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“Our members have asked us for pension certainty and our member-driven investment strategy is all focused around our funded status. By maintaining a fully funded plan, and by building upon the success that we have had in growing our surplus over time, we are in a much better position to ensure pension certainty. Our investment strategy … is really focused on managing risk and ensuring the pension certainty and surplus we have worked so hard to build (will) be there now and in the future.” – James Davis

 


 

Bob Dylan once sang about the need to get close to the teacher “if you want to learn anything,” presumably advising his listeners that proximity to the subject is key for lessons learned.
So when James Davis, OPTrust’s Chief Investment Officer, talks about getting close to the coalface of the market, he’s referring to the advantages of being able to react quickly to changing conditions, opportunities and challenges.
“If you think about success in investing, there are a whole bunch of things that will dictate that. One is by having a long-term planning horizon, which we do as a pension plan. But an important one as well is having access to information. You need to have access to knowledge and to know what is happening in the markets, in the macro economy (and) in the political environment,” he told ARIA during a recent conversation.|
The drive to bolster that market interface resulted in OPTrust bringing its capital markets activities in-house, with one of the benefits being the ability to better manage risks, says Davis.
“It gives us access to information we wouldn’t otherwise have, and allows us to be much more agile in terms of how we are managing risk. This is really important to us because managing our risk properly, pricing it properly and taking it as efficiently as possible, will allow us to better deliver on our pension promise.”
To do that, three different functional areas were created within the capital markets team: fixed income, funding and liquidity; an area Davis calls changes “in fundamental macro strategies,” and the third being a quantitative group called derivative strategies.
“By directly interfacing with the market, at the coalface … the capital markets team is going to be able to interface or interact with those people who have the knowledge and understand what the flows are in the market. That will allow us to be closer to (the) information and knowledge we need.”
What they aren’t bringing in-house are public equities activities.
“So while we may do some public equity transactions via derivatives, for the most part our public market equity exposure is going to be managed externally,” says Davis.
“That’s important to us because we want to have strategic relationships with some key partners. We have always had successful relationships, both in our public markets and private market activities. We want to continue to benefit from that.”
Not only will the capital markets team be close to the coalface, they will be near Davis himself – right outside his office 10 investment professionals will be deployed by the end of the year.
“Our ability to manage risk is going to increase significantly, and they are all going to be working together out there on the trading floor. You can see the collaboration that is happening already … and the type of information we are getting that will help us in terms of our investments.”
Davis calls the decision to move capital markets operations in-house an evolution for OPTrust, in line with what other Canadian plans have done and are doing to produce the lauded Canadian model of pension provision, practitioners of which have been called Maple Revolutionaries.
“One of the pillars of the Canadian model is managing assets in-house. OPTrust began that very early on … we have been managing private equity, infrastructure and real estate in-house for more than a decade and have been doing so successfully.”
Other components of the Canadian model that make it a successful keeper of the pension promise include the view that a pension plan should be run like a business, with a focus on governance, risks, costs and revenues and developing talent and strategies to be successful in the delivery of stable and adequate retirement income.
“The Canadian model is about encompassing all of those things,” says Davis.
The goal of the evolution, he continues, is not specifically investment market returns, but rather to better manage risks and ensure the plan delivers on its pension promise by aligning investment decisions with its member-driven strategy, which OPTrust President and CEO Hugh O’Reilly describes as creating long-term sustainability for plan members.
The measure of success, continues Davis, is maintaining the plan’s fully funded status, connected to the pension promise and stable employee/employer contribution rates.
“Our members have asked us for pension certainty and our member-driven investment strategy is all focused around our funded status. By maintaining a fully funded plan, and by building upon the success that we have had in growing our surplus over time, we are in a much better position to ensure pension certainty.
“Our investment strategy … is really focused on managing risk and ensuring the pension certainty and surplus we have worked so hard to build (will) be there now and in the future.”
Managing risk is fundamental for a mature and maturing plan like OPTrust, he says, as the plan is unable to bear losses to the same extent as a younger plan. Risk is managed “purposefully and efficiently” and moving the capital markets operations in-house “allows us to customize our portfolios more, gives us that access to the information we need to make better investment decisions” and to better understand the pricing of that risk.
Essentially, the ratio of active workers to retirees determines whether a plan is mature one. The closer the numbers, the tougher to take losses. That means a long-term focus, carefully balancing risk and return.
“It is easier to make investments for the longer term and ride out periods (of) potential dislocations, but even better to be able to step in and take advantage of those dislocations. By internalizing our capital markets activities … we can be agile and nimble and can step in when we see dislocations in the market.”
At the end of the day, the focus remains on the funded status, and the promise of pension certainty, says Davis.
“We have worked hard to build our funded status to put us into a surplus position. We want to maintain and build on that into the future and the best way to do that is through sound risk management with a very sharp focus on our funded status.
“While returns are very important to us as an investor, at the end of the day the most important metric for us is our funded status. Annual returns make the headlines but the funded status is the substance.”

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