CDPQ's at the Fringe Man?

Mario Therrien says he works “at the fringe” of CDPQ (the Caisse de dépôt et placement du Québec), the Montreal based long-term institutional investor that manages funds primarily for public and parapublic pension and insurance plans, where he is Head of Investment Funds and External Management.

CDPQ, which was created in 1965 and held CAD 333.0 billion in net assets (as at June 30, 2020), is a leading example of the “Canadian model” of institutional investing. The vast majority of CDPQ’s investments are made directly in markets, while the rest is done using external fund managers. Therrien coordinates those external relationships: His sleeve oversees some C$45 billion in assets and a network of 140 general partners. Although he’s “always building at the fringe,” that’s a part of the portfolio that brings access to new markets and strategies.

CDPQ always has an eye out for the new. “We invest in all asset classes from private to public. We’ve been investing in most of the large markets, both developed and emerging, and we have made a solid push in illiquid investments in infrastructure, private equity, real estate, capital solutions,” he says. At this point, he explains, “Close to one third (of AUM) is in public market equities, and then we have investments in private markets, and after that, we have everything that’s in fixed income. Fixed income is a blend of private credit, private debt and sovereign debt. And then there’s real estate, which is a balance of the asset allocation. There’s infrastructure as well – it’s an interesting asset class for a long-term investor like CDPQ.”

The asset allocation is on a journey, he says. “In both private and public markets, we have changed the focus of our portfolio from Canada to the entire world including emerging markets. And if you were to take a picture of our portfolio 10 years ago, we had a bigger weight in Canadian public stocks – we’ve really increased our diversification there, and we’ve been increasing private markets over the years.”

Therrien’s fringe plays several important roles. While in-house management may be cost-effective for big, relatively straightforward asset classes, to get the icing on the cake, it’s useful to go to outside specialists. For example, Therrien says. “Our view has been that smaller, niche markets might be less efficient than well-covered markets. We’ve done more at first in emerging markets through external funds. We did not have the capacity and the resources back then to pick and select stocks in China, India, and Brazil: These markets were less covered by analysts.” So, external managers provided a way in to capture alpha.

Besides offering expertise in various markets, external managers can deploy specialized techniques. For example, as CDPQ has focused more on capturing risk premia, he says, “Our first approach was to better understand them and see how we can use them in our analysis of our portfolio, and our partners allow us to get up to speed faster.”

Similarly, he says, “We do portable alpha, and for that we use hedge funds. Hedge funds are not an asset class; they’re an active strategy that you can port on the total portfolio. The way we select some fund managers and their strategies, we can port them on an asset class, with a marginal increase of the risk.”

External managers also serve as a sounding board. Therrien says, “We have conference calls with CIOs discussing the current environment, and what are the things at the margins that might be profitable. Whenever there’s volatility or market turmoil, there’s always a group of solid managers you can rely on to help guide yourself in this environment.”

For all of this good stuff to happen, of course, “You need to find the right managers.” Therrien says CDPQ is not necessarily always looking for pioneers and innovators, he says. “Oftentimes, good results are more about being able to capture opportunities than being creative.” He adds, “Another aspect of being successful is for an active manager to really share our time horizon: One of the advantages we have is being a long-term investor. And most of our managers are long-term managers, so I think that has been giving us a bit of an edge.”

Some institutions have rules of thumb – never hire a manager if there’s a Ferrari in is parking lot, or he or she is getting divorced or buying a baseball team. But Therrien eschews any such shorthand and relies on CDPQ shoe leather in picking managers. “We hit the road to find the best managers that can help us think through markets.” Therrien says, “The way our process works is we try to accumulate a series of facts and bringing these facts to life over time.”  

In order to optimize the manager selection process, he says, “what we’ve done recently is we reunited all of the teams that were working on external funds from different asset classes. Moreover, he adds, “By bringing under one roof the oversight of external fund managers, we really see the benefits of being one team dedicated to manager selection and performance analysis. We’re able to have a more holistic view and exploit investment themes more effectively.” He adds, “I would stress being associated with the right partners has been of tremendous value. So, we spend a lot of time thinking about, “Who do we team up within the ecosystem we’re going into?”

CDPQ is likely to tap some additional managers as it looks to its future directions. For example, he says, “One area where we’re doing a lot of work is capital solutions. There’s a lot of opportunities there. It’s not private equity; it’s not fixed income; it’s an hybrid.” Meanwhile, “In public markets we’re looking at opportunities in tech, and healthcare has been an area where we’ve done surveillance of who’s doing what.” Many of these initiatives will be done in house, but he suggests some will rely, with the right conditions, on outside specialized managers.

Therrien grew up in Richmond and Sherbrooke, both in Quebec. He recalls, “One of my first summer jobs when I was 16 was at a local pulp and paper company. This was a public company, so my father started explaining to me that I could buy a portion of that company, and I really got interested from the get-go. I was receiving financial statements every year, and my interest just grew.”

After earning a BA and MSc in finance and economics from the University of Sherbrooke, in 1992, he says, “I went straight to CDPQ.” Actually, one of his professors wanted him to take an internship there to work on a derivatives project. As Therrien recalls, the professor told Therrien to call him, so “I went to a phone booth – in those days there were phone booths – and he said, ‘Come in tomorrow.’ I had no dress shirts, no suits, no tie. So, I called my mother, and we bought a shirt, a green suit, and a green tie. While it’s not clear whether it’s ‘because of’ or ‘in spite of’ this sea of green outfit, he says, CDPQ “hired me for four months to do a research on derivative pricing models, and after that, they offered me an intern job for a year to continue what I’d started, and then I became an analyst.”

He’s been full-time since 1993, so it seems to have worked out. Meanwhile, Therrien got married in 2010 and had a son a year later. The family “has a house and a place in the country. It’s a good life; a balanced life.” Part of that balance includes fly fishing. “I love it. We have some very nice rivers here.” He’s also an avid bike rider and reader: “I read biographies; I read a lot of leadership books; I like the history of finance. I would like to design a course around the history of finance. There’s so much one can learn from history. That’s why for him, Lords of Finance that he recently read Liaquat Ahamed’s chronicle of events leading up to the Great Depression “a great book.” An intense reader, he says, “My books are full of notes and highlighted passages.”

In addition to his duties at CDPQ, he has been an active member of the Standard Board for Alternative Investments (SBAI), which used to be the Hedge Fund Standards Board,” and in 2020, he became its chairman. He explains, “I think the Board is really important. It’s making our ecosystem a better place to invest in and making standards for the things we espouse as investors. Being able to contribute a lot more to how we craft and design our industry is not something I can let go of. It’s kind of a neutral bond that brings together the best standards of investing.”

This was an excellent interview with my former boss at CDPQ and exactly what I want to cover on a Monday afternoon after a long weekend and day rushing to finishing a report where I examined in depth the asset mixes and investment operations at CPP Investments, OTPP, HOOPP, and a couple of others (don't ask).

Anyway, Mario and I go back years. He and Yves Moquin hired me back at the Caisse in 2002 when I was an economist at the National Bank and took me out of my miseries of doing repetitive economic and market comments (it wasn't that bad, learned a lot working with Clément Gignac, Stéfane Marion, Vincent Lepine and Martin Roberge and enjoyed my time there).

At the Caisse, I was in charge of monitoring the directional portfolio, or as I called it back then, the problem portfolio. We basically had two portfolios, multi-strategy and relative value funds where we invested with top funds - Citadel, SAC Capital, Millenium and other high caliber funds --  and then we had the directional fund which was full of private equity crap when I got it and some decent but not so great L/S Equity funds.

Anyway, to make a long story short, I really enjoyed that job even if I was a total novice at fund investing. I learned quickly about due diligence -- operational, risk management and investment DD (my favorite) -- and moved quickly to rejig that portfolio under Mario's watch and populate it with top L/S Equity funds, CTAs, global macros and short sellers.

Just to give you an example, when I was there, we invested with Bridgewater early on (thank you McGill Capital), Winton Capital, Viking Global and other top funds. I personally got to meet guys like Andreas Halvorsen who was extremely impressive and other less well known managers who were smart as hell.

It was the heyday of hedge funds, we were a small team getting approached by everyone looking for an allocation. Looking back now, it was a bit nuts.

I traveled a few times with Mario and enjoyed our trips. Well, one of them in London was a disaster for me as I had a cappuccino with Mario right after we landed in the morning and something in that coffee made me sick as a dog. I had four onsite office visits that day and each time I arrived, I asked them to use their loo (till this day, I never travel anywhere without Imodium quick dissolve tablets).

But another trip meeting to Geneva and Madrid will go down as one of my best trips ever. Mario and I met up with Ravi and Jesus, the two managers of Vega Asset managers in Geneva where they were doing their annual medical checkup (the ultra wealthy aren't like you and me). We were at some silly hedge fund conference and then met up with them for dinner at a winery outside the city.

That dinner alone was worth the trip as we shared great food and wine and talked all night about markets and life (great guys).

We then went to Madrid to see Vega's operations and boy did love that city, everything about it is just perfect (the people, the architecture, the food, you name it).

To make a long story short, we ended up allocating to Vega Asset Management but I cut the initial allocation in half because I disagreed with their main view that rates were going to back up significantly. They ran a sophisticated trading operation, tight risk management, were incredible at marketing themselves but the rise and fall of Vega Asset Management will go down in the hedge fund history books (I'm pretty sure they're still around). 

Like I said, I learned a lot investing with and interacting with top hedge fund managers but truth be told, I was sick of the traveling and the constant badgering from all these lesser known hedge fund managers looking for an allocation.

I was also sick of hedge fund managers giving me poor excuses when they underperformed and took my job seriously, grilled them hard even if they were doing well (Mario was with me on some of these meetings, he can vouch for that).

The thing that really pissed me off was operational screw-ups, like when we wanted to move from a high vol CTA strategy to a low vol one and for two weeks, we didn't know where the money was. The manager kept telling me to talk to the administrator and after a couple of phone calls, I basically ripped him a new one and told him if he doesn't fix the problem and give us back returns we lost, we are out.

Investing with external hedge funds isn't always as easy as it sounds. It's not like investing in top private equity funds, you can get smacked from all sides. 

Mario Therrien knows this better than anyone. He and Ron Mock have literally traveled the globe meeting great (and not so great) hedge fund managers.

My own views on hedge funds have drastically changed over the last 15 years. I still think most institutional investors don't have a clue of what they're doing, they don't have the right dedicated teams to invest in hedge funds and the results are pitiful.

Even in Canada, CPP Investments and OTPP are the top hedge fund allocators by far and they've taken their lumps some years.

Trust me, it's not easy, even when you're investing with top funds.

Over the years, Mario graduated from being in charge of hedge funds to being in charge of partnerships:

What does all this mean in practice? It means Mario is the Chief Investment Schmoozer at CDPQ and he and his team literally have to meet and know everyone worth meeting all over the world.

But above and beyond developing relationships with external partnerships, his team needs to monitor external managers from various asset classes and be on the lookout for interesting ideas that fall between the cracks. 

As the article above states:

CDPQ is likely to tap some additional managers as it looks to its future directions. For example, he says, “One area where we’re doing a lot of work is capital solutions. There’s a lot of opportunities there. It’s not private equity; it’s not fixed income; it’s an hybrid.” Meanwhile, “In public markets we’re looking at opportunities in tech, and healthcare has been an area where we’ve done surveillance of who’s doing what.” Many of these initiatives will be done in house, but he suggests some will rely, with the right conditions, on outside specialized managers.

There are plenty of other examples of hybrid investments but keep in mind, a fund the size of CDPQ is looking for scale so it's not going to invest in something just for the hell of it if it doesn't move the needle.

Oh my, I'm getting flashbacks from my days at the Caisse, marketing people from hedge funds calling me up, pestering me with pitches: "Leo, we are opening up our fund to a select group of investors, we'd like you to take advantage of this exciting opportunity."

Most of the time, I wanted to take a shower after meeting and talking these guys. I became very cynical early on about asset gatherers who never aligned their interests with those of their clients.

But that was a lifetime ago, I'm glad Mario Therrien is doing well, enjoying fly fishing with his son Jake who is nine years old now. I'm also glad he still enjoys reading good books and will put Lords of Finance on my reading list.

I'd recommend Mario reads John Kay's Other People's Money as well as Jonathan Tepper's Myth of Capitalism. I enjoyed reading both these books but nothing beats my all-time favorite, Roger Lowenstein's When Genius Failed. That was a classic, even better than Liar's Poker, another great one.

Before I forget, on Sunday, I posted this article on LinkedIn, a story about a Toronto-area family with a child suffering from an ultra-rare disease (SPG50) trying to raise funds for a cure. The family turned to crowdfunding to raise money to pay for gene therapy which scientists believe has the potential to halt the progression the disease and even reverse some of the damage.

The child's father, Terry Pirovolakis, is on a 400-kilometer bike ride from Pickering, Ont., to the nation’s capitol with the goal of meeting the Prime Minister and urging him to contribute to the fundraising efforts.

I'm doing my part in raising awareness and I urge all my readers to kindly donate any amount to help this worthy cause. The link to the family’s GoFundMe page can be found here, as well as a link for Terry’s ride.

Below, an older (2017) interview with Mario Therrien where he discussed the Canadian Pension Model with Ted Seides. Great stuff, listen to this interview.

By the way, Mario doesn't hold the record for the longest tenure at CDPQ, that honor goes to Claude Langevin who literally spent close to 50 years at the Caisse (they even hired him on contract for years after he retired but he's gone for good now).

Lastly, a recent interview with Nathalie Palladitcheff, President and Chief Executive Officer of Ivanhoé Cambridge. Great interview, listen to Ms. Palladitcheff, she discusses a lot here.