Finding an Absolute Return Solution for a C$11BN Pension Plan ft. Christophe L'Ahelec

[00:00:08] Christophe

What I find fascinating in our industry is the fact that we live in an ever-changing world. There are always new financial instruments, new ways to implement a given strategy, new tools at our disposal to invest, I can think here about machine learning, artificial intelligence so it’s using all the tools that we have at our disposal to make the most appropriate investment decision and so it’s very important that you stay on top of all those innovations.

[00:00:50] Intro

Imagine spending an hour with the world’s greatest traders. Imagine learning from their experiences, their successes and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world so you can take your manager due diligence or investment career to the next level.

Before we begin today’s conversation, remember to keep two things in mind. All the discussion we will have about investment performance is about the past, and past performance does not guarantee or even infer anything about future performance. Also understand that there’s a significant risk of financial loss with all investment strategies, and you need to request and understand the specific risks from the investment manager about their products before you make investment decisions.

Here’s your host, veteran hedge fund manager, Niels Kaastrup-Larsen.

[00:01:42] Niels

For me, the best part of my podcasting journey has been the opportunity to speak to a huge range of extraordinary investors from all around the world. In this series, I have invited one of them, namely, Alan Dunne to host a series of in-depth conversations on the topic of what it takes to be a world-class allocator.

In today’s world, portfolio construction is fast moving to the top of the agenda of many investors as they tried to analyze and understand the riskiness of their portfolios. With ever-increasing uncertainty around the globe, being well-diversified across many different strategies and themes in your portfolio can mean the difference between ruin and survival when the next crises emerge.

The aim of these conversations is to try and understand the experiences that have influenced these highly specialized allocators and the processes they follow to harness the best returns for their clients so that we can all become better-informed investors. With that, please welcome Alan Dunne.

[00:02:45] Alan

Thanks for that introduction, Niels. Today I’m delighted to be joined by Christophe L’Ahelec. Christophe is managing director of public markets at University Pension Plan Ontario.

UPP is the defined benefit pension plan for Ontario’s university sector and has just under 11 billion Canadian dollars in assets under management. Christophe is responsible for a UPP’s global investment strategy with a particular focus on public markets. He has been an allocator for many years prior to being at UPP. He was a Senior Principal in capital markets at Ontario Teacher’s Pension Plan, Christophe, great to have you with us say, how are you?

[00:03:23] Christophe

I’m very good thank you, Alan. I’m very happy to be here with you today.

[00:03:27] Alan

Good stuff. Well, great to have you on and I gave a brief introduction to your background, but maybe it would be good to hear from you about how you got involved and interested in financial markets and investing and what’s taking you to your current role at UPP?

[00:03:43] Christophe

Definitely, I believe I had an eclectic career getting exposure to different roles in the capital markets industry. It all started when I did my six months, and up-schooling internship within the fixed income financial engineering department at BNP Paribas in Paris. At the end of my term there, I was offered a contract to work within the fixed income trading room of BNP Paribas in Hong Kong. There I was responsible for the support and development of front office application ranging from prices to performance and risk reporting tools. At the end of that contract, I went back to Europe and joined a small asset management company based in Geneva, Switzerland called Mignon Geneve that was looking at diversifying their fund of fund activities by launching some hedge fund products in the credit and equity space.

I worked there on the equity side to ultimately launched a European systematic equity market neutral strategy which required building from scratch all the infrastructure necessary to run this strategy. It went from building our data management capabilities, backtesting and portfolio management tools, implementing execution capabilities, and developing risk monitoring and reporting tools. This was a very formative experience that proved very useful when I moved to Canada and join the external manager group at OTPP.

My role there was to bring a quantitative approach to the management of a hedge fund and private credit portfolios and later on, we added a long only equity program from both bottom up and top done perspectives. Bottom up by providing a qualitative support to the qualitative manager selection and monitoring process, and top done by setting up a portfolio construction and risk management framework.

I spent 11 years there, and then I moved on to join UPP in March 2021, so three years ago, to prepare for the launch of this newly formed pension plan by implementing the infrastructure required to take over the management of the assets and liabilities of UPP’s funding universities pension plans. This included, of course, the onboarding of their assets.

As you stated, I’m now leading a team of eight people covering the active public markets, activities of the plan, active public equity, active public credit, and absolute return strategies.

[00:07:00] Alan

Good stuff. Well, you mentioned it’s something of a new initiative, this UPP. I think it’s a consolidation of a number of universities’ pensions. Maybe give us a sense on that and then, obviously, what the overall investment objective, I guess, of the portfolio is.

[00:07:23] Christophe

Definitely, so our purpose is to consolidate pension plans of universities across Ontario. Our focus is on building stable and sustainable value for our members now, and in the future. As of the end of December 2022, we have 10.8 billion Canadian dollars in net assets, and the plan is fully funded with a slight surplus. We serve over 39,000 members from 16 participating imperials. This includes four universities, University of Toronto, University of Guelph, Queen’s University, and Trent University, and 12 affiliated organizations.

Our ambition is to attract all the universities in Ontario and that’s what we’re building UPP for. From AUM perspective, we are currently managing roughly 1/3 of the total AUM managed by the pension plans of these universities.

One important consideration is that we’re not a multi-client pension plan. We are jointly sponsored multi-university pension plan, and we manage one portfolio of assets and one set of liabilities. We invest across all asset classes including public and private equity, fixed income, infrastructure, and real estate.

We pursue your high-quality assets with risk adjusted value and we integrate ESG factors throughout our investing activities to derive and protect long-term value for all members. On the sustainability side, we are an engaged long-term investor that focuses on creating sustainable value in our portfolio through engagement, industry advocacy, and proxy voting.

In 2022, we launched our climate action plan that includes our commitment to achieving a net zero portfolio and your operations by 2040 and last year, we committed to invest at least 1.2 billion to climate solutions by 2030.

[00:09:57] Alan

Very good, you touched on the portfolio, but it’s been one portfolio I guess, one set of liabilities and also mentioned that it’s fully funded at the moment. So, being fully funded, does that impact the asset allocation? Give us a sense on how the asset allocation is determined, what investment strategy I guess drives that asset allocation.

[00:10:25] Christophe

Yeah. Our main objective is to remain fully funded, and to manage the funding ratio to mitigate its volatility. Our asset allocation today, we look at our portfolio by categorizing our investments, our assets across three different main asset class groups. The first one is return and then seen asset class which is comprised of public equities, private equities, private credit, and hedge fund are our absolute return strategy. We have a 52% target exposure to this group of asset classes, and the breakdown is 28% to public equity, 6% to private equity, 6% to private credit, and 12% to absolute return strategy, we recently actually increased our target exposure to absolute return strategy from 10% to 12% and that reflects our belief that in the next few years, the market environment will be supportive of active management. So, we will be looking at adding a return through our absolute return strategy portfolio.

The second group of asset classes is our interest rate sensitive asset classes comprised of government bonds and inflation linked bonds. Finally, we’ve got an exposure to what we call the inflation sensitive asset class that is comprised of real estate and infrastructure. Our target exposure to this group of asset classes is 16%, 8% to real estate, 8% to infrastructure and that requires a target economic leverage of 10%.

[00:12:35] Alan

Okay, interesting, I have a few interesting points to pick up on there. Maybe just picking up on the inflation sensitivity the real estate and infrastructure, is that based on research that these are the most durable assets to withstand inflation or were other assets and strategies [considered]. Things like commodities, or commodity futures are going to be reflected in absolute return but they would also give you some inflation, protection or hedging. How do you think about determining what goes in which bucket?

[00:12:35] Christophe

Inflation indexing is a characteristic that we offer as part of UPP’s pension plan to our members. So, it’s very important to be able to hedge that indexing by investing into assets that will provide some inflation protection and here, there’s real estate, there’s infrastructure. As you mentioned, commodities can play that role. Today, we don’t have a commodity program. That is something that we started discussing, but we’ve got a lot of priorities and it’s not part of our top priorities for now. One challenge that we have, when discussing commodities, commodity programs, is how you look at this asset class from a ESG and responsible investing point of view. That’s the reason that why it requires lots of discussion amongst UPP, amongst our investment team, and as well with our members because we want our portfolio to reflect the expectations of our members.

[00:14:40] Alan

Okay, very good and then on the return enhancing side, you’ve got equity like exposures and absolute return and you mentioned how you’ve increased the absolute return exposure reflecting your perception of a better environment. What would you say are those key factors that are driving that view? What do you think it is about the environment, at the moment, that makes it more attractive or active?

[00:15:09] Christophe

Yeah, it’s about the zero-button reset. After the global financial crisis, the decade that followed was characterized by central banks doing everything they could to support growth, putting, basically, the economy on a drip with low or even negative interest rates which essentially curved the left tail, and benefited beta and passive management.

We believe that this era is over and that the next few years will be characterized with a higher heightened level of volatility and discressions across markets and intra markets. We believe that this environment will be supportive, will be a constructive environment for active management and therefore, for hedge fund strategy. Investing into absolute return strategy will provide diversification and added alpha to the traditional asset classes, so to the 60/40 portfolio if I may say that.

[00:16:26] Alan

Yeah, that makes sense. From a strategy perspective, what does that 12% look like or how do you think about constructing an absolute return portfolio in terms of the underlying strategy makeup?

[00:16:39] Christophe

Yeah, so my goal, when constructing that absolute return strategy portfolio, is to construct a portfolio that is well balanced across different characteristic. One is divergence versus convergence strategies. So, convergence is a more relative value type of strategy, as opposed to a divergent strategy that takes a directional view on markets.

Here, you’ve got global macro, you’ve got managed futures, for example. That’s one thing that we look at, we looked at, as well, stress beta, how is the strategy responding to market stress and so we categorize our manager and our strategy across stress beta that is positive, neutral, or negative.

For example, a managed futures strategy is categorized as a negative twice beta strategy because in periods of stress managed futures tend to do well based on the volatility in the discussions that is arise in the market, therefore providing some support for the overall portfolio. So it’s all about building a balanced portfolio across different properties, different characteristic to other regimes in portfolio that will perform throughout market cycles and economic cycles.

[00:18:34] Alan

In some people you see things like trend following managed futures been treated more as, I guess, as you call it that negative stress beta or being treated as a portfolio diversifier or even early tail risk. But obviously, by having it in the return enhancing element of your portfolio, presumably you see it as something that can drive positive returns as much as providing protection. Is that fair to say?

[00:19:03] Christophe

Yes, so we consider trend following as a diversifying strategy that possesses crisis apha characteristics, meaning that they tend to do well in periods of stress. But there is no certainty it will and a good example of that is March 2020 when COVID hit the world. The market reaction was so sudden and so sharp that most of the managed futures and trend following strategies didn’t do well because it was a very short period of time. That’s why I refer to that crisis alpha, that is provided by a trend following strategy, as a statistical hedge. So, most of the time, it would provide a hedge but there’s no certainty especially when compared to other kinds of hedges like an options based hedging program that provides a more certain pay-out profile. But it comes with a higher cost than managed futures strategies.

[00:20:24] Alan

Is that something you’d include in your portfolio? Do you have specific tail risk protection, options strategies, or long vol strategies for that purpose?

[00:20:37] Christophe

We use many switches trend following strategy within our ARS portfolio, again, to balance the convergence characteristic of other strategies that we have in the portfolio. We also have an allocation to trend following at the total plan level. You can see that as a risk mitigating program, but that’s the program that we need to spend more time on before really being able to call it that way. Ultimately, I believe that the program will be a combination of statistical hedge. So those trend following strategies have a more deterministic hedge, like an option based structured program, and some other diversifying strategies, and fixed income can play also a role in that risk mitigating program.

[00:21:37] Alan

So very much in line with overseeing elsewhere in terms of crisis risk offset portfolios which are often trend following plus fixed income, plus in some cases options, and in some cases global macro type strategies.

[00:21:52] Christophe

Exactly.

[00:21:55] Alan

You also, interestingly, have 10% of leverage in the portfolio which I guess is something that we see across public pension plans in the US and obviously Canada as well. In UPP’s case, what’s the rationale for that, is it to boost returns or help but with effective portfolio management, or how do you think about why you have leverage and how much to have?

[00:22:23] Christophe

Yeah, you can use leverage to boost returns as you mentioned. That will be by relocating more to return enhancing assets. It can be used as well to mitigate the risk coming from our liabilities by increasing our allocation to fixed income assets. So there’s different ways to use leverage. But basically, the goal for leverage is to mitigate the risk coming from our liabilities.

[00:23:02] Alan

Interesting. So it’s largely, as I guess, as a hedging or defensive mechanism.

[00:23:07] Christophe

Yeah, and it needs to be cautiously managed and it’s a function of the perceived risk that we see on the markets, be it short term or medium term, against relative to our liabilities.

[00:23:27] Alan

Okay. In terms of the portfolio as a whole, and obviously, you mentioned you’re trying to minimize the volatility of the funding ratio, do you have an expected return for the overall portfolio, or what does the overall portfolio look like, would you say, from a return volatility characteristic?

[00:23:48] Christophe

We have a discount rate currently of 5.45% and our objective is to generate returns that will match or be even higher than that discount rate so as to hedge our liabilities.

[00:24:08] Alan

In terms of risk then is it around the volatility or would you have a sense for what the maximum drawdown you would expect at the portfolio?

[00:24:18] Christophe

So, we are a new pension plan and there’s still a lot for us to do to improve our portfolio management framework. Today we look at our portfolio in terms of exposure to asset classes. Ultimately, we want to build a framework that will be focused on risk factors because ultimately, that’s what is driving the risk return profile of our portfolio. I think it’s better to think of the risk of the portfolio through the lens of those risk factors rather than just exposure to the different asset classes: real estate, infrastructure, equity, and so on.

[00:25:08] Alan

So that’s the direction you’re moving in in terms of thinking about exposures. So would that be the main risks been equity risk, duration risk beyond that, and then I guess with absolute returns, it’s more idiosyncratic, is that it?

[00:25:27] Christophe

Yeah. So liabilities are driven by duration risk and inflation risk because, as I mentioned before, we offer to our members inflation indexing. So, a trivial way to look at those liabilities and to look at how to manage those liabilities will be to fully hedge our liabilities through a portfolio of bonds. The problem with that approach is that there’s a lot of basis risk between the portfolio of bonds and the liabilities of a pension plan.

For example, if you target a yield to maturity for your bond portfolio equal to the liability of this contract, there’s a big assumption by doing that. That assumption is that you will be able to reinvest your bond assets at the same yield than that yield to maturity, which is a not the case. Moreover, in asset liability modeling, liabilities are discounted at a discount rate established by appointed actuaries and this discount rate usually doesn’t move in tandem with the yield of bond assets.

The practice is that actuaries will delay and smooth the adjustment of the discount rate and therefore, the liabilities move slower than the bond assets. So, fully hedging your liabilities will be suboptimal.

It is also very difficult to hedge the complexity associated with inflation indexing and adds to the sub optimality of fully hedging your liabilities. The best approach to manage those liabilities is to invest into a diverse set of assets which will generate stable returns in the liabilities while managing to minimize the volatility relative to the liabilities. Today, our target hedging ratio is around 41%.

[00:26:45] Alan

Moving on to the manager selections and the types of managers that you look at. Firstly, maybe on the public equities side, do you do any securities selection yourself or do you favor index funds or do you like active or where do you stand in that whole sphere?

[00:28:17] Christophe

We use a mix of passive and active equity investments. As I mentioned before, we believe that the environment we’re in and the environment we see going forward will be supportive to active management. So, we are more heavily exposed to active public equities and passive equity. But passive equity is an important tool, as well, in the way we manage our liquidity profile. So, we have both in our portfolio.

The way we invest in active public equity is solely using external managers. So we don’t have any direct investment capabilities for active public markets. We made the decision not to implement those capabilities at the beginning of 2022 because we think that it would be too nervous for a plan of our size to do so. So, on the external manager, for now, that’s something that we will revisit in a few years, once we grow, after acquiring more universities, but for now, all external managers.

The portfolio that we’re trying to build will be a concentrated portfolio from a number of manager’s perspectives. We think it’s the best way to extract alpha from this portfolio. If we have, I don’t know, 30, 40, 50 manager, the end result is that we will own the markets and so then why paying fees if it’s to replicate the equity market. So, it’s a concentrated portfolio from a number of managerial perspectives and we’re targeting 10-15 managers.

We’re striving to build a balanced portfolio across different dimensions be it geography, be it equity style factors, be it a systematic versus discretionary type of strategy. Again, back to what I was saying before, our aim is to build a robust and resilient portfolio across market cycles and economic cycles.

[00:30:56] Alan

Obviously, we talked a little bit about active in equities, but maybe just talk a bit more about the types of strategies and absolute return, you’re talking about convergent versus divergent. I’m thinking, obviously, with the plan assets around 10 billion, you have the ability to access some smaller niche more capacity constrained strategies, is that part of your approach in that sector?

[00:31:22] Christophe

Definitely, we see our size as our edge. So compare the large pension plan. As you mentioned, we have the ability to invest in more niche strategies, in more capacity constrained strategy where we believe we can find more alpha than in unconstrained strategies that can absorb lots of liquidity.

Today, we are focusing on rebuilding the core of our portfolio and we allocate to strategies that have ample liquidity. But next year we’re planning to look to small niche types of strategies, like ILS, carbon trading, or other types of systematic strategies that focus on a very particular market segment and that will form what we call a satellite portfolio. So our approach is core to large core portfolios that will be comprised of strategy with limited liquidity constraints, and then the satellite portfolio which will be comprised of more niche liquidity constrained strategies.

[00:32:51] Alan

Okay, interesting. Within those, how do you think about finding those opportunities? Is it thinking about areas of the capital markets that are less efficient, or is it just the correlation profile that might be attractive with things like ILS, or how do you go about sourcing those types of niche strategies?

[00:33:14] Christophe

Here we talk to a lot of managers every day, every week, every month; managers that come to us either through either through teams at banks, or that reach out directly to us, or managers that we meet at conferences. So, that’s the main channel for us to source managers. We also use a database. We screen databases to look for a risk return profiles that are differentiated from the risk return profile already existing in our portfolio. But again, our main channels for sourcing managers is through conferences and managers reaching out directly to us.

[00:34:07] Alan

Okay. Maybe to give us a sense on obviously managers selection and evaluation, it’s as much art as science, and obviously there’s always that temptation to be heavily influenced by the track record, etc. But from your perspective, you’ve been in an allocator seat here, Ontario Teachers as well, what are the key things that drive your appraisal when you’re evaluating a manager?

[00:34:39] Christophe

Yeah, so manager selection requires a deep understanding of the technicalities of the strategies that the managers are running, technicalities that are often complex. In selecting managers, you’re not buying a track record. You are buying an investment process that you believe will produce a risk return profile for your portfolio going forward and it’s critical that you assess the sustainability of that investment process.

We all know about the alpha decay. To survive and continue to outperform, a manager should have the capacity to adapt to an ever-changing market environment, to research new strategies, models, and sources of alpha. So, when assessing a manager, it’s important, it’s critical, to have a forward looking view to assure that yeah, the manager will be able, in the future, to generate the risk return profiles that they have generated in the past.

But it’s not all about the investment process and the risk return profile, there’s also many myriad of variables that you need to account for and that you need to properly evaluate before making an investment. Those risks can be operational, or reputational and so, yeah, it’s not only about investment risk.

[00:36:18] Alan

Obviously, if you’re looking at more niche capacity constrained strategies, you’re presumably open to looking at smaller managers and where you may be taken on more maybe? Are you open to early-stage managers? Are you willing to take on that early-stage manager risk?

[00:36:35] Christophe

Yeah, so we don’t have any constraints in terms of how we select a manager from the prospects. So, we don’t require a set level of AUM, or a set lens of an applicant. So yes, we can definitely look at an emerging manager.

What’s important is to mitigate the risk that resides with those managers. One way to do that is through the use of manager platforms that mitigates some of the risks that you face when allocating to emerging managers. Here I’m thinking mostly operational risk. That the manager platform will provide the infrastructure that will mitigate those kinds of risk in an emerging manager.

[00:37:30] Alan

Okay, interesting. Managed accounts, yes, are increasingly used these days. It seems to shift a bit. There was a time when funds were more popular than managed accounts, but from your perspective, is the attraction largely managing that operational risk rather or is it the transparency as well, or the ability to leverage or all of the above I guess?

[00:37:56] Christophe

Yeah, all of the above. Investing through managed accounts provides lots of characteristics that make the investor a better investor. To describe managed accounts, I’m used to using the anacronym TLCCC. So, T stands for transparency, as you stated. Transparency is very important, not to look at each position that the manager has in their portfolio, it’s about being able to aggregate across your hedge fund portfolio all the risk exposure that comes from all you’re seeing in the line managers. To me, I’ve got a quant background, I’ve got a risk background, and so it’s very important to have access to the transparency to be able to properly manage the portfolio.

L stands for liquidity. Through the use of managed accounts, you are more in control of the liquidity of your portfolio and you’re less subject to the arbitrary liquidity terms that you can face when allocating through co-mingled funds.

Then the last three Cs, so the first one stands for control. So you’re in control of the assets. You’re in control of the set parties that operate around the managed account, be it an audit firm, the administrator, the prime broker, so you’re in control. You’re in control of the assets as well. They are your assets and that’s a very important feature.

The second C is for customization. Being able to customize the strategy with the manager so that it will meet more of the needs that you have of a given risk return profile within your portfolio. This is very important.

The last C is for cash efficiency. With the use of managed accounts, you don’t need to fully fund, fully cash fund hedge fund investments. Let’s take an example here, a managed futures manager, so trading only futures, this strategy doesn’t require a high level of cash, you just need to have enough cash to support the matching call coming from your investment activities in futures markets. So, instead of funding your investment with 100 million, as you will do when investing in the co-mingled fund, usually you can support the strategy of a managed futures manager with much less cash, like 20-30 million. Then you can deploy the cash that you’re saving on that side of the portfolio into other investment opportunities in public markets or private markets. So cash efficiency is also a very interesting property of managed accounts.

[00:38:26] Alan

Very good and you mentioned it’s obviously, you’re buying an investment process, it’s not just a track record. But when you’re looking at, say, take CTAs, when we both know CTAs and trend followers and managed future managers very well, there’s a lot of good quality firms, there’s a lot of people who would tick many of the boxes that an allocator would look for, when you get to that level that there’s a number of different managers that fulfill the basic criteria, what are the extra things that you think you’re drawn to that might tip the decision in favor of one manager over another? Is it around similar philosophies or what it, do you think, that are the differentiators between the managers you’re ultimately go with?

[00:42:29] Christophe

Within given hedge fund strategies, you can have lots of different risk return profiles. Let’s take an example here. So, when you look at managed futures, there are strategies that can be very short term, and more relative value versus some that are more medium term, long term with more directionality, like a trend following strategy. So, I don’t really look at how your portfolio is allocated through the lens of those high-level types of strategies; discretionary, macro, managed futures, equity, long/short, and creditary value, because what matters in the end is the type of risk return profile that the manager is running.

Let me give you an example here. In December, we made an allocation to a creditary value managers. Often in credit, credit long/shot, managers are running some beta to the market. There’s a bit of bias to this strategy. That’s the high-level perception of the strategy. Then the way a manager implements their strategy; it can focus on constructing a portfolio that displays positive convexity. Meaning that yes, the manager will still do good in periods of market stress and that manager that we have allocated to has, actually, a research and profile that has no beta to the market or even slightly negative beta. So, I think it’s important, again, to not look at the high level strategy, the nominations that the manager is running, but you need to look under the hood and look at the actual research and profiles that the manager is generating.

[00:44:53] Alan

Okay and obviously we talked about a lot about manager selection and how you think about that obviously, that’s part of the puzzle. The other part is once you’re allocated to managers and the ongoing appraisal, and how do you decide, I guess, obviously, if performance is very good, you’ll tend to hold on to them. But obviously performance might be disappointing, but not necessarily outside expectations or just shy of expectations. How do you put a framework in place for evaluating managers and deciding when it’s the right decision to remove them?

[00:45:28] Christophe

So you select a manager for the risk return profiles that the manager is running because you think that research and profile is a credit to your portfolio and has characteristics that will balance the risk return profile within your portfolio. As long as the manager keeps generating that risk profile, in my view, there’s no reason to fire the manager even if the manager generates an absolute performance that can be negative.

You need to evaluate the risk return profile generated by the manager relative to your expectation and the role that his risk return profile plays in the portfolio. It’s totally understandable to me that a manager will underperform or will generate negative performance for a period of time as long as that risk return profile is in line with your expectations.

[00:46:44] Alan

Obviously, you’re allocating to a lot of different strategies, and there’s going to be different degrees of sophistication and complexity with the strategies. I’m curious to hear your perspective on the challenge of getting those confirmed or approved through the governance process. Can that be challenging or maybe give us a sense of what is the governance process for your plan and are there challenges around educating maybe members of the team who don’t come from an investment background?

[00:47:19] Christophe

Yes. At UPP we’ve got two levels of governance when it comes to making investment decisions. The first level is what we call our management investment committee which is comprised of our CEO, our CIO, senior members of the investment department, our junior console, and our CFO. All those people have been in the investment industry for a long time. They are investment professionals, so they understand most of the asset classes characteristics, they understand investment strategies.

Sometimes, it still requires some discussion, some education around some particular investment strategy when we discuss the strategy. We explain why a profile of a particular strategy will be a credit to our public markets’ portfolio and to the overall UPP portfolio. With that understanding of the characteristics that this particular investment will bring to your portfolio, we can make decisions. So the MIC management investment committee.

Then we’ve got an investment committee that is comprised of members of this MIC as well as members of the board. Here, the members of the board that sit on our investment committee, it’s a mix of seasoned investment professionals as well as less seasoned professionals in the investment space. Here, yes, it requires a bit more education, but I’ve never had an issue or misunderstanding of the type of strategies that we invest into. Decisions taken at the IC level are decisions that carry significant risk for the plan, investment risk, but also operational or reputational strategy. So most of our investment decisions are taken at the MIC level. But when a decision carries more significant risk at the plant level, then it needs to be approved by our investment committee.

[00:50:00] Alan

Okay, so presumably the investment committee dictates the investment objective and would they determine the strategic asset allocation or is it more the management investment committee and that gets approved by the investment committee?

[00:50:15] Christophe

The investment committees supervise our investment activities. All the work around asset allocation and portfolio management is done at the investment team level.

[00:50:34] Alan

For things like manager selection, where obviously you’ll tend to get a wide variety of perspectives, is decision making by consensus or by majority or how do you harness the collective wisdom and get everybody on board in terms of those decisions?

[00:50:54] Christophe

Usually it’s been the case until now, decisions are consensual, we discuss new investment opportunity, we address concerns that some members of the investment committee have, and all our decisions have been done so far in a consensual way. But as per our governance, a decision requires only the majority of votes subject to quorum, and it requires, as well, the affirmative vote of our CIO.

[00:51:35] Alan

Sometimes people say decision making by consensus, there’s pros and cons. But obviously, ultimately, I guess the CIO has the final say, that’s the overall approach or is that fair to say?

[00:51:52] Christophe

Yeah, as I said we need an affirmative vote from our CIO, then only the majority is required to make an investment decision. But we’ve never had to go there. All our decisions were made on a consensus basis.

[00:52:11] Alan

As we get towards the end of the conversation, we like to get a ton of advice and perspective from our guests around things that they’ve found helpful in their careers for people who are maybe earlier in their journeys. You’ve obviously had a very, as you say, eclectic background in markets which I guess has been beneficial for you. Outside of that idea of getting lots of different experiences in different asset classes and different roles, what advice would you give to people if they want to develop their skills to be in a position to run an investment portfolio like you do in terms of things to do or things to read or any advice around that?

[00:53:02] Christophe

Yeah, my main advice is to be curious. When hiring investment professionals, I’m looking for people that are passionate about markets. What I find fascinating in our industry is a fact that we live in an ever-changing world. There are always new financial instruments, new ways to implement a given strategy, new tools at our disposal to invest. I can think here about machine learning, artificial intelligence, so, it’s using all the tools that we have at our disposal to make the most appropriate investment decision. So, it’s very important that you stay on top of all those innovations.

You asked me about a book, and here I want to take the opportunity to promote the book that was published last year by a very good friend of mine, Marat Molyboga, that co-wrote that book with Larry Swedroe. The book is called Your Essential Guide to Quantitative Hedge Fund Investing.

His book is looking at hedge fund investing from a quantitative lens. So, it first introduces hedge funds, discusses the gap between academia and the industry. It goes on describing approaches to manager selection and portfolio construction through the use of various quantitative methodologies. It also highlights the importance of diversity and inclusivity in the investment industry. Lastly, it includes interviews of investment professionals who go over their career path, provide insights on various topics that they are experts in. Those topics range from systematic strategy, emerging market investing, sustainability investing, machine learning, to manager selection and portfolio construction. I had the pleasure to contribute to that book through being interviewed by Marat.

[00:55:31] Alan

Very good. Well, that’s definitely one to keep an eye out for and for people to look out for. Christophe, thanks very much for doing this today. It’s been a very enjoyable conversation, great to hear about your experience and work at UPP.

So, make sure to follow Christophe’s work because it is important in an uncertain and ever changing world to understand and consider how to allocate capital well, and we hope that our conversation today has been beneficial in that regard. From all of us here at Top Traders Unplugged, thanks for tuning in, and we’ll be back soon with more exciting episodes, so stay tuned.

[00:56:08] Ending

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