After nine years as senior vice president of research and economics working with the private equity portfolio at the Ontario Teachers' Pension Plan Board, Toronto, Leo de Bever switched back to the money management world four months ago, taking a position as executive vice president of global investment management with Manulife Financial Corp., Toronto, which recently merged with John Hancock Financial Services Inc., Boston. Mr. de Bever, a Toronto-based economist who received his bachelor's degree from the University of Oregon, and master's and Ph.D. from the University of Wisconsin, has spent most of his working life in Canada, beginning in 1975 at the Bank of Canada in Ottawa. In 1980, he started an economic consulting firm for Chase Bank in Toronto called Chase Econometrics. Mr. de Bever spoke with Arleen Jacobius about his work at Ontario Teachers and his goals for Manulife Financial.
Change of Scenery: Face to Face with Leo de Bever
A My goal is to build out capacity that fits the balance sheet of the insurance company and external clients in an environment that will not be hospitable: to find good places to hide, in some sense.
A In the listed securities markets, we will have to be extremely efficient in picking active spots relative to benchmarks. What we are trying to do is identify markets that will be less efficient, and that leads to real estate, timber and infrastructure.
A Ontario Teachers' is very large and has a strong board. I was there nine and a half years. I had very strong people at the top and … not as much initiative as I would like to have. I wanted a change of scenery and a new place to ask why and why not. The question is what can you do with what's already here, and what to do to improve it.
A Manulife had real estate and some capacity for infrastructure. It's very limited and very little overlap between the two. The stuff that's new is timberland and agriculture. There are very few organizations that have a complete range of alternatives, for want of a better word. Between the two companies (Manulife Financial and John Hancock Financial), we have a good beginning to build on. The thing that is missing is a very large hedge fund type strategy. But I believe some hedge funds can be a problem. Some people latched on to hedge funds as the Great White Hope. A lot are the same, all active strategies in a different format. I'm not unhappy with not having a hedge fund strategy. If I do it, I would do it very deliberately and would not have the same strategy packaged in a different way. Theoretically, you ought to go long and short. It should give you some advantage, but you should control the process. At Teachers, we ran a lot of absolute-return strategy, but we had full insight of all the risks we were taking. The strategy has to make sense. The fundamental problem with investments in general is people expect good managers will have good results all the time. It could be possible that good managers will have below-average performance 25% of the time.
A Yes; most pension funds have difficulty understanding that point. It's hard for a board to sign up and stick with it. They have a tendency to meander. It's like when Warren Buffett was attracting articles about whether the wizard lost it. It's the same with managers with a good strategy. … That's why Teachers' was different. They did not always agree with it, but when they saw the logical argument, they went with it. Most pension funds are worrying about differing with the norm or the average. That gets you into trouble. … Short-term performance is not always indicative of the strength of a strategy. You have to sign up for a strategy and understand the long-term implications. What you hope to have is enough balance in your asset mix that you never go too far offsides. It does not guarantee that in any given year it will come up roses. Boards would like you to beat markets and to have positive results when markets are negative and, by the way, don't engage in market timing. Those things are not consistent. You have to pick spots. You have to understand the strategies you are undertaking, and you will do substantially better in negative markets. Sometimes it helps to take a bit of historical perspective. People have a tendency to go to the latest and greatest.
A Not 10 years, but they were willing to wait much longer than I would have had an option at other funds. … We always second-guessed ourselves. Our approach was to figure out the right things to do and then to do it. On the whole, people tended to go along with our arguments. If you have a pension plan, it's important to have people on the board who understand how investing works, how risk and return works, and the history of investing. After you have absorbed that, you realize five to 10 years is not enough to figure out what to expect. In the next 10 years, I'm worried things will be different from the '80s and '90s and lackluster, both bonds and stock markets. Waiting for good times to roll will not work out. … If you look at markets from a long-term perspective, you might get very queasy. You always have difficulty determining when to leave the party.
Q What is the function of pension plan valuation?
A There is a paper by Bader and Gold. They say actuaries have missed the last 30 years of financial innovations. The argument, basically, is actuaries have such stakes with the people who employ them and that the numbers are taken as a certainty. Bader and Gold point out that it is an estimate with huge leeway on either side. A pension board with a plan value that is overfunded will make serious mistakes. Pension plans were overfunded in the late '90s and decided to spend the surplus, and if they had done nothing, they would have been fine. Part of the problem is courts and tax laws. Canada and the U.S. have limits on surplus that can build up in a pension plan. Those tax laws were passed in a time when the notion of risk was not as built up as it is now. We should not worry about overfunding until it's over 120%. The maximum surplus in Canada and the U.S. is 10%. Canada kept the 10%, but certain pension funds can use a lower discount rate, which lowers the surplus. It's not my preferred way of doing it; it finesses the situation, but if it gets to the right result, why not? What really should happen is assets and liabilities should be valued as close as possible to a market rate of return, and you just accept the estimate on what assets and liabilities are really worth, and some wide range would be acceptable. There's a difference between an accounting approach and a financial theory approach, and unfortunately, the accountants are winning.
A I'll bring that perspective to how to set up a strategy. I'd like to design a strategy that is an omnibus solution to some of these issues. Now pension plans decide how much of what flavor of stocks and what flavor of bonds, and it's an extremely expensive way of managing a pension plan. If liabilities are long term, assets should be structured the same way. This comes back full circle to things like real estate, timberland and infrastructure. They give real returns that move fairly well with inflation. It's not just returns that matter, it's the risk you run to get there. That is something that is difficult for plan sponsors to grasp.