An increased focus on liquidity management through factors, a leaning towards public markets and robust risk management are all key to implementing HOOPP’s “maniacal focus on liquidity” that helps CIO Michael Wissell sleep at night. Amanda White spoke to the Toronto-based investment chief ahead of the Fiduciary Investors Symposium.

In comparison to its Canadian peers with huge weightings to private markets, the C$112 billion HOOPP leans slightly towards public markets, a preference consistent with its liability-driven approach and focus on member outcomes.

For instance, it has a 26 per cent allocation to public equities and 12 per cent to private equity and Wissell believes public companies are still bringing ingenuity that is worth investing in. (CPP Investments has 24 per cent public equities and 33 per cent private equities by way of comparison.)

“The innovation some of those public companies are bringing is great. It’s not either or, but public and private together that is compelling, they have different characteristics,” Wissell says. “Our relationship between private and public assets is a little bit more public oriented, which is predicated on our maniacal focus on liquidity.”

Historically HOOPP has been good at making returns in troubled markets, and Wissell is quick to point out that can only happen when there is cash available.

“We have ratios we look at and the quantum of cash available if we need it. How much is tied up and how much can you get at,” he says.

Liquidity management has developed using a series of factors to measure and manage the portfolio.

“I sleep well at night knowing tomorrow I can come up with an enormous amount of capital if I need to. We don’t think we need to, but we manage for events that can happen over time or in the near term,” he says. “We use a series of liquidity metrics, and then when something does go bump in the night you are a buyer. My crystal ball is not as clear as I’d prefer it to be, but you can build a diversified portfolio, hedge the risks you can and leave yourself liquid, because something will go bump.”

As an example, he says COVID presented enormous opportunities, and HOOPP was a buyer throughout all of 2020.

It’s Wissell’s opinion that “we do live in perilous times” but the fund is not leaning into any one thematic, rather it’s exploring themes, including AI and the impact on investments.

“AI for a large pool of capital is a tool for us to manage our corporate processes, management process, an area of investment and something our portfolio companies need to be aware of,” Wissell says. “There are a lot of touch points on that and makes it more complicated, it’s something we are spending a lot of time on.”

The investment process focuses in on understanding broad economic factors and examining its portfolio through certain factor exposures and the comfort around those, for example growth and inflation risk.

Once the risk parameters are set, for example around growth risk, the decision is made whether to get that exposure through in this case private credit or another investment that may have a better tradeoff.

“We try to build the best portfolio you can with the broad factors you are comfortable with,” Wissell says. “For example, how many nominal bonds can you own without inflation risk getting too high. This is where global diversification comes into play, and we tend to learn into the developed world economies. We have some emerging markets but that is an example of where we think we can make good returns but it’s a little bit trickier to know if you’re really getting paid for all the risks there.”

Fixed income allocation

Wissell says the team is continuing to manage the broader bond portfolio, which can be “tricky” in this inflationary environment.

“We need to be mindful of that and it’s why we have been actively adding to the real return bonds and can see that is going to pay dividends this year. It’s something I feel very strongly about,” he says. “When you can pick up 2-3 per cent real, for a plan like ours, on that portion of our investment assets it takes us a long way, because it is guaranteed return and liquid. With our remining liquidity it takes down the return pressure.”

Throughout the year HOOPP has been adding to its real return portfolio with the aim of getting the mix to 50:50 between nominal bonds and real return bonds.

“It’s a unique period of time where can manage inflation risk and lock in comparatively compelling rates for a really long time,” Wissell says.

HOOPP has invested in private credit for some years but only formalised it in the policy portfolio in 2023. It performed well for the fund last year with 9.33 per cent and Wissell says he continues to think the outlook for private credit is “constructive”.

“I’m in the camp that at this base interest rate and some of the spread tightening a bit, we will still get returns that meet our pension promise at reasonable risk,” he says. “Some of the structural changes mean it will remain compelling over the medium term. A 5 per cent allocation to that asst class, that’s a measured amount earning good returns.”

Decision making process

Wissell describes the portfolio construction as a “constant refreshing”.

“I like to think about it as if I was building the portfolio from scratch today how would we build it? And if that’s not the portfolio we have then make changes and bring people in. That’s’ how we stay fresh.”

HOOPP’s decision making process is best described as collaborative. Chief executive, Jeff Wendling, is the ex-investment chief of the fund and someone whose counsel Wissell finds important.

“On big decision he’s very much involved, he’s a phenomenal investor,” he says. “Some of the tweaks we are managing right now is with me, our asset class head experts, portfolio construction team, then on top of that there’s a risk team.

“It might seem like a lot of voices, but you want to avoid the unintended consequences. We take risk and are comfortable with markets going up and down, but don’t want to make an investment we didn’t really fully consider. This leaves you with a high degree of confidence and why HOOPP has done so well for so long.”

HOOPP has a 115 per cent funded status and a 10-year annualised return of 8.43 per cent.

Michael Wissell is one of the speakers at the Fiduciary Investors Symposium at the University of Toronto from May 29-31.

While many institutional investors find themselves overweight private markets, struggling to price and exit illiquid investments in the current market, C$11 billion University Pension Plan Ontario is aggressively building out its 20 per cent allocation to private assets.

UPP was only established in 2021 following the culmination of a decade-long process by three founding universities to amalgamate their existing pension schemes into one umbrella organization.

But the private markets team led by Peter Martin Larsen has already committed or invested CAD$900 million, most of which has gone into inflation-proof infrastructure assets.  Now their focus is turning to return-enhancing private debt and private equity with new partners in close relationships that will open the door to co-investment and direct participation down the line.

“The return enhancing element of the portfolio is gathering steam. We have been very busy adding to it and are looking to do a lot more. Our private markets target allocation is significantly higher than the current 20 per cent,” says Larsen in an interview with Top1000Funds.com.

Moreover, the current market is allowing UPP to get a foot in the door with sought-after and specialist mid-market managers by offering meaningful ticket sizes. Many asset owners lack dry power in the current environment but newcomer UPP still in the foothills of building its allocation can fill a gap as an attractive partner while other Limited Partners remain strapped for cash.

“We are in the fortunate position of expanding our exposure and are focused on making new investments, not trying to realise existing ones. It’s been great timing for us to create partnerships in this market,” he says.

Bold ticket sizes and portfolio exposure within the mid-market space also mean UPP can ensure a seat on Limited Partner Advisory Committee boards, where LP investors in a fund can take an oversight role and offers another way to cosy up to GPs.

“In addition to creating close partnerships around co-investments and achieving the long-term benefits of that approach for our members, we are also focused on governance in our fund investments. We typically target the mid-market, where we can be meaningful, and every fund investment we have done so far has included an LPAC seat. In fund investments this is one way to increase ongoing due diligence and governance and be close to our partners.”

Partnerships pay off

As he expands the portfolio, Larsen has turned his focus beyond fund investment to co-investment opportunities. He says UPP is targeting a selective, smaller group of GPs to develop strategic co-investment partnerships that will enhance returns, lower fees, and offer greater control and governance oversight, allowing UPP to align investments with its own risk tolerance and sustainability goals.

Co-investments will also allow UPP to develop shared best practice and a consistent approach to risk-return assessments including accessing opportunities at the intersection of asset classes, he continues.

“Co-investments are a critical part of our strategy. They really are the core of what we are trying to do.”

He adds: “Our focus is on finding partners for value creation and outperformance through our people who are market leaders in their fields. We are also very focused on being an attractive partner ourselves. The key words for us are in-house expertise and a cohesive approach across our four private asset classes, which enable deeper partnerships.”

The skills of UPPs diverse 12-person internal team span asset class expertise and an ability to draw on their own networks to source opportunities in funds, co-investment and direct private market investment.

“We have an amazing and experienced team who have been around the block and invested through cycles,” he says. “We have people who have invested in funds, co-investments and direct with global relationships who can originate opportunities.”

Larsen says his own move from institutional investment in Denmark to join UPP in Canada has been made easy by similarities between the two regions that include a deep institutional investment ecosystem and talent pool. “The investment approach in pension funds in Canada and Denmark are similar, inspiration in Denmark come from Canada.”

He says the skills of the team is already born fruit. Like UPP’s recent €150 million investment in offshore wind veterans Copenhagen Infrastructure Partners’ latest fund, and stake in Angel Trains, the UK rolling stock company.  “We have a team with global relationships that can originate these opportunities.”

With its focus on people and partnerships, UPP’s strategy is typical of the Canadian Maple Eight. He began by building in-house expertise focused on accessing opportunities, executing; building partnerships and monitoring the portfolio. Now he’s developing partnerships that will transition into co-investment and direct participation. He also wants to integrate sustainability and diversification, tapping long-term, secular trends that are robust in any interest rate or inflation environment.

“Coming out of COVID, diversification was one of the biggest learnings”

Sustainability is incorporated into the screening and underwriting process, overseen by the internal team.

“Besides being a key way in which we seek to invest responsibly on behalf of our members, integrating material ESG factors across all investment processes is the right commercial thing to do to avoid undue risks such as stranded assets. There must be a buyer in 15–20-years time when we may look to sell the asset.

We want to partner with GPs with a track record in responsible investing (RI) and we actively engage with GPs to influence their investment decision and management practices. ESG is integrated into our portfolio construction.”

As Larsen builds out the allocation, today’s overweight LPs is a reminder of the risk and long-term nature of private investments. He says UPP has a five-year strategy to reach its (undisclosed) target allocation and won’t rush – despite the opportunity – to ensure vintage diversification.

“We will invest for the long term and target value creation over 10-15 years. All the data shows consistent out performance from private markets over a 10-15 year period v public markets. But you need to be patient and accept and embrace the illiquidity. You don’t want to be a forced seller of private assets.”

Peter Martin Larsen will speak at the Fiduciary Investors Symposium in Toronto from May 29-31. Click here for more information.

 

Adam Matthews, chief responsible investment officer at the £3.5 billion Church of England Pensions Board, a UK asset owner and a long-term shareholder in mining giant Anglo American, is concerned about the impact of a potential sale of the 107-year old company to Australian mining industry leader BHP.

Anglo has rejecting BHP’s approaches twice, and in the latest twist, unveiled a sweeping break-up plan. In a bid to defend itself it has laid out plans to focus on energy transition metals like copper and spin out or sell its less profitable coal, nickel, diamond and platinum businesses.

But as the corporate drama continues to play out and if the two firms do merge, Matthews flags worrying long-term consequences to asset owners interests.

“Anglo is a globally significant diversified mining company that operates in key parts of the world, particularly in some important emerging and developing markets, and seeks to do so to the highest standards. Losing Anglo as a distinct entity may serve short-term financial interests, but as an asset owner we are not convinced that such consolidation will serve our long-term interests as a pension fund,” he writes.

Matthews is an expert on the complexities of investing in the hard to abate sector which is also essential to the energy transition. He has previously voiced his concern that risk-averse investors may avoid the sector because they are worried about tripping net zero and ESG pledges.

Yet estimates suggest that over the next decade overhauling electricity transmission will require the equivalent of all the world’s copper used to date. It means capital and finance needs to continue to flow into the mining sector for a successful energy transition.

One area Anglo has played a distinctive role in driving best practice is in tailings dams, the vast toxic lakes used to store the by-products of mining operations and which illustrate one of the sustainability challenges in the industry.

“The company was one of the first to support institutional investor calls for a different approach following the Brumadinho tailings disaster. It recognised that the social license of the sector was under threat and that the key to addressing challenging issues and building trust required multi-stakeholder approaches. It is also Anglo that has championed the development of a multi-stakeholder approach to standards through initiatives such as IRMA Initiative for Responsible Mining Assurance .”

Matthews also draws attention to the enhanced role mining could play in key economies especially in Africa.

“We need more companies like Anglo that are willing to grasp the opportunities of operating in emerging and developing markets such as Africa, not fewer,” he writes. “The sector benefits from there being a race to the top among the major mining companies, and consolidation at this level removes a key actor in pursuit of a socially and environmentally responsible mining sector.”

Anglo employs around 60,000 staff globally of which slightly more than half are based in South Africa, according to its most recent annual report.

“As a UK pension fund we are keen that the LSEG (London Stock Exchange Group) remains a premium market for mining companies.  Rather than the prospect of losing Anglo, it would perhaps be more appropriate to consider what enhanced role Anglo and other companies could play in benefitting local and national populations, generating broader long term value and supporting economic development in mineral rich countries.”

Matthews has previously argued that corporates operating in emerging markets can be unfairly treated by investors targeting net zero. Carbon targets that focus on numbers rather than nuance impact these companies because they typically have a higher carbon footprint in a portfolio, and reducing exposure is an easy win on the net zero road.

“Measuring local companies in emerging markets against globalised benchmarks doesn’t allow for these companies’ differentiation in-line with the Paris agreement,” he told Top1000Funds.com, arguing current frameworks, including the Net Zero Asset Owner Framework, need enhancements to ensure they offer differentiated and fair pathways consistent with the science for these companies.

The Church of England Pensions Board recently decided to divest from oil and gas companies following sustained engagement.

In 2021, the Church Commissioners excluded 20 oil and gas majors from its investment portfolio. Then it decided to exclude BP, Ecopetrol, Eni, Equinor, ExxonMobil, Occidental Petroleum, Pemex, Repsol, Sasol, Shell, and Total, after concluding that none are aligned with the goals of the Paris Climate Agreement, as assessed by the Transition Pathway Initiative (TPI).

“It was our fiduciary duty to take the decision we did,” says Matthews.

The UN-backed Principles for Responsible Investment (PRI) is in the process of an identity refresh as it looks to shift its primary function away from driving ESG accountability among investors (which it has been doing for the past two decades) to facilitating collaboration.  

In an interview with Top1000funds.com, the organisation’s chief sustainable systems officer Nathan Fabian says the pivot is necessary “in a world where regulators of financial services are stepping in and where they have the actual substantial mandate on supervision”.  

The PRI’s signatories have all committed to a set of responsible investing standards, including practicing active ownership and encouraging appropriate ESG disclosures internally and in companies they invest in.  

Now a network of some 5,500 asset owners, investment managers and service providers, the PRI’s expansion is a good indicator that responsible investment is becoming increasingly mainstream. But Fabian says this development has also caused a lot of divergence in ESG approaches from investors. 

“If you put all of those things together, it’s easy to understand why there’s accusations of greenwashing and even pushback on ESG in some quarters,” he says. 

“Even though that anti-ESG is a politically motivated campaign, there are reasonable questions around who is doing what and why on responsible investment. 

“There’s an acceleration of practice and diversity, and our role is better served in helping signatories’ progress. 

“So we’re trying to move away from accountability being the primary basis of our relationship to our assistance to signatories’ progression being the primary basis of what’s valuable about the PRI, which means providing collaborative spaces.” 

Fabian says working closer on the ground with prospective emerging markets signatories will be a focus in the year ahead. The PRI just made new hires in the Middle East and Africa, and while it has an established team in South Africa, the organisation is looking to ramp up its presence ahead of the Brazil COP 30 in 2025.  

Working with developing world signatories requires a different approach, Fabian says. 

“[In these markets] You’ll have some managers with foreign capital, and you’ll have some who are maybe managing a little bit of sovereign savings. When that’s the dynamic, there’s a smaller base of local investors to work on that financial system on incorporating ESG,” he says. 

“So what we’re finding is that we need to work with a broader range of collaborators, and much more time spent with regulators, stock exchanges, and international development finance institutions.” 

For example, stock exchanges can bring together listed companies, financial advisors and regulators on ways to improve market infrastructure, Fabian says. He concedes that these are not usually the priority partners for the PRI, but they are essential if the organisation “wants to do something meaningful around the role of [responsible] finance in emerging markets”. 

“In the past, we would have just recruited the big signatories to be part of the PRI, provided some guidance, and allowed them to start developing their practice,” he says. 

“But we just realised we need to be far more present, far more hands on, bring in far more expertise and share much more dialogue.” 

With that said, the work is far from done in developed markets. The US Securities and Exchange Commission (SEC) last month stayed the implementation of its climate-related disclosures by public companies in the face of multiple legal challenges from attorney generals of several Republican-led states.  

“The US is a difficult place at the moment,” Fabian says.  

“I don’t believe there’s any doubt in the minds of investors in the US about the importance of climate disclosure for their investment activities… and I think the SEC, by attempting to bring forward a climate disclosure rule, also believe that’s relevant to investors into companies. 

“The fact that the speed of transitioning on fossil fuels is the source of a political argument is not surprising. We’ve seen that in lots of countries of the world over the past few years, and the Americans have not fully emerged from that argument. 

“But that’s a transition issue. Investors will still expect companies to disclose, whether the SEC makes the rule or not, and I think they’ll default to the ISSB standards.” 

After five years as deputy CIO, Scott Chan has been appointed to the top investment job at CalSTRS. Top1000funds.com takes a look at his leadership style and his influence so far on the team and the fund’s investments.

Scott Chan has been named chief investment officer of the $332 billion CalSTRS, replacing long-time investment leader, Chris Ailman, who will retire after 23 years at the helm.

In the past few years Chan, who has been deputy CIO since 2018, has been instrumental in restructuring the investment team with a particular eye on positioning for future growth; as well as directing the fund’s ‘collaborative model’ which has saved more than $1.6 billion in costs since 2017.

Like Ailman, Chan is deeply committed to the mission at CalSTRS of providing a secure retirement to California’s educators (on average, members who retired in 2022–23 had 25 years of service and a monthly benefit of $5,141). Chan also has a personal connection to the fund as the husband of a California educator, and his wife is a member.

In his new role, Chan will be responsible for developing and implementing CalSTRS’ investment policies, strategies and initiatives; managing a significant and complex budget; fostering a collaborative culture of excellence and diversity, equity, and inclusion; and overseeing all CalSTRS investment portfolios.

“I am honored to oversee CalSTRS investments and lead our amazing team,” Chan said in a statement. “I am committed to driving excellence in how we invest, including advancing sustainability practices and promoting diversity across CalSTRS, our portfolio companies, partners and the industry. I’m humbled to follow Chris Ailman, a great friend and mentor, in maintaining our collegial and inclusive workplace culture and continuing to work with our CEO, Cassandra Lichnock, and our board’s Investment Committee to achieve our goals.”

Chan has always been supportive of his team and quick to give praise to others.

“We had built solid strengths across asset classes, and we have deep expertise. I think we have the number one team in the country – I’m bullish on our team,” Chan said in an interview last year. “We want to make sure we build upon that. And what stands out is we have such a strong culture, focused on the mission and a great set of values in how we operate.”

An investment team restructure last year was deliberate in its focus on how to position the fund for future growth with assets doubling every eight to 10 years. It also intentionally took a close look at the ongoing complexity of the portfolio and the skills required to manage it effectively in the future.

One of CalSTRS’ identifying factors is its ‘collaborative model’ which includes more internally managed assets, with 62 per cent of the portfolio now managed internally. But as the fund moves more into private assets, the collaborative model has focused not just on internal management but how CalSTRS can partner with external providers in innovative ways to achieve similar benefits.

SMAs and co-investment have been a feature of the model so far and Chan has said as the fund moves into the next phase of the collaborative model it will move more into joint ventures and revenue share and ownership.

A direct result of the collaborative model is that CalSTRS internally is taking on more execution risk, which has a direct implications for the size and quality of the team.

In its most recent five-year plan, the fund outlined 91 new hires and has developed a plan to hire more staff to manage and mitigate the execution risk and to train and equip the current staff. The CalSTRS investment team currently numbers 225 and Chan has said a focus will be on hiring people with a background suited to those types of investments, such as a recent portfolio manager hired from KKR.

In an interview last year about the collaborative model he said: “All the credit goes to the team; they have executed this excellently. We have a great team and culture, they feel empowered and have delegation up and down the chain. We have a streamlined decision-making process and they can be nimble in the marketplace.”

Like many large institutional investors, CalSTRS is paying more attention to overseeing management of the total fund including short and medium tilts and whole of portfolio challenges like taking advantage of the energy transition and diversity of managers and internal teams.

ACCESS, the United Kingdom’s £35 billion Local Government Pension Scheme (LGPS) pool, is seeking two private equity managers in its latest push into private markets following mandates to infrastructure and real estate managers in the last year.

ACCESS, which outsources all investment management and has mandated to a pool operator to run its outsourced processes, is planning a multi-vintage private equity programme.

The 11 pension funds in the pool, all located in the east of England, will be able to commit to different vintages on an ongoing basis over the terms of the mandate. Each vintage will be globally diversified with investments across primary and secondary funds and co-investments.

Annual commitments to both external managers will average around £500 million in the first five years but the total allocation over time will reach £4-6 billion.

“Considering the potential ultimate scale of the mandate, it is anticipated that total assets across all vintages across both allocators could exceed £4-6 billion, based on potential asset growth and/or increases to individual authorities target allocations,” states the pool.

ACCESS pool, one of eight LGPS  pools, is under the radar compared to better-known sister pools like Border to Coast, Brunel Pension Partnership or LGPS Central.

Yet with a potential £56 billion in assets under management if all assets in the 11 pension funds are pooled and representing 3,400 local authority employers, it is one of the largest LGPS partnerships. Pooled assets represent 85 per cent of all listed assets held by the individual pension funds and 59 per cent of total assets have been amalgamated so far.

In comparison, Brunel Pension Partnership now runs around 80 per cent of total member assets.

A government consultation published last year found only £145 billion, or 39 per cent, of total LGPS assets had been transferred from single funds to the pools. If the LGPS was a single fund it would have around £365 billion assets under management.

One of the reasons behind slow progress by some pools is that the government never laid down clear rules around how the pools should be structured. And although assets have been pooled, other functions including administration or governance remain in the hands of the individual pension funds.

For example, at ACCESS strategic oversight and scrutiny responsibilities remain with the individual pension funds as does all decision-making not only on their individual asset allocation, but on the timing of transfers of assets into the pool.

ACCESS’s own, modest, internal team comprise a handful of full-time staff sitting in its support unit providing program and contract management support. Neither its joint committee (the formal decision making body) nor the support unit have FCA authority.

The three pension funds making up Northern LGPS have also been slow to pool – like £18 billion West Yorkshire Pension Fund. Apart from two pool mandates in excess of £10 billion each, West Yorkshire continues to invest the bulk of its assets via its own 20-person in-house team based from its Bradford office.

ACCESS uses Apex Investment Advisory to advise on implementation for the pooling of illiquid assets including private equity, private debt, infrastructure, and real estate. As implementation advisor, Apex provides support in selecting individual investment opportunities and investment managers to build portfolios in a range of illiquid assets.

Infrastructure

Earlier this year ACCESS allocated £1.5 billion to two infrastructure fund vehicles managed by IFM Investors and J.P. Morgan in its second push into private markets in allocations focused on core plus and value add investments spanning transportation, social infrastructure, energy and telecommunications utilities, GDP sensitive assets and contracted power and energy assets.

In November last year ACCESS selected real estate manager CBRE Investment Management to manage both a UK core real estate and a global real estate mandate for its first illiquid asset class.