Better internal investment integration and coordination will drive long-term returns for the world’s two largest investors, but cultural issues — including diversity and team building — will focus more closely on how they affect overall enterprise performance.
When the Canada Pension Plan Investment Board was initially given C$200 billion (then about $146 billion) in 1997, it did what it had to do: it went out and built investment capacity, across asset classes and geographies.
But when the fund turns its attention How the C1 trillion ($730 billion) fund works.Geoff Rubin, CPP’s chief investment strategist, says the siled structure doesn’t work.
Now, the fund is exploring how to coordinate and develop better relationships in its investment and management operations to not only reduce costs, but also improve investment performance. But the CPP is contemplating more than just structural reinvention. He is also thinking carefully about how cultural issues affect team success.
“15 years ago, the solution to the problem was very clear: build active investment capabilities to shift that passively liquid portfolio into active investments that can generate superior returns at the same level of risk,” says Rubin.
That was it: go build it. Go build a real estate investment team and capacity, and go build private equity and loans and funds, build these teams — oh, and build a risk department and an HR department and all these enablement functions.
Now, Rubin says, CPP is facing a different challenge as it plans for a day when investments reach $1 trillion in assets.
“It’s about organizing these active skills in the most effective way,” says Rubin.
“And it’s about building relationships between them to develop and sharpen some edges. [of competitive advantage] We talked about it earlier.
“This is a very important evolution for our company, because we have been a company for almost 10 years. [that] He was able to do all of this, because we had this huge liquid passive portfolio to draw on. We are now in the land of the Force.
“As we move from an organization that is building capacity to one that is preparing in the most effective way, this need to prioritize is becoming an increasingly demanding challenge for us.”
It’s more than just investing.
The operational and logistical issues involved in connecting the various internal components of an organization into a single entity are significant. But Rubin says, “If you don’t have a culture where people are really motivated and excited about the overall organizational mission, you can throw all that stuff on the fire and burn it.”
“When we were in silos, people felt as much or more of an identity and loyalty to their team or group than to the organization as a whole,” he said.
“We do these annual off-sites where the teams get together, and they beam at each other from different corners of the room. There’s been a lack of culture around real fun, not just meeting for basic reasons.” [also] To make ourselves better investors, to be the most successful private equity investor in the world, to have those people really hungry to connect with their peers in a way that they can be attracted to by their relationship or their perspective or their relationship. They use techniques and that in the investment environment.
Rubin says rebuilding CPP will be “a combination of some of these structural elements of how we allocate capital and how we evaluate the portfolio, but it really depends on this cultural piece of making sure the identity of people in this organization is CPPIB.” .
Diversity is critical.
He announced how the appreciation of cultural affairs is 307 billion dollars CalSTRS has rethought its approach to investing. Chris Ailman, the fund’s chief investment officer, said diversity in an organization is critical to supporting better decision-making and delivering better results for fund members.
“The best way I can put it is if all of your employees were hired from the same university or business school, you’d probably be a little worried,” Aylman says.
“And then they’re all the same. Let’s say they all come from one part of Australia. It is not very different. It doesn’t matter if they are of different nationalities. You look at that and you say, ‘Well, it’s close to groupthink and I’m a little worried about that.’
“And that’s how we’ve tried to approach this from an investment perspective, which is, diversity leads to better diversity, better ideas.
“There’s a reason it’s called Lehman Brothers, not Lehman Sisters or the Lehman Family. I often tell people, just think of your families. Things are often debated before a decision is made. And that’s what you want in the investment process.
“You want someone who can look at things from different angles and really argue. We know from biology and human psychology that people think differently. And that’s a good thing.
“So instead of having everyone else, picture me — pale, male, and old — and think of a little ABCD-1-2-3 line pattern, what I’m looking for is different, different backgrounds, different schools, and think about it differently.
“And boy, we have that. And it leads to lively debates, which are good because I think it leads to better investment decisions. It doesn’t mean we eliminate all risks, but when you meet people from different backgrounds, you know for sure that they look at things in different ways.
You get what you pay for
Rubin says CPP aims to align salary and compensation structures with the concept of being a single investment entity, but that has some obvious challenges. It is not always clear how the efforts of an individual contribute to the results of the entire enterprise. Some object to the idea that their compensation can be based on the performance of others in the organization like themselves. Sometimes non-monetary rewards can produce the desired results.
“Historically, people have expressed a limited ability to touch and see how their efforts are moving the total fund,” he said.
“It can be difficult in a large organization [to define] I think this line of sight, this motivational and corrective movement, and drive around what you’re trying to achieve is generally very important. Com is a piece of it.
“It’s not going to be perfect, and some of it is more reward than compensation – it might just be that people in the culture are really rewarded; or success stories; or congratulatory emails; or are the promotions focused on what makes the company a better investor, or are they narrowly focused on what’s happening elsewhere?” Is it around people focused on L?
“I think we have to do all of that, and the com will be a big piece.”