrust, it does not administer pensions, handle liabilities or set asset allocation (it advises its clients on asset allocation and I would take that advice seriously).
Unlike other large Canadian pensions, however, IMCO does not have captive clients so a considerable amount of time will be going to educating prospective clients on the advantages of joining IMCO. "Much like a private asset manager, a lot of time will be going into client development."
Bert seems fine with that and relishes the fact they need to prove themselves but I told him that Ontario's legislators made a big mistake by not forcing these pools of capital to join IMCO. Moreover, I said some pools of capital will perceive IMCO as a threat even if they're not run as efficiently and don't benefit from scale and the internal expertise IMCO has.
He told me there's roughly $80 to $100 billion in potential pools of capital and while some may perceive IMCO as a threat and "choose not to join for all the wrong reasons," he hopes to convince most of them that IMCO's value proposition and advantages are too compelling not to join.
In particular, he cited three factors as to why it makes great sense to join IMCO:
- Advice around portfolio construction: It's no secret that asset allocation is the biggest determinant of returns and part of IMCO's seven investment beliefs is that by providing strong in-house asset allocation advice and a diverse range of investment products, they can enable their clients to achieve sustained, long-term results that exceed their required rate of return.
- Access to private markets: IMCO's scale allows it to form strategic partnerships with top funds all around the world so they can invest and co-invest with them on larger transactions to lower overall fees. Smaller funds lack this scale and end up paying big fees to funds to gain access to private markets.
- Unparalleled risk management: Again, another one of IMCO's seven investment beliefs is that understanding and managing risks is at the core of investing: "We believe that the ultimate risk for our clients is their inability to meet their promised financial obligations. True diversification and capital preservation are key to mitigating this risk and strong risk management systems and practices improve the investment decision making around these factors. Therefore, a robust risk framework and client engagement guide our investment activities."
I shifted my attention to investments and asked Bert about deploying capital in public and private markets after a long bull market. He told me: "In retrospect, it has been a very good ten years but if you think back to October 2008 and even 2009, people were very wary of taking risks back then."
Very true. He also agreed with me that a large pension has to invest over the long term and cannot time public or private markets perfectly.
Still, in our discussion on infrastructure, an asset class he's very familiar with because he was the head of Infrastructure Ontario before joining IMCO, he said they're open to doing some greenfield investments as long as the risks are appropriate and that illiquidity premiums of the past are gone and you can't just deploy capital in infrastructure, you really need operational excellence to add value to an asset.
I couldn't agree more and told him that in the old days, they used to hire investment banking people focused on deals and look to buy assets on the cheap. Nowadays, that strategy doesn't work, you really need people in infrastructure who know how to add value, "not plain old originators of deals because illiquidity premiums have come down considerably."
In fact, Bert notes this is the case for all private markets, "they have become mainstream investments and the differentiating factor which will lead to success is scale, building direct investment capabilities (co-investments or purely direct deals you originate) and adding value through operational excellence."
In order to do this properly, IMCO needs to hire a great investment team and that job falls under Jean Michel, IMCO's CIO. Bert told me Jean has been busy meeting with potential candidates to fill the spots of head of public markets, head of private markets and other important investment roles.
Recall, Jean Michel joined IMCO after leaving the Caisse where he was the Executive Vice-President, Advisory Services to Depositors and Strategic Analysis. His departure from that organization was another bonehead HR move, one of a few I've seen at Canada's large pensions, but the Caisse's loss is IMCO's big gain.
Prior to joining the Caisse, Jean was the president of Air Canada Pension where he focused on asset liability, risk budgeting and the intelligent use of leverage to bring that plan back to fully-funded status from a huge deficit.
In fact, just today, I read a great interview on Chief Investment Officer where Vincent Morin, the current president of Air Canada Pension, explains how Air Canada retooled its structure for better returns and lower pension plan risk. Vincent is a very smart guy, he learned a lot under Jean's watch.
Anyway, Jean Michel has to build his investment team and he has great candidates to choose from in Toronto, Montreal and other cities. He needs alpha generators in public and private markets and people who will cooperate and work well across all asset classes, not in silos.
I have no doubt he's going to find the right people to join his team and he has the full backing and support of Bert Clark.
Bert told me he's very happy and proud of his entire executive team and has full confidence in them. He even told me they recruited a great Chief Risk Officer, Saskia Goedhart who served 20 years as Group Chief Risk Officer at AMP Limited in Australia prior to joining IMCO.
It sure looks like the ramp-up phase at IMCO is over and come 2019, the rubber will meet the road.
We ended our conversation discussing communication and diversity in the workplace.
I asked Bert if he's going to be out there more often talking to the media. He told me not particularly but whenever there is something material to discuss concerning IMCO, be it a big investment or something else, he believes it's his duty to be open and transparent with members and all stakeholders, including the media.
As far as diversity in the workplace, I told him that over 20 years ago, I was diagnosed with MS and it hasn't always been easy (doing fine now). It's a disease which affects many young Canadians in the prime of their life and in too many cases, it impacts income security.
The experience of living with MS has made me very sensitive to the struggles of people with disabilities who through no fault of their own, do not have equal access to employment opportunities at large private and public organizations.
I told Bert I admire his father, Ed Clark, for his long-term focus on diversity in the workplace and hope he will continue this tradition. He told me it‘s part of his core values that were instilled in him.
I can't think about a better role model than Ed Clark to be a great leader, but make no mistake, Bert Clark is his own person with his own views and he will pave his own road to success using the values both his parents instilled in him.
I wish him and all the employees at IMCO many years of success, have fun during this journey.
Below, an older (2016) clip where Bert Clark, the then head of Infrastructure Ontario discussed P3s. All I can tell you is P3s are fine but they aren't as good as what the Caisse is doing with the REM project which keeps getting trashed in the media for no good reason.
I also embedded some clips with Ed Clark that I enjoyed watching. First, his talk at Rotman School of Management about receiving CEO of the year in 2010. Listen to what he says about having a strong bias against the great leader theory and what it takes to be a great leader.
Second, four years ago, the then outgoing TD CEO Ed Clark talked to Amanda Lang on his time at the bank, the highlights of his career, and the charitable causes he supports.
Lastly, to mark the 10-year anniversary of the financial crisis, Ed Clark, former CEO of TD Bank Group, shares his views with BNN Bloomberg on how he managed to steer the ship during the crisis. His takeaway: "you have to understand your risks."
Very wise advice which I'm sure Bert Clark knows all too well.