Top Traders Unplugged
ALO22: Finding an Absolute Return Solution for a C$11BN Pension Plan ft. Christophe L'Ahelec
Wed Apr 03 2024investingfinancial instrumentsasset allocationrisk managementliability managementmanager selection
Description
The episode discusses the importance of staying updated on new financial instruments and tools in the ever-changing world of investing. It covers University Pension Plan Ontario's investment strategy, asset allocation, risk management, liability management, manager selection, and decision-making process. The episode emphasizes the need to balance portfolios, manage risk factors, evaluate investment risks, and stay updated on innovations. It also highlights the book 'U.S. Central Guide to Constrative Education Investing' that focuses on hedge fund investing from a quantitative perspective.
Insights
Staying updated on new financial instruments and tools is crucial in the ever-changing world of investing.
Listeners are reminded that past investment performance does not guarantee future results and there is a risk of financial loss with all investment strategies.
University Pension Plan Ontario aims to consolidate pension plans from various universities in Ontario to build sustainable value for its members.
UPP manages $10.8 billion Canadian dollars in assets, serving over 39,000 members from 16 participating entities, with a focus on high-quality assets and integrating ESG factors.
A Climate Action Plan was launched in 2022 to achieve a net-zero portfolio by 2040, with a commitment of at least $1.2 billion to climate solutions.
Building a balanced portfolio across different properties and characteristics is crucial for resilience throughout market and economic cycles.
The pension plan aims to generate returns matching or exceeding a discount rate of 5.45% to hedge against liabilities.
Investing in a diverse set of assets with stable returns greater than liabilities while minimizing volatility is recommended for managing liabilities.
Managed accounts help mitigate operational risks for emerging managers and provide transparency, liquidity control, customization, and cash efficiency.
Manager selection is crucial, and ongoing appraisal is necessary to decide whether to hold on to or remove managers based on performance.
New financial instruments and tools like machine learning and artificial intelligence are constantly evolving for investment strategies.
Chapters
- Importance of Staying Updated on Financial Instruments and Tools
- Investment Strategy and Asset Allocation
- Building a Balanced Portfolio and Managing Risk Factors
- Managing Liabilities and Manager Selection
- Evaluating Investment Risks and Managed Accounts
- Manager Selection and Decision-Making Process
- Importance of Staying Updated on Financial Instruments and Tools (Continued)
Summary
Transcript
Importance of Staying Updated on Financial Instruments and Tools
00:08 - 09:18
- Staying updated on new financial instruments and tools is crucial in the ever-changing world of investing.
- Past investment performance does not guarantee future results and there is a risk of financial loss with all investment strategies.
- The conversation features Kristoff Lylek, Managing Director of Public Markets at University Pension Plan Ontario, who shares his background in financial markets and investing.
- University Pension Plan Ontario aims to consolidate pension plans from various universities in Ontario to build sustainable value for its members.
- UPP manages $10.8 billion Canadian dollars in assets, serving over 39,000 members from 16 participating entities, with a focus on high-quality assets and integrating ESG factors.
Investment Strategy and Asset Allocation
08:52 - 18:33
- The investment strategy includes a focus on high-quality assets with risk-adjusted value and integrating ESG factors for long-term value protection.
- A Climate Action Plan was launched in 2022 to achieve a net-zero portfolio by 2040, with a commitment of at least $1.2 billion to climate solutions.
- Asset allocation is determined based on three main asset class groups: return-enhancing, interest rate-sensitive, and inflation-sensitive.
- Real estate and infrastructure are considered durable assets against inflation, while discussions are ongoing about including commodities for inflation protection.
- Increased exposure to absolute return strategy reflects the belief that active management will be beneficial in the upcoming market environment characterized by higher volatility.
- Constructing an absolute return portfolio involves balancing divergence versus convergence strategies and stress beta responses for resilience across market cycles.
Building a Balanced Portfolio and Managing Risk Factors
18:15 - 27:06
- Building a balanced portfolio across different properties and characteristics is crucial for resilience throughout market and economic cycles.
- Trend following strategies are considered diversifying but not guaranteed to perform well in all crisis situations.
- Managed future trend following strategies are used to balance the convergence characteristics of other portfolio strategies.
- Leverage can be used to boost returns or mitigate risks from liabilities, requiring cautious management.
- The pension plan aims to generate returns matching or exceeding a discount rate of 5.45% to hedge against liabilities.
- The focus is on managing risk factors rather than just asset class exposures, with an emphasis on equity risk, duration risk, and inflation risk.
Managing Liabilities and Manager Selection
26:50 - 36:17
- Actuaries adjust liabilities slower than bond assets, making it difficult to hedge inflation indexing and fully age liabilities.
- Investing in a diverse set of assets with stable returns greater than liabilities while minimizing volatility is recommended for managing liabilities.
- A mix of passive and active equity investments is used, with a focus on external managers for active public securities.
- The portfolio aims for a concentrated approach with 10-15 managers across different dimensions like geography and strategy types.
- Leveraging the plan's size to access niche strategies with more alpha potential compared to unconstrained strategies is part of the investment approach.
- Manager selection involves evaluating investment processes for sustainability and adaptability to generate desired risk-return profiles.
Evaluating Investment Risks and Managed Accounts
35:51 - 44:53
- Investors need to evaluate operational and reputational risks in addition to investment risk before making investments.
- There are no constraints on selecting managers based on AUM or length of record, but it's important to mitigate risks associated with them.
- Managed accounts help mitigate operational risks for emerging managers and provide transparency, liquidity control, customization, and cash efficiency.
- When choosing between managers with similar strategies, looking at the actual risk-return profile rather than just the high-level strategy is crucial.
Manager Selection and Decision-Making Process
44:38 - 53:51
- Manager selection is crucial, and ongoing appraisal is necessary to decide whether to hold on to or remove managers based on performance.
- Evaluating the resultant profile generated by a manager relative to expectations is key in deciding whether to retain or fire the manager.
- At UPP, investment decisions go through two levels of governance: Management Investment Committee and Investment Committee, with decisions made consensually.
- The investment team handles asset allocation and portfolio management, while decisions like manager selection are made through consensus with majority vote.
Importance of Staying Updated on Financial Instruments and Tools (Continued)
53:23 - 56:36
- New financial instruments and tools like machine learning and artificial intelligence are constantly evolving for investment strategies.
- Staying updated on innovations is crucial for making appropriate investments.
- A book titled 'U.S. Central Guide to Constrative Education Investing' focuses on hedge fund investing from a quantitative perspective, emphasizing diversity and inclusivity.
- The book includes insights from investment professionals on various topics such as systematic strategy, sustainability investing, and manager selection.