OPTrust Joins Canada Pension Peers Bringing Trading In-House

2017-01-09 17:28:51

OPTrust Joins Canada Pension Peers Bringing Trading In-House
by Maciej Onoszko
(Bloomberg) — Canadian pension plan OPTrust is catching up with its bigger domestic peers by setting up a trading floor and adding as many as 10 portfolio managers to oversee about half of its C$18.4 billion ($13.9 billion) of assets in-house.The move to internalize oversight of foreign-exchange, fixed-income and derivatives strategies is meant to improve the pension plan’s risk management by getting “closer to the coal face,” said James Davis, OPTrust’s chief investment officer, who’s handling the transition. The fund, ranked 18th by assets in Canada according to a research of pension funds by London-based Willis Towers Watson Plc, currently has external firms managing its market assets.

“We’re a maturing pension plan and in that environment, our tolerance for risk isn’t as great as a pension plan that is younger,” Davis told Bloomberg News in an interview from his office in Toronto. “Having direct access to the market allows us to manage risk in a far more agile way.”

Canada’s pension funds have led the world with their active approach to investing, buying real assets, as well as using sophisticated financial instruments and leverage. OPTrust’s effort to take more matters into its own hands, with the first trade expected in the second quarter of this year, is an “evolutionary” move for the fund, according to Davis.

Management Skill

It may also be something of a necessity. The fund, which manages pension assets for almost 87,000 former and current public-service employees in Ontario, is aging. Between 2005 and 2015, its retirees rose 57 percent to almost 34,000 while its active members fell 1.6 percent to nearly 44,000. That ratio of 1.3 contributors for every retiree compares with about 1.4 for the Ontario Teachers’ Pension Plan and 2.7 for Canada Pension Plan Investment Board, the country’s largest pension plan.

OPTrust returned 8 percent in 2015, Teachers’ returned 13 percent and Canada Pension 16 percent.

“We will be looking not just to manage risk but to be able to earn some returns through the skill of our portfolio managers,” Davis said.

The fund is at the low end in terms of assets to move management in-house but it makes sense to internalize some of their activities, said Donald Raymond, chief investment officer and managing partner at Alignvest Management Corp., who built the public markets investments department at Canadian Pension more than a decade ago. “They’re looking at what other larger pension funds have done and they’re following in those proven footsteps.”

Complex Process

Canadian pension funds oversee around C$1.5 trillion of assets, which accounts for about 15 percent of all assets in the country’s financial system, according a June study by the Bank of Canada. Around 75 percent of their assets are managed internally, a report by the Boston Consulting Group shows.

Setting up a trading platform from scratch is not an easy thing to do, Davis said. The process at OPTrust began in June.

“It’s a quite complex process with a lot of interdependencies,” Davis said. “We don’t want to do anything in a rush, but rather take our time and make sure that everything is working perfectly before we go forward.”

OPTrust has already hired seven of the 10 portfolio managers. They will be involved in both formulating trade ideas as well as executing the trades. Several more people will be employed to handle compliance and other roles such as the settlement of trades and custody, Davis said.

The capital markets group at OPTrust is led by Paul Lishman, formerly the head of North America at Maple Financial Group, who reports to Davis. Within the group, Rainer Kaufmann heads the team responsible for fixed income, funding and liquidity, David Ross oversees foreign exchange and macro fundamental strategies, while Chris Orsi directs the fund’s derivative strategies.

OPTrust’s public markets portfolios are managed by a number of advisers, including Royal Bank of Canada’s PH&N Investment Services and Beutel, Goodman & Co,  Hugh O’Reilly, OPTrust’s chief executive, said in March. Equities will remain managed externally, Davis said.

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