Ontario hopes to create investment management firm

The Ontario government is poised to create a money management business that could oversee as much as C$100 billion ($83 billion) from small pension funds and universities in the province.

That's bad news for money managers and consultants hoping to grab a share of those assets to run through their Canadian investment outsourcing businesses — directly affecting U.S.-based providers such as Aon Hewitt, Mercer, Russell and Towers Watson.

A bill in the Ontario Legislative Assembly expected to be approved in the next several weeks would create the Investment Management Co. of Ontario, a government-sponsored corporation to manage assets of approximately 70 midsize and smaller public pension plans and university endowments and foundations.

The legislation was introduced by the Ontario government on the recommendation of a 2013 working group that called for pooling the assets of smaller asset owners to reduce costs and increase investment efficiency, said Scott Blodgett, spokesman for the Ontario Finance Ministry. Participation by the plans would be voluntary. No timeline has been established.

The firms that now run assets for those asset owners could lose that business if plan officials choose to use IMCO instead.

“The economies of scale and efficiencies will be coming from the hides of investment managers,” said Andrew Harrison, managing partner at the Toronto-based law firm of Borden Ladner & Gervais LLP, whose clients include money managers doing business in Ontario.

Some of those managers could get mandates from IMCO if it decides to outsource some assets, but there will be fewer managers running more money, Mr. Harrison said.

And ultimately, assets could all be managed internally by IMCO, as is the case with other government-created entities in Canada, such as the C$225.9 billion Caisse de Depot et Placement du Quebec, C$114 billion British Columbia Investment Management Corp. and C$80 billion Alberta Investment Management Corp.

Sources said investment outsourcing firms will be particularly hard hit, because what they offer to smaller asset owners — reduced management fees and enhanced ability to access strategies like alternatives — is generally what IMCO would provide.

“The real challenge is that you're competing with an elephant” in IMCO, said Mr. Harrison. “Despite the performance benefits, IMCO could be less costly to do because of their scale. OCIOs will have to work much harder to get their business. ... They'll need to be nimble, offer a customized service and probably have to yield somewhat on price.”

Janet Rabovsky, senior investment consultant at Towers Watson & Co., Toronto, said if IMCO can create a good governance model and provide competitive investment returns at lower investment fees, “they will potentially limit the ability for investment outsourcing services to grow. There'll be a smaller pie for them to find new business.”

IMCO is expected to be seeded by the C$25.6 billion Workplace Safety and Insurance Board, Toronto, Ontario's workers' compensation program, and the Ontario Pension Board, which manages assets of the C$22 billion Public Service Pension Plan, Toronto.

Both boards' internal investment units, which will initially serve asthe IMCO staff, will manage the seed assets at the start, expected to be around C$40 billion, Mr. Blodgett of the finance ministry said. Management fees have not yet been announced. Officials at the boards would not comment while the legislation is pending.

The province's other large plans — including the C$154.4 billion Ontario Teachers' Pension Plan, C$72 billion Ontario Municipal Employees' Retirement System, $65 billion Healthcare of Ontario Pension Plan and the C$17.5 billion Ontario Public Service Employees Union Pension Plan — would not be involved and would continue to operate separately.

“I wouldn't say this legislation will enable the outsourced CIO market” in Ontario, said Jaqui Parchment, partner, head of investments, at Mercer (Canada) Ltd., which serves as the outsourced chief investment officer to C$10 billion in Canadian assets. “In some provinces where they have superagencies to manage pooled assets, it may have slowed down (outsourced investment management) a bit. But we've continued to see both corporate and government money going into OCIO in Canada.” She wouldn't identify any new clients.

Ms. Parchment said the move to create a provincial corporation proves the merits of outsourcing investment management. She said the legislation “is driving the concept of why OCIO can work. Whether you access those strategies through a superagency or through an outsourced CIO, the reasons to do either are the same” — access to higher-returning strategies, efficiencies and cost.

Borden Ladner's Mr. Harrison said IMCO would not be a “death sentence” for external managers. Instead, he said, they could take advantage of the relatively new status of the corporation to highlight the value of what they offer.

“If I'm an OCIO, I'd see (the challenge to managers from IMCO) as an opportunity,” Mr. Harrison said. “I'd imagine that the board of each plan looking at IMCO might want to treat them as they would a new manager; they'd want to see their (performance) track record before they decide to have them manage their assets. That could be an opportunity for OCIOs as well” because most have long-term track records, Mr. Harrison said.

IMCO will operate separately from the money management unit being planned for the Ontario Retirement Pension Plan, a supplemental defined benefit plan to the C$264.6 billion Canada Pension Plan, Ottawa, scheduled to start in January 2017. Details of that management entity have not been finalized, but it could eventually manage C$80 billion in assets. n