"The number of managers who have expertise in this area is quite limited," said John Gilfoyle, a consultant with Watson Wyatt Worldwide, Toronto. "There are lots of managers with the long-only skills but not with the shorting ability."
Mr. Gilfoyle said some of the "main players" in Canadian money management have indicated to him they will not participate. Interested firms must contact the fund by June 27; proposals are due next month.
The size of the mandates ($500 million) will also limit the number of outside money managers that will bid. "This opportunity would swamp some managers," said Mr. Gilfoyle.
But Stephen Jarislowsky, chief executive officer of Jarislowsky, Fraser Ltd., Montreal, one of Canada's largest money managers, said he would be "happy to manage" a stock portfolio for the CPPIB.
The CPPIB's posting on its website refers to the strategy as a "long/‘synthetic short' approach." However, Mr. Raymond said, the managers "are not going to be shorting stocks. We'll be net long all the time."
He said the managers will identify stocks they like and don't like. They will then sell the stocks from the CPPIB's passive equity portfolio that they don't like and use the proceeds to buy more of the stocks they like.
The proceeds will be in a separate portfolio for each manager. Mr. Raymond said he expects the proceeds to be the equivalent of a $500 million active equity mandate with a 3% to 4% tracking error.
This strategy is the best way for the plan to implement an active equity management strategy, he said, adding that because of the fund's size and the fact that its equity portfolio is constructed with Canada's 30% cap on foreign investment, it would be extremely difficult to just hand out active equity mandates.
"If we handed out a lot of $100 million (equity) mandates to many managers, they'd be trading against each other and we'd be paying a lot in fees," Mr. Raymond said. He noted that executives plan to select two outside managers with different investment strategies.
"How many really unique strategies are out there before (managers) start imitating one another?" he asked rhetorically. "We have to think about the scale issues very carefully."
"We can't let managers sell Canadian stocks to buy foreign stocks. We recognize there is a cost to the foreign property rule. If a manager wants to sell a Canadian stock, he would have to buy a Canadian stock."
Mr. Raymond said the mandate is global but with a core Canadian portion, so the managers chosen must have dedicated resources to the Canadian equity market. That doesn't mean only Canadian managers will be considered, he added.
Total assets of the Canada Pension Plan, including the fixed-income portion of the fund, are expected to grow to C$80 billion by the end of 2006 (they are now at C$55.6 billion). Mr. Raymond expects there will be about a 50-50 split between the plan's equities and fixed-income assets within the next 12 months. Other outside active equity managers will be hired in the future.
The CPPIB will retain the responsibility of managing the desired market risk exposure, while the managers will be responsible for creating value by taking active positions on different securities.