A Conversation With… Tony Gage
To mark its 15th year of publishing, Benefits and Pensions Monitor is featuring a series of conversations with people who have made a significant contribution to the industry. Tony Gage is former chairman, president, and chief executive officer of Phillips, Hager & North Investment Management Ltd.
The following is an edited version of the conversation between Gage and Benefits and Pensions Monitor Executive Editor Joe Hornyak.
BPM: What would you say has been biggest change since you started in the industry?
TG: Canadian money managers now face a much more difficult environment. The elimination of the 30 per cent foreign property rule and the shift to liability driven investment (LDI) moves people away from a standard balanced, equity and fixed income fund. They can reproduce these by indexing and save themselves costs.
They have had to evolve in terms of not only the clients they have and the mandates they have, but in the way they manage money.
BPM: Is that why we’re seeing a serious erosion of style? There was a time where a value manager was a value manager and a growth manager was a growth manager. Now, each year when we do our survey of money managers, we’re asking if they’re growth or value or ‘other,’ and they’re selecting all.
As you get larger, you want to offer different mandates so that business risk never impinges on investment risk.
Another consideration is over the last 10 years the number of foreign firms listed among the top managers in Canada has more than doubled. Elimination of the 30 per cent foreign property rule is part of the reason, but the other part is that these managers were able to respond to this changing environment. So, all of a sudden, an indexer like Barclays Global becomes a large hedge fund provider or TD Asset Management goes from being known as an ‘index operation’ – and they’re still a significant one – to managing private equity.
Most Canadian money managers never reach that point. As a result, they’re not getting the incremental flow. I looked at the dollar amounts that foreign firms manage. In 1997, foreign firms managed approximately 10 per cent of Canadian pension assets. As of June 2006, the comparable number was 27 per cent.
That’s the challenge Canadian money managers face. There has been this evolution that Canadian money managers have not participated in and it has led them to being vulnerable to these changes.
Clients have changed as well. When I got into the business, clients were just getting into the game of relative performance and this was leading to the development of companies such as A. G. Becker and, later, SEI.
That has changed. Clients are not as inclined to care how they’re doing relative to other people. Now they’re saying ‘we expect you to deliver this, with this kind of risk profile,’ and it’s against, where they can find it, a passive index.
Plus, when you underperformed 20 years ago, you probably could buy a reasonable period of patience. However, prudent person rule legislation in the early 1990s meant sponsors started to write these expectations: ‘You shall, in fact, provide us with two per cent over the S&P/TSX on a moving four year basis.’ If the manager doesn’t meet the target, what does the sponsor do?
BPM: So, in essence, it meant pension funds had to start chasing returns?
TG: It left them very vulnerable because they had to fire money managers at their relative low and hire managers at their relative peak.
One of the most difficult things, which has always been the case, is people cannot convince either themselves or their bosses to hire a fourth quartile manager whose style is completely out of favour. Still, I remember one client who allocated cash flow inversely related to the relative performance of their managers. It was an incredibly successful strategy, but it required a degree of courage. I don’t think most people would actually have the fortitude to follow such a strategy.
Because I was a bond guy and the bond market has a lot of mean reversion, I’ve had the philosophy that if a money manager has no other issues, you are simply hiring a style and you want to hire the firm when their style is out of favour. Pension funds won’t do that, so they end up actually hurting their results with the hiring and firing process.
BPM: What about the impact of computers and technology?
TG: Most of the financial theory that we use as a base today – Capital Asset Pricing Model, Efficient Market Thesis, Option Pricing – was developed between 1950 and 1975. Our actual execution of these theories, knowing full well that there are some weaknesses to them, has occurred in the period of 1990 on because of the advent of better databases and technology. We were able to start using the power of computers to actually manipulate these numbers: the result being a proliferation of quantitative strategies. For example, asset liability models today, in my opinion, are much more realistic then they were 15 years ago.
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