Pension Funds' Problematic Operations Structure (w/ Jim Keohane)

Video Transcription:

  Pension Funds' Problematic Operations Structure (w/ Jim Keohane)

ED HARRISON: So how have you changed HOOPP and how has the pension industry in Canada in particular changed in the time when you first came in 1999 to now, when you're leaving? JIM KEOHANE: So there's a few big things. We've pretty much insourced all our activities. So we have our own in-house investment management staff that runs virtually all of the money. We still have some partnerships outside, but most of the money is run directly by our own staff. And that has huge advantages in the sense of it's much more cost effective. So paying people to run money for you is significantly more expensive. Just to give you an example. When I first became the chief investment officer, we had about 15% of our money run externally. And so when I insourced that, that 15% cost more to run than the other 85%. And actually, the returns were not as good. And one of the other intangibles is that you sacrifice control of your risk management, because when you give money to other people, they're going to do what they want with it. And your choice us you can take your money back or leave it with them. And so whereas internally, if you're not comfortable with the market, we can dollar risk up and down quite easily. ED HARRISON: And you say 15% was more expensive than 85%. JIM KEOHANE: That's right. ED HARRISON: That's astounding. Because again, one of the key things-- we'll talk about your framework of how you look at the pension industry-- but one of the things that I thought was extraordinary is about the cost versus an individual-- that is a cost savings that you can't make as an individual, if you're investing on your own. JIM KEOHANE: Yeah, so our investment costs are about 20 basis points or 0.2% percent per year. And when we looked into what individuals pay, and it's typically somewhere between 2% and 3% per year. So 10 times as much. ED HARRISON: Right. JIM KEOHANE: And that difference of 180 basis points-- I mean, it doesn't sound that much annually, but you start compounding that over 40 years, and you actually end up with half as much money. ED HARRISON: Right. JIM KEOHANE: So I mean, when I first saw that, I thought, that can't be right. And I did the calculation myself, and in fact, that is true, right. ED HARRISON: The magic of compound interest. JIM KEOHANE: Yeah. It does make a huge difference over time. ED HARRISON: And what other things have you seen? Because I think that the industry has changed a lot. I mean, essentially, you came in from an industry, you brought your expertise. My sense is that in order to have people of that capability, you have to pay them the going rate. What staff do you have in terms of trading and risk management and things of that nature? JIM KEOHANE: We really have top notch staff-- really, some of the best people in the world. And we pay them market rates. And I think that's one of the big challenges that the US funds have-- is the governance structures don't allow them to do that. And so there's some very large pools of capital you ask that could be run the way we run our money. So all in in-house staff. But the structure of most US plans is not independent. I think a lot of the state plans, they have politicians sitting on their boards and stuff. And it's politically unacceptable to pay people in-house-- you have to write a check to an outside manager that's 10 times as much, because it depoliticizes the payment.