← Capital Allocators – Inside the Institutional Investment Industry
Capital Allocators – Inside the Institutional Investment Industry
CIO Greatest Hits: Sovereign Wealth Funds – Geoffrey Rubin (CPPIB)
01:10:20
This week’s final Summer Series is a mega two-fer, Raphael Arndt from Australia Future Fund and Geoffrey Rubin from CPPIB. We packaged these two leading sovereign wealth funds together to compare their application of the Total Portfolio Approach –...
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Capital Allocators is brought to you by my friends at WCM Investment Management. To outperform the markets, you have to do something differently from others. In my 30 something years investing in managers, there may be no one I've come across who does that as clearly and as well as wcm. I've seen it up close. As an investor in their international growth strategy for the last five years, WCM is a global equity investment manager majority owned by its employees. They believe that being based on the west coast, away from the influence of Wall street groupthink provides them with the freedom to live out their investment team's core values, think different and get better as advocates of integrating culture research into the investment process and advancing wide moat investing. With the concept of moat trajectory, WCM has delivered differentiated returns while building concentrated portfolios designed to stand out from the crowd. WCM is committed to defying the status qu by dismantling outdated practices, believing in the extraordinary capabilities of its people, and fostering optimism to inspire each individual to become the best version of themselves. To learn more about WCM, visit their website@wcminvest.com and tune into this slot on the show to hear more about WCM all year long.
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This testimonial is being provided by Ted Seides and Capital Allocators who have been compensated a flat fee by wcm. This payment was made in connection with Capital Allocators, testimonial and production of podcasts and is not depend on the success or level of business generated. The opinions expressed are solely those of Capital Allocators and may not reflect the opinions of others. Investing involves risk, including the possible loss of principle. Past performance is not indicative of future results. Please visit wcminvest.com for WCM's ADV and further information.
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Today's show is also brought to you by AlphaSense. AlphaSense is the market intelligence platform trusted by institutional investors worldwide. It gives you access to over 500 million premium sources, from company filings and broker research to news trade journals and over 200,000 expert calls. This October, AlphaSense is hosting its inaugural Alpha Summit 2025 in Brooklyn at the Refinery at Domino. Alpha Summit will discuss how AI is reshaping investment research and decision making. Featuring leaders from ubs, Wells Fargo, Accenture, Google, Stripes Group, the Carlyle Group and new speakers announced each what makes AlphaSummit unique is that it's not just about ideas, it's about showcasing the real workflows and strategies top firms are using today. Join AlphaSense at AlphaSummit 2025 October 6th 8th. To register and to see the full list of speakers and agenda, go to AlphaSense.com capital that's alpha-sense.com capital.
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Hello, I'm Ted Seides and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money.
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Game, we learn how these holders of.
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The keys to the Kingdom allocate their time and their capital.
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You can join our mailing lists and access Premium content@capitalallocators.com All opinions expressed by Ted and podcast guests are solely their own opinions and do not reflect the opinion of Capital Allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Capital Allocators or podcast guests may maintain positions in securities discussed on this podcast. This week's final summer series is a mega twofer Rafael Arndt from Australia Future Fund and Jeffrey Rubin from cppib. We packaged these two leading sovereign wealth funds together to compare their application of the total portfolio approach with Australia focused on partnerships with external managers and CPPIB on a hybrid of internal and external management. Both have been thought leaders on modern portfolio management and have experienced great success with their innovative approaches. Before we get going, it's time for all our back to school rituals. Time to shop for clothes, buy a few pencils and notebooks, or update electronic devices as the case may be, adjust sleep schedules and launch into the excitement of new teachers, classrooms and classes. But rather than hear about it from me or my kids who are long past the precious ages of first day of school photos, I thought you might enjoy hearing about it from the Capital Allocators family. Here's Blake Arguela, Morgan's nine year old daughter.
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I love school because I get to see my friends that I did see over the summer.
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And another from Galia Auerbach, Tamar's seven year old daughter I love school because you get to see old friend a new thing. The lesson from these adorable kiddos is the same as investing in managers. It's all about the people. And when it comes to connecting and learning with your peers, there are only two ways I know to bottle up similar enthusiasm in adults coming back to school. First, investor relations and business development professionals can join us at Capital Allocators University for our next course in December. Early bird rates will last another week, and for everyone else, you can tune in right here for a modern version of the classroom each week and tell all your friends to join your class. Thanks so much for coming back to school with capital Allocators. Please enjoy my conversations with raf Arndt from 2018 and Jeffrey Rubin from 2022.
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Jeffrey, thanks so much for joining me.
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C
It is a pleasure to be here. Thanks for having me.
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B
Well, we've got plenty to dive through and before we do that, your background before joining CPPIB a dozen years ago or so has a whole bunch of interesting different steps you take me through. Maybe the elevator pitch version of it.
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C
I wish it was a cogent and consistent narrative to head from beginning to end, but it is probably more about just looking for opportunities to do exciting, challenging, gratifying work along the way. So I kind of through my undergraduate and graduate years it was economics and culminated in a PhD in economics that I think was intended to lead to academia at the outset. Over the course of spending that much time in that environment, you learn things about yourself and limits. And I certainly found my limit in terms of really being able to stay in that academic environment for too long. So it was pretty clear that it was time for me to build a career outside of academia.
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B
What were those bells and whistles for you that let you know that your academic life would be cut short?
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C
It's fascinating to see, but when in it you realize that the academic environments, while it can be incredibly rewarding in terms of intellectual curiosity and research and doing amazing work, it's unfortunately as freighted with political intrigue and infighting as almost any institution you can find. It really is quite remarkable that there's that much focus on are you in the right spots with the right papers, working with the right colleagues, as opposed to a more open ended consideration of what you might want to do intellectually. Every organization has that to some degree. Ted. I thought academia did so to a degree beyond. So it's finding a spot in an organization where people are all really working together in a way that's trying to build out something special just appeals to me more.
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B
So once you put that aside, how did you dive into the business investing world?
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C
Yeah, it started working for a smaller shop in New York that was focused on commercial real estate advisory and investing and taking more quantitative and research approaches, grounded approaches to thinking about commercial real estate at a time where the data was less prevalent and the kinds of analytics that we could run, I think were real value adders for commercial real estate investment decisions. And I think that that experience really helped ground this evidence based and analytical approach to investing, which I think I've carried along throughout the career trajectory. From that it was a move into the commercial banking side. And it worked with Capital One for a number of years, which was at a terrific point in that organization's development where they were moving from a model line credit card lender to one that was a full service commercial bank and required the kind of coordination and orchestration at the top level to ensure that their balance sheet was being used to greatest effect. The amazing thing I learned at Capital One is that it was not as much a portfolio of positions as it was a portfolio of businesses that generate positions for the balance sheet. They had an auto lending business and a card business and a mortgage business and a deposit business, all of which needed to be considered in thinking about how you orchestrate and develop and allocate resources to those different pieces. That was the challenge in managing the Capital One balance sheet, was ensuring that these businesses were empowered and oriented and aligned with what we were trying to accomplish at the top of the house. And it was that perspective and the subsequent work I did after Capital One, working in a consulting firm, that helped some of the large, newly minted bank holding companies grapple with some of those same issues. It became very clear that that experience, in terms of managing portfolios of franchises and businesses, is something that a large institutional investor like CPPIB needs to grapple with. With our collection of investment businesses and the infrastructure and real estate and private equity and private credit and hedge fund teams that we've built, we too have this collection of capabilities, active investment capabilities, that needs to be really carefully coordinated and managed at the top of the house. And, Ted, that experience from doing it on the commercial banking side, I think translated with really meaningful effects over to the pure investment problem that we're working on here at cppib?
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So, Jeffrey, what's an example from those Capital One days of seeing a balance sheet that has positions on it that come from, as you said, a series of businesses that you might think about differently from just looking at the balance sheet in a series of positions.
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C
So take a business like mortgage lending. That business has its own set of exposures and sensitivities to things like rates and inflation that need to be anticipated. When you're thinking about how you build it into the portfolio as a whole, how is the commercial mortgage business going to respond in environments where the deposit franchise is doing well or doing poorly? How do we want to think about combining those two? How do we actually originate the mortgages in that kind of business? And to what extent can we scale up or scale back that activity without impairing our ability to go forward in a viable way. This is questions of team and staffing and how you build teams. How fungible are the people on those teams with other businesses that you have internally within the organization. These are all the questions that you need to answer when you're thinking about establishing and resourcing a business as opposed to a collection of positions. If you think about the portfolio as one of a page or two on a Bloomberg terminal, you can think about in a very agile and flexible way, scaling up and scaling down exposures to respond to both longer term and tactical or conditional risk adjusted pricing. When you're thinking about businesses, you need to do the extra work to anticipate how you're going to maintain that capability through cycles and over time in a way that is contributing to the portfolio. The analogy just, it sits so well within our current organization. We have a real estate business, a team of over 100 professionals around the globe. We need to think very careful about how we scale the exposures in our real estate department up and down so that we can preserve this capability to effectively invest in the way that we do, in this active internal way that we invest. That becomes part of the problem you solve. Not just how much real estate do I want in my portfolio today?
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B
So you joined CPPIB 2011. I know it had been around for a decade and a half or so when you joined and why don't we circle back. It is part of this so called Canadian model and we'd just love to hear a little bit about the origins. And then what does Canadian model mean to you?
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C
Yeah, I am fascinated by this history because it's so clear if you hang around in this business long enough, almost, almost every organization, it's an artifact of where they've been historically and the constraints and the aims and the personalities and the hardships. And it's where you are today is typically a product of where you have been historically. I think the Canadian model broadly is one that was, I think fairly pioneered by Ontario teachers. I think they had the help of some great thinkers here within Toronto and Canada in terms of building the conviction and the appropriate governance to actively invest with internal teams that are empowered to compete against other investors globally on equal footing and have the governance and commitment to do so over longer horizons and ways that you can build up active investing capabilities for which you're going to show real conviction through cycles and over time. That was, that was really the start of the Canadian model. It started with really terrific governance and included the development of these internal active investment capabilities behind which real conviction lies and willingness to hire and to deploy in ways that are the equal of any other investor in the space. I think Teacher's early success was really important, and it's probably worth pausing. Had they not been so successful in terms of of the investment returns they generated and the funded status they supported in their plan, there might have been a very different story here in Canada that subsequently followed. So a ton of respect for what they did. But as you note, with following upon those early successes of that kind of active investing, in the mid to late 90s, there was an agreement to set up the CPPIB to invest in exactly that way. I think in our governing legislation, it is very clear that our duty is to maximize investment returns without the taking of undue risk, while maintaining regard for the funding of the Canada Pension Plan itself. We were set up as investors, and I think that's the heart of the Canadian model is that expectation that we are here to maximize returns. We are not an organization that's seeking to deliver some minimum target level of return at the lowest possible risk. To the contrary, there's an expectation that we will be risk takers that will pursue the highest possible return we can. And to do so, we need to be active, we need to be global, and we need to build internal capabilities that allow us to invest in ways that will maximize return. That's the journey that CPPIB has been on since that mid-90s founding. That's a really important place where we started. In the context within which we started. I think one of the more fascinating elements of our development and evolution has been starting from a spot where we had aspirations and clear governance and leadership commitment to being active investors. But we had not yet built those capabilities. So we started from a spot where we were almost entirely passively invested, internally managed, but it was, broadly speaking, a passive investment portfolio. And this was in the early days when we were perhaps of a size of $150 billion. So a large fund, but almost entirely passive by virtue of the fact we had not yet built those active capabilities. And that became our most important job as an organization was to progressively transition our portfolio from one that was more passive to one that was actively invested, and to build the capabilities. The businesses that we've already talked about go build a real estate business and an infra business, and agriculture business and credit, go build these capabilities to actively invest, and in doing so transitioned the portfolio from one that was predominantly passive to one that was increasingly active. This phase of building out active capabilities and ensuring we were delivering incremental value along the way really lasted up until, call it 2018, 2019, around that time period. So there was substantial initial liquid capital. There were continuing inflows from the Canada Pension Plan that needed to be actively deployed, and we were in the process of building these active capabilities. I think we largely succeeded there, and our investment results are evidence of that. We did deliver very high absolute returns and high returns relative to our benchmark that we set for ourselves by virtue of building these active capabilities. But of critical importance, Ted, we have now transitioned our portfolio to its targeted level of about 80% or so active. It's not all private. Some of our public programs are also active. But this transition from a broadly passive portfolio to one of active has been 15 years or so in the making and has been really quite effective, but now puts us in a spot where we are in a different place as an organization. Our job is no longer to build active capabilities and ensure we make that transition from passive to active. Rather, our job now is to make sure we are coordinating and optimizing among those developed active capabilities in ways where we have to think about trade offs, we have to think about connections among those different investment strategies. We are now faced with a different challenge, getting the most out of our capabilities and our existing proportion of active investment, as opposed to one in which we needed to build and grow those.
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B
Capabilities in that building phase. Before we get to this kind of interesting current challenge of maximizing, there's two things you touched on that are so easy to say and so hard to pull off. So the first is excellent governance. What is that structure like that was put in place such that you've been able to succeed over this decade and a half of shifting from passive to active capabilities?
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C
I think it was strong clarity as to accountability for the decisions that the organization collectively needed to make. The biggest decision we need to make as an organization is the level of risk that we think is appropriate for our fund. This is what we think is the level of risk beyond which it would be inappropriate or undue to go as an organization. And we had very good clarity as to our professional board's accountability for establishing that level of risk for the fund. And that is work that we in management spent significant time with the board going through and being very clear as to what that appetite for risk might look like and what the different implications are of of those different risk levels. But our targeted risk level, which for the base or initial fund itself was a level of risk equal to that of a portfolio comprised of 85% equities and 15% fixed income, that became our targeted level of risk. That's a level of risk which is higher than many other investment funds. It is attributable to the funded construct of the Canada Pension Plan itself. It is not a fully funded plan, it's a partially funded plan which admits a higher degree of risk appetite. But setting that up in such a clear governance fashion was of great support because once established, management had the conviction and confidence to go out and build a portfolio with that level of risk. Not the same composition, so not 85% equities and 15% global fixed income, but one of that same level of risk. And we could do so with real confidence. The governance decision to invest actively again was very clearly a board decision, which they felt they had the support and confidence to do, based upon the broader governance construct of the Canada Pension Plan and the Canada Pension Plan Investment Board for who we work. And they were very clear in conveying to management where the boundaries lie and what the expectations and objectives were for that development of active management. What was delegated to management was as important as what was retained by the board in terms of approval with appropriate governance and oversight. They delegated to management the strategic orientation of the types of active strategies we wanted to build, the means by which we would consider whether they are effective or not and how they're contributing to the overall portfolio. That strength of governance is an enormous advantage for the Canadian model and for ourselves. I am very sympathetic to other funds that find themselves in different circumstances. I try not ted to be in the school of right and wrong. I try to be in the school of difference. And I certainly admire the positive characteristics of the governance construct that we have here in Canada, but appreciate that other institutions are dealing with different constructs and as a result are solving different problems at some level.
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B
So once you had that in place, you then have this challenge of oh, there's buy in to actively manage returns. Though at some point in time, some time ago, there was no one in place to actually do that, Particularly internally. How did you go about building out, as you say, these businesses in each area, acquiring talent, retaining talent, compensation, everything that goes along with that?
- [23:51]
C
It was all spearheaded by some really forward thinking and long horizon leadership. We adopted what we call here internally the crawl, walk, run model, where we would stage everything in a progressive fashion in a number of the strategies in which we now have active capabilities. We started with heavy reliance on funds, so heavy reliance on third party managers. In a number of these programs we would seed internal employees to go sit with our gps and making sure that we can Learn as much as we can from them and develop those capabilities. And over time, we would progressively build out internal capabilities that 80% managed actively. I think. I think about 55% is managed internally as opposed to externally now. So most of our active capabilities are now built in house. As a result, we have a large organization. We're over 2000 individuals focused solely on the overall investment process problem that we need to solve. So there was rapid growth there starting from those early seeds of let's crawl and let's just get the initial momentum going in terms of these active capabilities and over time, progressively leaning more and more into it. That's what has happened here in this organization over the last 15 years. The ability to hire, retain, develop and compete in the talent marketplace has been a really big part of that, as has the overall leadership of the organization, willingness to take the risks, both investment risks and organizational risks, to build these teams and provide a degree of commitment that falls behind them. I'd say the last point I'd make on this one, Ted, is we've done our best to always reconcile the active capabilities we're building with these sources of advantage or edge that we possess. We've as carefully as possible tried to identify those active strategies in which size, certainty of assets and long horizon might be of particular advantage. We think those can be edged if carefully and appropriately drawn upon. And where we want to build active capabilities, we need to make really sure that those teams, those strategies are appealing to a clear source of edge and advantage. Great partners, great internal teams in our total portfolio approach. I think those are among some internally developed sources of edge. But I am a big believer that one must be constantly assessing and testing and challenging and sharpening those sources of advantage in all of our active programs. So that was a big support for us having those possessing those sources of edge. Being careful about making that linkage, I think, is also something that gave us the confidence to go ahead and build some of those capabilities.
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B
Could you walk through an example, maybe in one of your businesses, of how you see those advantages playing out?
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Let's talk about the impact of Horizon on performance. We've done quite a bit of work here internally to look at how a long investment horizon can enhance performance. And there's some good external work that has been conducted on this one. At the highest level, I get concerned that long horizon is a bit of a platitude that folks can wave hands to the notion that we're a long horizon investor and all these clever phrases around that, when in reality, I think an investment Rises fundamentally about the length of time one can remain committed to an investment strategy that is broadly performing as expected without getting stopped out. For me, the big value of possessing a longer horizon is the ability to stay within a strategy, a strategy that might be performing poorly, but within the range of expectation you would have for a risky strategy. Without getting stopped out by your governance, without getting stopped out by your internal folks, by the press, by interested parties within and beyond the organization who start asking, well, wait a second, this strategy has lost money two years in a row. Why are you still running it? If we take a look at things like strategic tilting, think of this as akin to the tactical asset allocation. These are strategies which by definition could be of a very long horizon. It might take years and years in order to demonstrate, prove out the skill and the edge that you might have in a strategic tilting strategy. Long horizon means is you have the wherewithal and ability to stay invested in that kind of strategy even when it's running against you. I think all too often, even within our organization, scrutiny on performance of investment strategies can arise well within the window of really proving out the thesis. And I think when we do commit, we try to do as good a job as we can to ensure that strategies have the time in order to demonstrate performance and in order to, to deliver what we're expecting over the appropriate horizons. But in cases where that horizon doesn't exist, it's far better not to pursue the strategy than to, than to go for it and find yourself stopped out, behaviorally or structurally or otherwise, because the performance is just not there. Ted, I, I think that's one of the biggest errors that we can make as investors is believing we have a longer time to prove out an investment approach than we really do. If the answer is you only have a couple of quarters to prove that makes money, you better make sure your investment thesis is aligned to that particular horizon. So there's an example of where we felt emboldened to build out active capabilities consistent with those horizons in very careful ways.
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B
So alongside of that requirement of that aligned horizon, at the end of the day, we're all human beings and therefore run into the same challenges when it comes to these periods of underperformance. What are some of the processes that you've put in place to take advantage of that long term horizon?
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C
I think the simplest has been the look back period on incentive compensation. For example, we try to configure all of our performance periods to five year trailing returns. Are there some strategies for which an even longer horizon might be More suitable, sure, but now you're really testing the limits of length of career time people are in roles and what happens when individuals turn over. And we're still looking back at strategies that have been updated or modified over that five year period. These are all challenges and we do our best to maintain that longer perspective. But we just need to be very clear with ourselves as that horizon shrinks, the horizon of evaluation, the horizon over which people feel accountable for the results because they're new to the team or the strategy and others left, as that shrinks, you're simply shrinking the effective investment horizon over which you can build your strategy. And if the reality is that you know what that really has compressed to the point where it's only a year or two and we need to prove results within that window, that's fine. But you we can't necessarily claim that long horizon is an edge in delivering returns in that area.
- [31:39]
B
I want to level set on where you got to in terms of these different businesses. Say you can circle back three, four years ago. What were these capabilities at the end of that period when you got to say 80% active.
- [31:52]
C
So the biggest are represented by our five different investment departments. So we have an investment department that handles private equity and that is both internally driven or direct private equity as well as a external funds and secondaries portfolio. We've developed capabilities really across the entirety of the spectrum of private equity investments all the way through growth and even some vc. And VC was a challenging one for us just given our scale and size as to the role of a VC program within that overall portfolio. But we do have that there. So we've. Private equity is one of our five investment departments. The second department is our real assets department which is made up of three larger broad capabilities. Commercial real estate, an infrastructure program as well as what we call SCG of the sustainable energies group which is all of our energy, our energy generation investments, typically renewables, including on and offshore wind and solar. So real assets is a second set of developed capabilities. A third is our private credit departments which has a range of global credit strategies, both liquid and illiquid reside within that department. We have an active equities departments which is our liquid public equity alpha oriented strategy. So these are the stock pickers and again spans the globe in terms of location, in terms of styles and approaches, combines with fundamental as well as some heavier quantitative approaches to investing. And then the final department is really more quantitative hedge fund type investing, the preponderance of which is externally managed within that department. This is what we call External portfolio management or the investments with hedge funds of all type, as well as some risk premium strategies that we're running internally. So taken together, we have an opportunity set that is about as broad as what one would find at any large institutional investor. And that's true of asset class, it's true of geography, it's true of the underlying factor exposures we can get access to. We can get access to almost all of the typical types of exposures that one finds in a portfolio. It is a terrific opportunity set. It is a terrific vantage point from which to see how markets around the world are performing in terms of their relative value prospects and prevailing risk adjusted returns. We just now have the challenge of making sense of it all and ensuring that we are coordinating and really optimizing that collection of capabilities.
- [34:55]
B
There is, as you mentioned a number of times, a global aspect to what you're doing as you've built out particularly these internal multiple offices around the world. What have been the strengths and of course, the challenges in coordinating all of that activity?
- [35:13]
C
We now have, I believe, nine or 10 offices around the world, including large hubs in Hong Kong and Sao Paulo in London. What motivated us to build out that global reach were a few items. The first is diversification and the ability to effectively diversify our portfolio by virtue of getting access to this breadth of investment opportunities. The second motivating reason is exposure to global growth. I think it's hard to conceive of a fund like ours of $500 billion going to a trillion over the next six or seven years or so. It is hard to conceive of us maximizing returns at a particular target level of risk without truly global exposure to sources of of prosperity and economic vitality. And the third reason is alpha opportunity and the belief that many of these markets into which we are expanding afford us an opportunity to generate outsized returns largely by virtue of the fact that their markets are still less efficient and are still developing in ways that might provide opportunity along the way. I think broadly speaking, the thesis of diversification and growth and alpha opportunities has broadly played out in these global markets. The lesson of learning, Ted, is that as we've talked about at the outset, doing so requires a real organizational commitment, not just a portfolio commitment. These teams located in our foreign offices, these are large teams now. And there's all of these staffing challenges that you face. There are the cultural connectivity challenges you face. How do you maintain a unified culture for an organization with 10 offices around the globe? It's a big challenge. So I think we have found the demands of a truly global investment footprint to be every bit as much as you might expect. But the payoff in terms of how we are contributing to the portfolio in ways that diversify and get us exposure to growth and create new alpha opportunities, I think has been largely redeemed.
- [37:28]
B
So over these last couple of years, how have you gone about trying to get the most out of these capabilities around the world across these different businesses?
- [37:38]
C
By being as clear as we can around the capital and risk we allocate to these teams and the expectations that we have of them. We've moved into a spot of the need to orchestrate and prioritize instead of simply just build out capabilities. I think the way we've addressed that is by being very clear as to what we expect in terms of deployment in these different areas, what we expect on dispositions, on the management of assets in the existing portfolio, and what kind of return prospects we're looking for. So the first step has really been a clarity of allocation of resource and expectation of returns contributed by each of these different businesses around the globe. That's been the first expectation. I have to emphasize that's all done within the context of very clearly delegated accountability to those teams to make the right investment decisions. This is not about orchestrating investment theses from the top down. This is about orchestrating our capabilities and making sure they are in positions to effectively invest and have the resources they need in ways that are contributing to the total fundamental. So that's been the real focus. I think where we want to go to next is better connecting these capabilities around the globe. While we have a very clear view of how the team in Sao Paulo is investing and what our expectations are of that team in terms of their contributions. We need to do more to make sure that the Sao Paulo team is investing in ways that is well connected with the rest of our organization. They're benefiting from the perspectives and observations of the rest of the portfolio, of the techniques, of the relationships, of our ability to invest. This is the next phase we're going to go into, Ted, this one fund notion of connecting all of these, this breadth of capabilities around the globe in ways that allows them to invest even better than what they can do in more siloed ways.
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B
It all sounds good. So how do you do it?
- [39:53]
C
You lay in a stock of Red Bull and coffee and you round up the team and you know this is going to be a big effort from everyone in the organization. I think our approach will probably harken back to the crawl walk run in many ways it'll harken back to the really strong leadership from the top. To be clear that connecting our organization up in this way is the means by which we are going to continue producing outsized returns. Part of our effort on this has been to go out and talk to all the great investors around the world. And it's so enlightening to sit down with people and hear their thoughts and you try to steal their best ideas and ignore the worst ones. And it's just great to get out there and connect with folks. But inevitably when we talk about strategy and our approach to strategy, the question arises, what's the burning platform? What's the burning platform suggesting that there's not flame under feet. You won't be motivated to do anything. It needs to be urgent and dire. I don't know that we have a burning platform in that sense, in that our current approaches I still think are terrific. I still think we have amazing active investing capabilities. It's just that without this prioritization and coordination and integration, the connectivity among them, I worry that these spaces in which we invest will become ever more standardized and commoditize and over time will have diminished risk adjusted returns as a reward for taking risk in those areas. I think that is the challenge. Our status quo is one that I think will generate terrific returns, substantial returns, but I think over time will expose us to greater and greater competition which will make it harder and harder to produce truly outsized returns. I think this connectivity, this need to really wire together all of our capabilities. Investing capabilities I think is the means by which we can maintain genuine edge for the next ten years and beyond.
- [42:07]
A
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- [43:07]
B
Now back to the show. So if you look at that today in the various businesses that you described, most people would say, boy, at your size, you are at the apex of competition. So you're talking about tens, high tens, if not hundreds of billions of dollars into private assets, real assets, private equity, similar in public equity, which puts you in a certain cap range for the stocks you're looking at. So what is it so far that you feel has been able to generate excess returns in areas that are very, very competitive today?
- [43:43]
C
I think this is an ongoing and constant challenge. I think it's 10 years ago, I think when we came in with the kinds of check sizes that we did, we were in some cases the only investor in the world that could do that. In other cases, a small handful. And I think the performance of those investments showed. One of our earliest and largest investments is the 407 toll road here outside of Toronto, which was an investment which at the time I believe constituted almost 5% of our entire portfolio. Portfolio size, I think the numbers were in that ballpark. 5% ticket size now would be roughly $25 billion investment. I don't know that we're positioned internally to do a $25 billion investment. So the ticket size as a percentage of the portfolio has gone down. The number of other investors that can invest at that scale broadly has increased. The clarity around the Canadian model is something that's been adopted around the world. I don't believe we are dealing with a situation of extreme urgency. I don't believe this is a case of these markets are going to be irrationally priced in the near term. But I think the pressure is in that direction. I think one thing we saw up until the last six months or so were illiquidity premia in many asset classes that felt like they were getting bid to very, very skinny levels. I'm even concerned that there are some large institutional investors who would be willing to pay up for the accounting stability of private assets, which might in some points of the cycle, induce a negative illiquidity premium. It might actually be more expensive to hold private assets. This changes over points in the cycle, and I think we're going to see some big differences as we go through different economic conditions. But, Ted, this is the awareness that we're starting to develop is around notions of how these markets are going to compete going forward and what it might take for us to differentiate our offerings from those who are able to write big checks and stay in positions for a long time and not necessarily demand outsized returns as a result.
- [45:59]
B
I'd love to pull that thread a little bit on capital Allocation and position sizing. So at your level you're thinking about it across the businesses. But then clearly some time ago you had a 5% position in the pool in the entire pension fund, maybe less so today. How do you draw those lines of where you're playing on the field?
- [46:24]
C
The first spot is on the basis of total portfolio construction. So we have a team with a terrific capability and means of really understanding how to build a well diversified portfolio that's exposed to the factors that we think will support the highest performing portfolio over time. So I think we do a great job at the total portfolio level thinking about issues like concentration, risk and diversification where we want to invest. But there are a number of organizational challenges or impediments to go from that picture of the total portfolio to how people are actually investing. What makes for an outsized concentration risk at the total fund level is going to look very different than outsized concentration risk at the level of a portfolio owned by one particular portfolio manager within our organization. And oftentimes we have these conversations with portfolio managers who say, look, a $2 billion ticket here is a big, big weight in my local portfolio and it could induce a degree of volatility or underperformance that would be really difficult for my team to absorb and digest. Even though a $2 billion or $3 billion ticket at the total fund level will have very little impact on our concentration risk, bridging the gap between the two is a challenge. And that too is part of this work we are doing on one fund to try to solve the problems of alignment and orientation so that the local teams don't have one perspective towards concentration risk that means something very different for them than the total fund.
- [48:12]
B
That sounds like it leads to some type of supersizing capability. You think of a center book portfolio in the public markets or an internal co invest structure in the private markets. Is that how you've been thinking? Thinking about it, yeah.
- [48:25]
C
We've experimented with a variety of different solutions to that in the past. We previously had a centralized book and the local team would hold a pro rata piece, but a small piece and the centralized book would hold another piece. To be honest, I don't know if there's any perfect solution to this, but we found some of those fairly dissatisfying really because of accountability and ownership for the position. I think that the top principle when solving these kinds of problems is make sure there's very clear ownership and accountability for performance. So I think the solution that we want to drive towards is one in which the Local team does own the position in its entirety, but is given that the comfort and assurance that things like incentive compensation and team reward and ability to continue investing in the ways that they invest for their investment thesis are not unduly affected. So it might include things just like judgmental overrides on the weight of that position. When you think about the overall performance of their portfolio over time, it might include other adjustments that allow you to take a longer view and perspective towards performance of the team. I think those kinds of solutions are ones that we prefer over the position splitting where you start to lose some direct accountability for the entirety of the position.
- [49:48]
B
A lot of the way we think about that type of sizing and impact on performance goes hand in hand with compensation arrangements. There's always this question when you have a large internal team, can you recruit the talent and compensate them as much or competitively enough as to what they might get away? How have you gone about compensating the internal team both directly for their book and then also with this potential misalignment of position sizing with the fund as a whole?
- [50:18]
C
Yeah, this is obviously where everyone's IQs drop by about 40 or 50 points when you start talking about compensation. So let's see if we can puzzle our way through this. I think our comp philosophy is there's a couple of pillars of that. I think one is in terms of just overall compensation remuneration. I think we pay vigorous, but certainly not top, top, top percentile of compensation across the entire industry. That said, the level of compensation is generous, it is substantial, and the caliber of professionals that we can hire with that overall level of compensation I think very clearly allows us to run the investment strategies that we do. Are most of those people also motivated by things like mission and purpose and who we are as an organization? They are. And I think for folks who, who take really kind of equal gratification in both the comp side and the purpose and performance side, I think they really find their groove here and are encouraged to perform and deliver in terms of the variability of that level of compensation. We have a really a three part incentive compensation system. One third is tied to the performance of the overall fund, one third is tied to the performance of the local team portfolio, and the final is based upon individual performance. So we do have a means of putting equal points of emphasis on both the overall performance of the fund as well as the local performance of the fund. That's part of the approach that we are taking to try to ensure that people are as motivated by the Total fund problem as they are by the local portfolio problem.
- [52:03]
B
As you've evolved these teams, as you said, you've now built it out. You're now in this period of execution and optimization. You then get into the excitement of getting going and hopefully succeeding and to retention and training and internal development. How have you thought about the ongoing improvement and stability of the teams that you've been able to build internally with these capabilities?
- [52:31]
C
We are going to need to embrace the dynamic you just described this dynamic of going from one of really high intensity development and construction of these capabilities and building out teams and recruiting in and getting our foothold into markets. That you're absolutely right. That was an exciting proposition. A particularly acute proposition for our team and our employees and our new hires. That's a compelling story and our story going forward is equally compelling but different. It's going to be around continuing to deploy and find great investments and to think about how we can most effectively invest. But it will be complemented by equal parts great disposition and selling and thinking about how we, how we add value through our exits as appropriate and asset management, how we make sure the assets that we do have, we're getting the most out of those and the strategies we do have. How are we getting the most out of those investment strategies for people? I think there's going to be much more circulation of both ideas and people within the organization. I like the notion of the T shaped professional. Somebody who has great depth in one particular area but a broad curiosity and ability to connect with others who have different levels or different areas of expertise. And combining T shaped individuals in ways where you really get both breadth and depth combined in terrific ways. I think the era of the eye shaped individual who's just really deep in one particular area and has been mentored and has been apprenticed in one particular area and staying in that area their entire careers. I think that's going to give way to more circulation of people and breadth of experience here within the organization. We're still going to have huge challenges, huge challenges of connectivity, huge challenges of figuring out how we avoid these areas of the market that are becoming increasingly competitive. We can make sure we we pivot away from those into areas where we think we have real edge. It can deliver outsized returns. These will be the challenges and these will be the value propositions for employees going forward. Different than the one we had offered in the past. Ed. But I think one that that for the right kind of person could be equally rewarding.
- [54:51]
B
I'd love to turn a bit to how are you thinking about this next leg of what you're doing internally to optimize and improve these teams?
- [55:03]
C
We're taking a look at what we're calling the commons or the common capabilities of the organization, which it's not a centralized insistence on connecting with others, it's more of a center led capability or facility that people can tap into. So we've, we've had an effort here called Knowledge Advantage up for a number of years, which is a small set of folks who are really doing the work to ensure that the connections, the perspectives, the relationships, the information being gathered across this very broad organization are being gathered and synthesized and curated and made available to everybody. Seems pretty simple, but if you don't have a couple of people working on it probably falls through the cracks. And this is not just about having some type of customer relationship software set up. A software is a part of it, but a part of it is just making sure that there is quality within that work that people are actually eager to tap and to contribute to. And when an investor is taking a look at a particular diligence, particular opportunity, their first reflex is not I need to call and get some external consulting support on this or we need to get an external advisor. Their first impulse is I gotta check in with my internal colleagues to see who is has experience in this area and who's been doing work in this and what are some of the previous investment opportunities we've looked at in this area. That's a center led capability, knowledge Advantage that we think could be of real value to all of the teams in the organization. We're similarly building a team that we call Investment Sciences, which is building out some of the AI machine learning technique for purposes in investment decisioning. It's not a top down team telling all investors, you must have this as part of your process. Instead it's a set of capabilities that if you are the executive who's running an investment process, you'd be thrilled to have access to this group to call them up. Say, can you come on in and take a look at the steps of our process and help me think about where these kinds of techniques will make us better decision makers over time. Those common capabilities in those areas and areas like sustainable investing and climate change risk exposure in areas like relationship management, we think those are the kinds of common capabilities that we can build to provide center led support for our investors as opposed to insisting from the top down that everyone must adopt what's the.
- [57:47]
B
Output delivery mechanism, particularly of this knowledge group, such that it stays top of mind across the organization.
- [57:54]
C
It's everything from asking questions at investment committee as to how you use that team for the particular memo that you're looking at. So it's about those expectations. It's about culture. It's about a culture of expectation that those who have been delegated accountability are administering that accountability by first checking internally and working with colleagues to make the best possible decision. It's in the form of reports. We do have the technology system where folks can go in and do searches on in particular sectors or areas or company names. And all of the information that we've gathered over the years across the organization is made immediately available. So it's through a variety of different measures that we make sure that this perspective that we have, which should be a real source of edge for us, is actually being used in the investment decisions we make.
- [58:47]
B
So across this organization along the way there have been a couple of thought leadership or initial initiatives. If you think about you guys got involved in a significant way in diversity back in 2017. The first green bond in 2018. I'd love to hear how something new makes it from someone on the ground in one of these businesses to becoming something that's emphasized well before the market broadly has picked up on it.
- [59:20]
C
This is, I think one of the more charming aspects of CPPIB is that we are very hard on ourselves when it comes to innovation and our pride in being innovative. I think maybe this is just being Canadian, but we tend to be more, a little more humble around that than maybe what our track record would suggest. I think we have been innovative in some of the areas more that you pointed out. It doesn't always feel like innovation though, internally on the ground, Ted, it's not an issue of people running around in lab coats and buns and burners and beakers and aha, I've invented it. It tends to be more of a just kind of get it done attitude here. When you talk about things like the Green Bond, that was just an example of people who are empowered to make decisions, who have accountability for doing things. There was a sensibility to it. They did the hard work and a lot of hard work. We are a very kind of evidence based organization and culture. So they would have put together all of the evidence on what this means in the, in the market and the spreads associated with it. And it was an immediately compelling proposition. One incredible thing about the Green Bond program is that it allows us to issue it spreads that are inside where we issue in our normal programs. There's no trade off there between do we want to do well for the environment or do well for the beneficiaries and contributors. In terms of returns, the two are perfectly aligned. We have these asset programs that are investing in green assets. And this was a team that just had the moxie to say this makes sense. And they did the work and they presented it and it was approved. And now I believe we're one of the largest green bond issuers of all the pension funds and institutional investors. That was in some sense just really organic and just business like innovation. And I think most of the innovation that we've done has been that very kind of just put your shoulder into it and get it done and bring the business case and be empowered to make the decisions to go. As opposed to grand innovation exercises where we sat down and said, okay, let's be innovative. What should we do here? It's been much more, much more organic in that fashion. And when you stand back and look at it all, it is impressive. But sometimes internally we might not even see that.
- [61:53]
B
So in a big complex organization like this, inevitably there are going to be some failures along the way. And I'd love to hear some of the stories of things that you were optimistic about in terms of improvements or.
- [62:07]
C
Returns that just didn't work out in our previous strategy. So this was the strategy that we struck around 2019 or so. The strategy we struck there called for a heavy reliance on technology and data. And maybe in some ways TED is a counterexample to what I just said in terms of real organic innovation. This was more kind of a top down expectation that we were going to put data and technology at the center of everything we do in terms of the decisions we make and how we invest. And I don't think we've as an organization have developed capabilities that match that lofty aspiration. I think we've made progress on technology and data, but much more in the workmanlike way that I was describing earlier, as opposed to the grand top down vision of we are going to now invest in this way across everything we do. I think that I call it a failure in so much as we learned, in so much as that allowed us to better understand where our strengths and advantages and capabilities lie and where we might have a more difficult time. So I certainly think we are a better organization because we laid out that aspiration and we gave it a shot and we discovered who we are in terms of data and technology and how we want to approach. And I think we'll continue to kind of learn from that. Other failures we've certainly had investments that didn't turn out the way we wanted to. We've had investments in strategies that didn't turn out the way we want to. I mentioned we built an agriculture investment strategy a number of years ago and I'll give us credit for having the wherewithal to understand that that was an investment strategy was never going to have the kind of needle moving impact to our portfolio that we wanted it to have. I think it's an asset class that might work very well for other types of organizations. For us it was not a match and we gave it a shot and we committed to it and we even staffed it up and we had to make that difficult. But I think well grounded and evidenced call within a few years that that was not a strategy that was going to be a big part of our longer term future. So I think those are the kinds of examples of where we came into things open minded, with real commitment. But you evaluate the evidence and realize it's not for you. Yet you move on.
- [64:27]
B
So I want to ask you one question about market turmoil. What happens at an organization like CPPIB when we go through what we have the last nine months of this year in markets around the world struggling?
- [64:41]
C
I have to say I think our organization has been remarkably composed through all of this turmoil. I think a lot of this is attributable to the fact that we as an organization do try to maintain a longer horizon and perspective on markets and our investment strategies. We don't face day to day, month to month retail driven contributions and redemptions. We have a much slower metabolism when it comes to inflows and outflows of the fund. I think that helps support a longer term perspective and horizon. We have a commitment to our strategies that extends beyond a month to month issue. So I think when we move into moments like this, we often think as much about the opportunities that this affords us in the markets in which we're investing as opposed to having to be excessively focused on just the exposures and the downside risks to our portfolio. Obviously we do quite a bit of work in terms of risk management, anticipating the nature and size and our resiliency to downturns. That's not a predictive exercise. That's one of ensuring that we have the the capacity to withstand these kinds of downturns and make sure what we've experienced in the market over the last few months is not going to knock us off the path that we're on. So I think as an institution, if we can have one possible advantage that given Our endowed circumstance and who we are as an organization. If anything, we should be able to stand tall in times of market disruption. And I think for the most part, we've done a good job of staying to course over this kind of market episode and being able to look for opportunities as much as deal with exposures.
- [66:33]
B
So, Jeffrey, one thing I haven't noticed over the course of this conversation is your Canadian accent. So while you may have adopted a stereotypical Canadian demeanor, to the extent that professionals on the team are buying into this important cause of serving the Canadian people, what's it like for non Canadians of whom there are many on the team?
- [66:59]
C
So my family and I, we are almost Canadian. We have been in the final stages of the process here for a Covid delayed three or four years. We certainly feel Canadian. And since I am American and my wife is British, on average we're Canadian. So we're really, really close here. And we do have a very international workforce, both here in the Toronto office as well as obviously around the globe in our other offices. I think there is a shared sentiment, a shared Canadian sentiment of one level of friendliness, the jerkometer around here, it scores very, very low in this organization. There are very few just jerks running around. And those who are tend to kind of look around before long and realize it's probably not the spot for them. So I think we have these really terrific Canadian attributes of kindness and collaboration and calmness and working towards something bigger. I think some folks who come in also identify some of the challenges of the Canadian culture. Are we the most forthright culture internally in terms of raising issues and really challenging and debating ideas? We can probably learn a few things from other cultures around the globe that maybe draw some of that out in a more pronounced way. But I think overall that is part of what makes us special as an organization is for whom we work and the way we work. It does feel like the maple leaf is something at front of mind for most of the folks here at the organization.
- [68:40]
B
All right, Jeffrey, I'm going to ask you a couple of closing questions. What is your favorite hobby or activity outside of work and family?
- [68:47]
C
Yeah, if I were to look at the pie chart, working families is pretty much the whole, is pretty much the puck. I think of the small sliver beyond work and family when it's just purely indulgent me time. I recently got bit by the rugged rugby sevens bug. It's a niche sport within a niche sport. It's a type of rugby play that I think is just thrilling and exciting and fun. And the sports wagering opportunities on it are fun. And doing some quantitative modeling of the lines and the sides and the totals is, again, a fun pastime, but one that occupies a really small, really small part of the whole.
- [69:31]
B
What's your biggest pet peeve?
- [69:33]
C
I guess one would be. I do find when I go to restaurants, Ted, it's not the quality of the restaurant that I worry about, it's the ratio of the pretense to the quality of the restaurant. I would rather go to a so so restaurant that knows it's so so than go to a good restaurant that thinks it's great. I like right size, pretense and quality.
- [69:53]
B
How about on the investment side, your biggest investment pet peeve?
- [69:57]
C
Doesn't it drive you nuts when people take very binary views towards what are very clearly probabilistic outcomes? Like every investment, Ted, is a screaming buy or an absolute zero in advance. Then afterwards it's 53.47. I would love it if in our industry, in our field, we tempered our polarity somewhat from it's either the best thing ever or the worst possible thing, or it's either catastrophe or it's celebration. It's usually somewhere in between. So I think that would be one.
- [70:32]
B
Which two people have had the biggest impact on your professional life?
- [70:36]
C
George Overstreet was a professor of my undergrad days who, the moment I kind of walked into his classroom and saw the way that he taught finance and the way he connected with people and the way he found such joy in everything he did, that's kind of what led me into finance. If I'd walked into an astronomy professor's class and they had had what George had, I'd be doing that. It wasn't the subject matter that inspired me, was George that inspired me. And I ended up working for him and with him for years and years. And he's really the reason why I'm in the field broadly. And he's to this day, really dear friend. And I would say second person is Don Raymond, who was one of the first employees here at CPPIB and started up what we now call the Total Fund Management department and the whole approach, and is the person who brought me into the organization and really transitioned from that commercial banking side of finance to the investment side of finance. Don is now running or helping run the Qatari sovereign wealth fund, but he is somebody without whom I certainly would not have had a chance to come to CPPID and really helped this organization over the last decade. Plus.
- [71:51]
B
What type of investment do you gravitate to like a moth to a flame.
- [71:55]
C
Within my personal account, there are plenty of flames. Keeping this to the CPPIB portfolio. I really like working problems big to small. So the investments I most think about and most excited about are those that are diversifying, those that really help us build out an overall portfolio that's going to have the risk and return characteristics that we need for long periods of time. I think the smaller individual investments, as we think about what we're trying to accomplish over the horizons we're trying to accomplish, it tend not to have as big an impact on the portfolio.
- [72:32]
B
What teaching from your parents has most stayed with you?
- [72:35]
C
I think the easy, fundamental ones kindness and hard work and purpose and humor and just getting the most out of what you have. That's kind of how we grew up and I think those have been really useful.
- [72:51]
B
All right, Jeffrey, one more what life lesson have you learned that you wish you knew a lot earlier in life?
- [72:56]
C
I wish I had Carol Dweck's book when I was about 13. I think her thoughts around the fixed versus the flexible mindset and just how much fun and empowering it can be to adopt a curiosity and an openness to learning and to go and sitting with the brightest people in whatever field and just wander again and say, I have no idea what you're doing, but I'd love to learn. Can you tell me about it? I think that is something I do now quite a bit, to the absolute horror of my kids and most of those around me. But it is just so much fun and so helpful to just be very open and honest with all these other great people around as to what they do and not try to show off that you know more than they do. But to be very clear that you only know less because you haven't had a chance to learn it yet. I think Carol Dweck has been a real inspiration over the last few years.
- [73:54]
B
Fantastic, Jeffrey. I feel like there's so many more layers of the onion we can peel away. But until we do it again, thanks so much for coming in, sharing the CPPIV story.
- [74:03]
C
It was really great. Thanks so much.
- [74:06]
A
Thanks for listening to the show.
- [74:08]
B
To learn more, hop on our website@capitalallocators.com.
- [74:12]
A
Where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more. Have a good one and see you next time.