2019 Industry Innovation Awards

Risk Management

Air Canada

Vincent Morin, President Chief Investment Officer
Vincent Morin
Art by Nigel Buchanan

Vincent Morin, president and chief investment officer (CIO) for Trans-Canada Capital, a $21 billion fund responsible for Air Canada’s pension plans, has run a surplus for the past three years with his team. That’s quite a feat considering 10 years ago, when he started, the plans were in significant deficit and the outlook for the airline industry was grim.

“It’s a quite interesting position to be in. We operate in a very cyclical industry, being an airline. We don’t want to be in a position where we’re hit by a negative trend on both fronts, from the corporate side and the pension plan side. So we’re taking a very prudent stance at this point,” Morin says, noting the plans have only a 10% allocation to equities.

He attributes his team’s success to the “four Ps:” people, philosophy, process, and performance.

The people, philosophy, and process all interlink to produce the performance. On the people side, Morin says his team has a diversified skill set. Some, like himself, have actuarial backgrounds but work on investment selection. Others specialize in risk management, while still others have a top-down economic background.

While everyone has specific delegated duties, they also come together as a six-person committee to challenge investing ideas before making decisions. Morin heads the investment committee, which also includes the head of fixed income portfolios and tactical allocation, head of public equity and alternative investments, their head trader, the head of risk management, and head of asset allocation. Team members have the flexibility to make investment decisions, but Morin says having these committee discussions also allows people to change their minds, which he says is “quite important.”

Debating investment ideas brings about robust discussions since different team members bring different mindsets. “We want to make sure that every angle was covered,” he says, adding this helps “avoid falling in love with an asset.”

Conventional wisdom says teamwork is important, “but making it core to the investment strategy is hard to maintain,” he says.

To do that, he ensures that all team members have a voice and that their ideas can be implemented into the portfolio. “You never know where the next best idea will come from,” he says.

The purpose of the pension fund is never far from Morin’s mind, which is to have enough returns to ensure the fund can pay obligations. That’s why the risk management team is fully integrated into portfolio discussions. Investing with a view toward risk management ends up generating alpha.

“The risk management team is sitting on the desk and they vote on each transaction as well. I think it’s a key to our success,” he says.

Focusing on risk management paid off in the fourth quarter of 2018. He says in the summer of 2018, the team discovered some volatility hedges that were at their cheapest level ever, and through analysis, they found the level of optionality wasn’t that expensive over a full cycle. They piled on the hedges.

“We thought at the time if the market goes up, these won’t be expensive, and if it went down it would protect the portfolio very well. It helped quite significantly,” he says, adding that the team reviewed the risk profile of all of its positions, decided what market they wanted to protect, and the type of risk they wanted to hedge.

After the markets took a significant tumble in 2018, and the S&P was down -6.24% for the year, Morin’s fund’s fourth quarter 2018 return was 1.1%, for a total 2018 return of 2.2%, beating its benchmark.

Regular investment team meetings help avoid a silo mentality, a core part of their team’s philosophy. “Silos create undesired behaviors,” he says.

That anti-silo mentality works not only with asset allocation, but with manager selection and allocation. Morin says the team broke the silo between public and private markets, which normally have different teams and asset classes.

A few years back, the committee considered an investment in Brazilian real estate, seeing it as an opportunity for good returns. Their senior vice president of fixed income and derivatives countered with an idea to buy a real return Brazilian bond, saying rates were high, the market was more liquid than real estate, and after fees, the real estate return wouldn’t be much better. The real estate team agreed that Brazilian bonds made more sense.

“Often, a real estate team would decide to do whatever they wanted to do and the public market side would do whatever they wanted to do. But here we discussed and decided from a risk, reward, and liquidity profile, bonds were better,” he says.

They held the bonds until a better opportunity in Latin American real assets opened up as the market became more distressed, providing a more generous illiquidity premium, and they entered the market. “It’s the kind of thing we do, compare and contrast against each other,” he says.

It’s one thing to have good ideas, it’s another to be able to execute, and that’s where having a repeatable and well-articulated process comes in, Morin says. The investment team establishes a risk budget, which is a level of how much risk they are willing to take on a position and the impact on the portfolio. Even if they love a trade, they will follow the risk budget and add it gradually, as the budget allows. “Even though we might believe it is a home run, most of the time we are not trying to hit home runs, but are trying to hit singles,” he says.

The investment team also systematically will review all the trades and positions in the portfolio and question if the position is still viable. They will research whether the position still represents the return potential based on whatever risk it has on the portfolio. “It’s hard to do, but if you have a strong process in place, it allows you to never fall in love with a transaction,” he says.

They try to take this viewpoint across the portfolio, although sometimes it’s harder to implement with more complex investments like alternatives.

The three Ps add up to the fourth P, performance. In addition to a positive return in the fourth quarter 2018, Trans-Canada Capital delivered above its benchmark for 26 consecutive quarters, through fourth quarter 2018. In the first quarter of 2019, the fund was down 0.1% but bounced back above its benchmark for the second and third quarter of 2019, Morin says.

He doesn’t target a certain value-add objective, rather he targets how much risk the team wants to take, which goes back to risk management.

“Within that risk budget, we try to be nimble, to find the best reward or asset class or transaction we can find. We then build a diversified portfolio targeting the risk budget. The value-added is the end result at the end of the year. We see how much we added and it turned out very well and very stable because we pursue a specific risk budget,” he says.

Debbie Carlson

Risk Management Finalists

  1. Institute for Advanced Study
    Mark Baumgartner
  2. University of Chicago
    Mark Schmid
  3. UPMC
    J.C. Stilley
  4. SWIB
    David Villa
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