Marlene Puffer – Canadian Pension Model at AIMCo (EP.337)

27:28And so once you've got an understanding of the asset liability problem and that strategic asset mix, then it's about efficient execution and putting together a diversified portfolio to meet that long term objective with the kind of profile you want. So that total portfolio view, the total portfolio construction, and the thoughtfulness around how to put all the pieces together with consideration of do you need leverage? Where should you have leverage if you're using leverage and private assets in combination? How do those areas impact liquidity? And in particular, how do you plan for contingency around liquidity should there be market disruption?

28:12So how have you gone about doing that? It began with the consideration of these principles at NAV Canada and at CN and at Hoop, each with a different set of constraints and objectives and translating those to operating at a larger scale here. I would say the differences at scale are it takes longer to execute when you want to make a strategic change or a tactical shift. You have to plan further in advance. You have many more partners to work with. So working strategically with those partners in order to take advantage of scale and take advantage of scale in the markets and take advantage of scale through negotiations with partners, while bearing in mind that sometimes scale can work against you.

29:02So there's a lot of thinking about the aspect of scale that impacts execution. It's a much bigger team. So I went from having 45 or so investment professionals at CN to now I have about 175. And we're located across the globe. We have offices in Edmonton, Calgary, Toronto, and London. And we're opening offices in New York and Singapore. So execution with a team that's globally dispersed has its benefits. We have boots on the ground now in locations that I didn't have the privilege of at CN. And we have more ability to choose where we use funds, co -investments, and direct investment strategies.

29:51How do you think your historical fixed income lens impacts how you think about a large pension fund investing? Coming up through the fixed income side is interesting because it combines the macro view, where it's all the macro forces that influence interest rates, with the credit view, where it's very micro forces that influence credit quality. It's where macro and micro really meet. The credit side makes us as fixed income investors worry about downside risk and really worry about the tail events. So for me, that has, I think, given me a healthy skepticism of how to navigate difficult environments and to always be prepared for the worst.

30:45And it makes fixed income investors naturally risk aware because the asset class is often used as a risk mitigator. And yet there is in the credit space correlation with equities and other return seeking assets. So we kind of have to know all those dynamics as fixed income investors. How have you gone about organizing that investment team? We're in the midst of a strategic shift to open these two global offices in Singapore and New York. We've learned from having the multiple offices already in Canada and then in London. There's challenges and benefits. The benefits include, we're able to now search more globally for talent.

31:32And we have a terrific team that's based here in Edmonton. And on the investment side, we home grow a lot of our talent here in Alberta from the Alberta education system, which is super strong. But sometimes with specialized functions, having the ability to do a search more globally is important. And then having some of that local knowledge really matters. So, for example, in Singapore, we've got a new head of Singapore starting in a couple of weeks who's coming to us from GIC. And leveraging that experience that he's bringing to the table will be highly valuable as we build our relationships and boots on the ground throughout Asia.

32:05The boots on the ground aspect, the ability to execute and the talent attraction are really clear benefits. The challenges do include we spend a lot of time on remote meetings. We have a work -our -way approach to our employees throughout all of the offices, which means we are really keen on setting clear expectations and accountability. We're less concerned about whether people are working in the office or remotely, and people are quite flexible in where they work physically. The benefits of that are the ability to attract and retain talent because of that flexibility. But it does mean that we have to be quite thoughtful about bringing people together sufficiently often with the right agendas to ensure we have consistency of culture and that we have sufficient sense of teamwork and common understanding.

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33:50Learn more at srsaquium .com. That's S -R -S -A -C -Q -U -I -O -M .com. And now, back to the show. How have you decided to implement across internal and external management? At Imco, our implementation of internal versus external is different depending on the asset classes. And it's different because to some degree of the history of the development of those asset classes. We have a combination of internal and external and co -investments and direct investments really across every asset class. Of the private asset classes, infrastructure is the most global and has a very high proportion of direct investments.

34:36As a result, we have a very sophisticated team and it's an evolution. You go from fund investments to co -investments to direct investing in general. And that asset class has evolved quite rapidly over the last 15 years to really having a lot of chunky direct investments across the globe. In real estate, we have a lot of direct investments there as well that were largely focused in Canada and then over the years diversified into more of the developed markets, primarily the US and Europe. And that's a combination of direct and some funds. So that's a complex portfolio with a lot of smaller investments in it.

35:15And in private equity, we're mostly funds and some co -investment. That's an evolving area for us. In private debt and loan, we have a strategy to grow, and that's really the impetus behind our New York office, is expanding our investments in private debt and loan and increasing the proportion of direct investment there. Obviously, with direct investing, you're not paying out the fees. You're starting ahead of the starting block. In the public markets, primarily internally managed, but in our equity book, for example, we've recently taken an approach of being clearer about the strategies that we have in place for our clients that are separating out alpha and beta more clearly.

35:59So we have introduced some more passive pools that provide some of the inexpensive beta exposure, and we're working with some external partners on those. More clarity around the alpha generation internally that's coming from a well -constructed absolute return portfolio primarily that is designed to have very low correlation with the rest of the asset classes. So there's a shift in the strategy in that area. When you have such a significant internal management effort, you always scratch your head about compensation issues. In the Maple 8 and the large Canadian plans have done a wonderful job of being able to attract and retain talent.

36:38Why is it that that seems to work in Canada when it doesn't in a lot of places elsewhere around the world? Getting the compensation model right and that alignment of interest right is something that the Maple Eight figured out early on. Ontario Teachers, Canada Pension Plan, and then the others really thought hard about that and realized that the pool of talent we wanted to attract was from asset managers. And so in order to attract and retain that, the idea was we needed to pay at least in the same zone. I would say the pension space doesn't quite pay at the same level as some of those areas, but it's not too far off.

37:22We also attract and retain those like me who care about why they come to work every day. So we are able to take advantage of that work motivation and satisfaction piece of really being aligned with pensioners. So that's a bit of an ability to shave a little bit off relative to some other areas in the capital markets. But it's worked in Canada really well because the pools of capital are large and we're able to make the investment in the governance models to have the sophistication of board members that's required in order to understand this alignment. We've also got the strength of governance whereby we're separate from government.

38:09It's not political here in Canada. The expertise on the boards is part of what gives comfort into the process. But it's the precedent that really was set early on and the fact that it has led to strong performance and that alignment of interest is clear. What are some of your favorite ways of achieving that alignment of interest across the team? Aligning interest has multiple layers. First and foremost, and it's one of the reasons I'm in the pension space, is the culture of thinking about who your clients are. So for us as a pension management firm, where we have clients that are government of Alberta clients, Our alignment of interest comes from really working directly on behalf of Albertans.

38:58And we build a culture around that here at AIMCO where we talk about our clients all the time. Our values are very closely aligned with our clients and with meeting their overall objectives. So having the clarity of who you're working for and why is such a base that has to be built on in order to have alignment of interest. And when you have third -party managers, that alignment is cracked a little bit. I learned a whole lot about agency theory at the University of Rochester. It was a fundamental piece of the Chicago School of Thought. And agency theory basically means when you're not a direct actor on behalf of your beneficiaries, you need something else to create that alignment of interest.

39:47And performance fees are an important one. we don't mind paying performance fees. We like them better than fixed fees. So that alignment of interest is a powerful tool for us with our external managers. But then we have to dig a layer deeper. And what is the alignment of interest of those external managers and their own team and their own staff? What is their compensation model? What is their turnover rate? Do they have strong diversity, equity and inclusion, policies and practices to ensure that they continue to have a robust team that people want to work at. Getting underneath the hood of what their culture and their philosophy is to align with the compensation side, those two things have to work in tandem.

40:33When you're looking at external, let's say, private equity managers, what are the types of managers you like to partner with? In the private equity space, we have a variety of managers, some relative household names that you'd all recognize. They're quite diversified. It's about portfolio construction and having quite a global footprint. We don't have much activity in venture capital. That area has just not been a focus for ANCO in a big way. And our scale is not sufficiently large that we really need to reach into that space at this time. What characteristics are your preferred habitat for external managers?

41:11With external managers, we look for those relationships in areas where it's difficult for us to have an edge as direct investors or in areas that are more innovative, areas that are in emerging markets. It's a little more challenging to really cover those areas with a still relatively small team. In some instances, the idea is to learn from those managers and make that progression that we were talking about earlier from partnerships to more co -investments because the economics are better on the co -investment trajectory. And then where relevant to consider building internal teams for that direct investing.

41:58And you need sufficient scale, you need sufficient longevity of the investment strategy and long -term horizon for it to make sense to build an internal team. Along that path of looking at a manager that you can then co -invest and then potentially do it yourselves down the road, how do you navigate the relationship with a manager who understands that down the road, you may be a great client who is a former client? That's a great question. As long as you're transparent at the outset, those relationships can go really well. They'd rather have you as a client for a short time than not as a client at all.

42:37And oftentimes it can go well when you're dealing in a strategy that is a relatively newer strategy where everybody is learning their footing or where there's a lot of technical expertise required. So an interesting example is tail risk hedging. Tail risk hedging is tricky to do as an external strategy because it's a bit of a no -win situation. It's basically an insurance policy, no matter how it's structured. Unless there's a crisis where the tail risk pays, you expect it to be something that loses money. Constructing that as an external strategy is pretty tough. The alignment of interest is not very strong.

43:15It's tough to have the governance model so that the decision makers are willing to stick with the strategy for the right reasons. So that's an interesting example of engaging with some external managers who are creative, thoughtful around that for a period of time, learning from that. And they've been quite willing to share expertise and to internalize because it's such a difficult area to maintain a long -term relationship with a client as an externally managed tail risk manager. That's an interesting example that's unique. In other areas, you're investing in funds for the most part. Those funds have a life.

43:52And so you may not renew in the funds with that manager, depending on the nature of the strategy. That's a normal course of business. What are some examples of that innovative approach that a manager might take that's hard for you to do internally? Some regional approaches are good ones for us, where we may be new to a region and it makes sense to get into that region with a partner. with an understanding that we're going to learn from them and partner with them for the period of time that it makes sense. Private debt and loan was a good example. We're quite sophisticated in that area now, but it was a good example where as that market was evolving and developing, it made sense to work with partners and we still work with partners.

44:33But we also expect something like a four to one ratio of direct investment opportunities for every dollar that we're putting with a partner. And that's evolved. That was not the case a few years ago. So PD &L was a great example of a market building, the expertise building, and starting with working with sophisticated external partners and then slowly internalizing. What have you learned about assessing external managers that's been enhanced by all the activities from having internal management across asset classes? Assessing external managers is as much art as science. The fundamental piece of assessing external managers is as much the talent and alignment of interest and how they manage talent as it is about the actual strategies and investment process.

45:25So when you manage a team internally, you see all of the aspects of that talent management piece. And it really puts the spotlight on how critical getting the alignment right is, how critical diversity of thought is in order to keep investment strategies alive and well as markets evolve to eat your lunch. What investment opportunities are you most excited about today? We are launching into a very interesting strategy related to transition finance. We've been talking about it here at AIMCO for almost two years. And the market and the ability to make very interesting investments in the energy transition space has really evolved.

46:13So we are on our way to a meaningful allocation to really making an impact on the energy transition. We have the flexibility to take on assets that may have a carbon footprint that today doesn't look great in order to be strong stewards of capital to ensure that technology is applied appropriately in those areas to take them from gray to greener. How are you going about doing it? The transition finance strategy is where we are working with a portfolio of strategic partners in this space. some of whom are large players, some of whom may be smaller players who have expertise in a variety of areas.

46:59How do you think about sizing a new opportunity like that into the portfolios? The sizing for us requires consultation with our clients because we don't control their strategic asset mix. So we have to consult with our clients in order to get them to allocate. And in order to do that, we've built the business case for it. So in Alberta, our clients are, in many instances, the pools of capital have grown partly because of Alberta's involvement in the energy sector. And so there's a comfort here among many of our clients. That involvement in the energy transition isn't something to be afraid of.

47:36It's something to be strong stewards of. And how about risks? Things you're most concerned about? The risks that I am most concerned about, I think you can bucket under reputational risk. And if you think about what makes up reputational risk, it covers a lot of areas. We have to be strong stewards of capital. We have to have strong reasons for making the investment decisions that we make. We have to ensure that we are thoughtful about every aspect of risk, whether we can quantify it perfectly or not. So reputational risk encompasses it. In terms of the markets themselves, I'm worrying about the risk that the policymakers don't get this right and that we end up in a stagflationary environment.

48:23That's a serious risk. And it's very difficult to steer a portfolio to be really resilient against that. That's one of the toughest environments to really do well in. I worry about the geopolitical risk that is hovering over us in so many ways and how to best navigate that in a way that is prudent and appropriate. Geopolitical risk is some of the most difficult to get our heads around in terms of what are the clear implications as investors. What do you do in the portfolio to consider those risks? For the stagflation risk, having a very well diversified portfolio is principle number one. Principle number two is thinking carefully about the inflation side of that equation and understanding, first of all, our client's liability profile and how linked is that to inflation.

49:15For our clients, the link is variable, but reasonably manageable. And then thinking about in each asset class, how well does each asset class do in terms of its inflation hedging properties and ensuring that we have enough in those asset classes and perhaps even some tactical positions that are protective there. And a careful example is with real estate. Certain areas in the real estate book are good inflation hedges for Canadian investors and others less so. The more opportunistic part of the real estate market is less of a direct inflation hedge. So thinking carefully about each asset class in that way, and ensuring that our clients that we advise them, for those that have more inflation sensitivity in their liabilities, that they have sufficient allocation to the areas such as real estate infrastructure, inflation like bonds, etc, that can hedge there.

50:08The diversification can include renewables and resources, as an example, where that's diversification into some commodity price risk. And that can be one of the best hedges against inflation. So being thoughtful about each of the asset class areas. So that's the inflation side. On the recession side and the stagnant part of the economy is, again, the diversified approach. And the absolute return book, for example, can be a helpful strategy that's designed to be as all weather as it can be and as uncorrelated with markets as it can be. And I think we've done a good job of being strategic and thoughtful about how we're structuring that.

50:45How about geopolitical risk? It's more thematic in general. It's more long term. So thinking that through and being plugged into experts in that space is one approach. But to translate that into how we actually manage the portfolio, I don't think anybody was able to really foresee the implications of the war in Ukraine. and how that affected energy markets until it happened. In those instances, it's how do you react quickly and stay plugged in in those fast evolving geopolitical environments? Are you prepared in advance to think about the possibilities is really key. But some of the other geopolitics around trade issues, the world becoming more bipolar and the unwinding in a way of globalization into more regionalization, Those are themes where our diversification into a wider variety of global markets in a thoughtful way is helpful.

51:43And being careful about gaining exposure to certain higher risk markets indirectly through jurisdictions where the rule of law is strong and perhaps where the companies that we're investing in may be exporters to regions that are a little more challenging to invest in from a governance perspective. What have you found about what is different with the Canadian pension funds compared to those run elsewhere around the world? I think there's increasingly more in common across many of the larger pension plans around the world as we've exchanged ideas. When you think about New Zealand Super and GIC, some of the European pension plans, much of the thinking that has been put in place in those pension plans has been developed at the Maple 8 and enhanced in those funds tailored to their needs and their governance models.

52:39The total portfolio approach and the alignment of compensation design is penetrating where it's able to penetrate in certain markets. But there is still that distinct willingness, I would say, in Canada to be innovators, to take part in the global markets as important players. We don't have much of a home bias anymore in the large Canadian pension plans. Canada is, call it, 3 .8 point something percent of GDP globally. And our portfolios now are closer to reflecting that in our return seeking assets. We have a lot of Canadian fixed income, but the home bias is much lower in the large Canadian pension plans.

53:24And that's different from the U .S., where the U .S. market is, call it, 50 percent of the global market. and as a result, U .S. pensions have a very large focus on their home market. One of the impacts there is around currency. As a small country where our return -seeking assets are largely global, the currency hedging decision is a really important one and it's a less important decision for a U .S.-based pension plan. Have you tackled the currency hedging decision? The currency hedging decision is one of the most difficult investment decisions at a pension plan, and there's a lot of confusion about it.

54:07It has evolved over time. Often, pension plans have ended up in the so -called no regrets, 50 -50 hedge half approach, which really doesn't make sense. Philosophically, the hedging of currency should depend on what the intention is of the investments that you're making globally? What role are they playing in the portfolio? Recognizing that whatever your strategic asset mix is, for the return seeking piece, you may invest, for example, in the global equity index, which has, by definition, a certain currency exposure embedded in it. That may or may not be the best currency exposure if you left it unhedged for you as a Canadian pension plan.

54:55But how to determine what's right? Is there an optimal currency exposure? The answer is, well, no, there isn't. So what we can do is think thoughtfully about directionally, what role does currency play? And how does currency volatility fit into the overall risk appetite, both in asset liability terms, and in asset only terms. So you need to do the analysis. And it can vary a bit over time. But in principle, there's an important aspect of currency that sometimes is missed by Canadian pension plans. And that is exposure to certain currencies can play a diversifying role and can play a tail risk hedging role.

55:35When we think about crisis periods, the US dollar, the yen, Swiss franc, really play a role of tail risk hedges and natural diversifiers. So as we've expanded from having more Canadian return seeking assets into foreign return seeking assets, As we expand into the US, that has some nice properties, even as in the short term, that currency volatility can be somewhat difficult. But overall, each client needs to make up their own mind about what is appropriate for them, given their overall asset liability problem and their risk appetite. And usually it ends up being any fixed income related investments that may be in foreign markets.

56:20typically those would get hedged. Or fixed income -like, where the volatility of the return stream is low, the currency volatility can swamp that. And usually that's playing an asset liability function in the portfolio. So typically that kind of investment stream would get hedged, whereas public equities, private equity would more typically be unhedged because the diversification that comes from the asset mix itself usually is USD -centric. And depending on where you're investing in private equity as you get more and more diversified into more volatile currencies, perhaps. You may want to give some consideration differently to those.

56:56But generally speaking, the fixed income -like streams may get hedged and the return -seeking streams generally unhedged. So you're in your first year in the seat. And hearkening back to your early lessons, I'd love to hear a little bit of what your, we'll say 90 day plan, but past that sort of extended plan is to manage this set of clients, pool of capital and team. I've been in the seat now six months on the nose. I was really lucky in the timing and coming into this organization where the corporate strategy was just set and approved at the board and where the investment strategy was just finishing being shaped.

57:44And then each asset class strategy was being determined and shaped and taken to the board during these past six months. So really terrific time to be here to shape the trajectory to the future. The key strategic areas that we're focusing on are globalization, opening the new offices in Singapore and New York, where Singapore is focused at the starting point on infrastructure, and where New York is focused primarily on private debt and loan. So thinking through the talent plan and the strategy in both of those areas and the relationship management relates very closely to another pillar of the strategy that is around partnerships and being really thoughtful and strategic about our investment partners, centralizing information, having a proper database management system to be able to really fully understand and all aspects of our relationships across the whole organization so that we can optimize those in terms of investment execution and cost.

58:46And then on the client centricity side, that's a key pillar of the corporate and investment strategy and really building those relationships more deeply with our clients to be deeply trusted advisors and doing so with a focus on the total portfolio management of their whole strategy and making sure that the strategic asset mix is appropriate and that our execution of that, and in particular, increasing emphasis on private assets where some clients are arguably underweight relative to their peers and what might be good for them and having those conversations and executing well in those markets to serve them.

59:24Marlene, I don't want to let you go without asking you a couple of fun closing questions. What is your favorite hobby or activity outside of work and family? Can I pick three? I have three. Sure. So yoga. I started yoga as a kid before it became a sport. I'm a trained yoga instructor, practice regularly and taught informally for five years. Meditation goes alongside that. Deeply trained in meditation with a lay lama for about 15 years, studied deeply with her. fitness to prepare for expeditions with an organization called True Patriot Love that benefits Canadian veterans. Just got back from a very remote expedition in the Canadian Arctic where we were aiming to summit the tallest peak in the Canadian Arctic called Barbo Peak.

1:00:08We raised a million dollars to benefit the organization. Unfortunately, had to turn around early, so we summited a smaller peak instead. And then singing. I sang in pop choirs with one of my kids for a few years was in the dance troupe and I missed that. I got to get back to singing somehow. What is your biggest investment pet peeve? The gouging of retail investors, especially through structured products. What investment mistake have you made that you'd never make again? Not having enough strength of conviction, especially early in my career, in order to really put my money where my mouth is and being willing to take appropriate risk sized in the appropriate way, being comfortable with that.

1:00:52Which two people have had the biggest impact on your professional life? One is Paul Halpern. Paul was my first professor who taught me my first finance class in the business school at the University of Toronto. And then after I finished my PhD. I came back to the University of Toronto and he was my colleague. And then he became the dean of the business school. We worked together once I left and went to Bay Street on something called the Canadian Investment Review that was a journal that now is an online platform that bridged the gap between academia and practitioners. And he's been a lifelong friend, mentor, advisor are in every dimension.

1:01:37And the other, just to use her first name, is Isabel. She was the executive assistant at CN Investment Division when I arrived, and she'd been the executive assistant to the CEO for about 25 years, and she taught me how to be a CEO. In what way? She taught me about how to think about all aspects of every decision I made, whether it was a big or a small one. She taught me how to connect the dots across all the people in the organization. She taught me how to not put my foot in it. She taught me how to be careful about positional power. It's easy as a leader to think out loud from time to time without noticing that people really listen to you when you think out loud.

1:02:22And oftentimes they'll go off and do things because they think it's what you want when all you were doing is wondering about something. What teaching from your parents has most stayed with you? My parents taught me to be feisty. That feistiness has been an important part of making my way through my career and serves me well when things get challenging. All right, Marlene, last one. What life lesson have you learned that you wish you knew a lot earlier in life? Don't waste time and energy on self -doubt and negative self -talk. That part of our brains the size of a peanut, but it's a really loud peanut.

1:03:00Basically tell it to be quiet. Marlene, thanks so much for sharing your story and your approach and investing on the behalf of all these great Albertans. Thanks very much, Ted. It's a pleasure to be here. Thanks for having me. Thanks for listening to the show. To learn more, hop on our website at capitalallocators .com, 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.