[0:07] We're ready to go, Mr. Chair. Thank you very much.

[0:13] So welcome, everyone, to this special meeting of the one

[0:15] joint investment board and the purpose of this meeting is

[0:19] to do the last of our three part series on.

[0:23] Alternative investments conducted by Eckler and this part of. The

[0:29] education session will focus on portfolio construction. So we'll start

[0:33] with Oman. Acknowledgement we recognize that our work is the

[0:37] one joint investment board and the worker municipalities take place

[0:40] on traditional indigenous territories across Ontario. We recognize and we

[0:44] respect the history, languages and cultures of the first Nations.

[0:50] Mati, Inuit, and all indigenous peoples whose presence continues to

[0:53] enrich our communities. Are there any members of one jib

[0:57] who have a conflict to declare due to a monetary

[1:00] interest on any item on today's agenda. So, looking at

[1:04] my screen here, seeing none, we'll move on. We have

[1:07] staff from Eckler. Joining us again this morning. So, Jenny,

[1:09] I think you can invite them in. We'll just wait

[1:14] for Brad and Kyle to join us. There. I see.

[1:26] Let's see. I see kyle there. And I see Brad.

[1:29] Great. Welcome, gentlemen. Thank you for being with us again

[1:34] this morning. We're looking forward to the presentation. I think

[1:37] we've really appreciated the last two, and we're looking forward

[1:39] to this one, so we're ready to go whenever you

[1:42] are. Sounds great. So we'll kick it off, star Sharon,

[1:46] as always, if there's any questions that come up, we'll.

[1:48] Keep our eyes open. We're going to just share. Presentation

[1:54] here. Share that one. Okay. Let's do.

[2:04] Screen load. All right, I'll maybe just confirm you can

[2:08] see that and move to the next slide. A thumbs

[2:12] up. Okay. Thumbs up. Thank you. Okay. Obviously. Thanks so

[2:18] much having us back. This one is. We've gone through

[2:23] different asset classes, obviously. We've been through private, public, some

[2:28] different things, and this is really portfolio construction and monitoring.

[2:31] So this is like us, how? You would put it

[2:33] all together and then check in to see. If it's

[2:35] working long term. So we just wanted to kick off

[2:37] with portfolio. It is. Portfolio construction. I think there's a

[2:40] quote there by Blackrock, right? The world's largest investment manager.

[2:44] And really what it is, is, yeah, it's putting together

[2:46] the different. Asset classes and strategies in your portfolio and

[2:50] understanding how that kind of builds up to a whole

[2:53] strategy, right? For a lot of groups. Again, this is

[2:57] how you approach. This is probably somewhat similar, whether you're

[3:00] a pension plan, a trust fund, an endowment, probably similar

[3:03] structure, no matter what you are. Kind of starts with

[3:06] really objectives. Right? So when we talk to most of

[3:08] our clients, what are the key objectives you're trying to

[3:10] do. So give you the idea some groups may be

[3:13] very focused on capital protection. So if you were an

[3:15] endowment and you had 50 million given to you that

[3:18] says, listen, you can't spend anything if it takes me

[3:21] below the initial amount. You're going to. Be very cognizant

[3:24] of losing any capital. Right. We have other groups where

[3:27] really it's about generating returns. So you might have a

[3:30] pension plan that's maybe underfunded. And it needs to move

[3:32] to a certain position they might be willing to take.

[3:35] A little more risk because of that. Again, there's a

[3:38] lot of different goals that you can have. And what

[3:40] I would always say in the portfolio construction piece is

[3:42] that it tends to be a teeter totter, right? If

[3:44] you have one goal, that you push on something else.

[3:47] Has to move in the system, right? If you push

[3:49] on return, you have to accept the risk. That comes

[3:52] with that. If you really want capital protection, then you

[3:55] may have. To sacrifice some level of return to increase

[3:58] that. Right. So all of these are going to be

[3:59] competing at some level, right? So what a lot of

[4:02] groups talk about is, what are the pain? Points. And

[4:05] that second part of the process is there's really a

[4:07] risk budget. So what are the things that you really

[4:10] want to avoid. So there's the goals of what you

[4:12] would like to do. That's great. What's the other side

[4:16] of it? What's the thing that you can't. Stand. Right?

[4:18] So is it a capital impairment again? Is it corrective

[4:21] action? Is it decreasing spending? Is it going back to

[4:24] the beneficiaries or the members or whoever is obviously you're?

[4:27] Managing this money on behalf and asking them to do

[4:29] something that you'd rather not ask them to do right

[4:31] because the portfolio hasn't performed the extent that you've. Looked

[4:34] at too. So that's really what we would call establishing

[4:38] the risk budget. And then from what is that thing

[4:40] that you just don't want to happen or you want

[4:42] to minimize the risk. Of take whatever that is and

[4:46] you're willing to take some amount of risk as long

[4:48] as you can minimize this outcome. And then you spend

[4:51] that risk budget on the last one, right? So go

[4:53] out and invest the portfolio consistent with those. Goals and

[4:56] understanding. What are the things that you're trying to avoid?

[5:00] So when we do this, On doing this portfolio construction

[5:04] process. There's a few things that are going to be

[5:06] inputs. To the process, which a lot of his expected

[5:09] returns and risk. Right. So for the expected returns, it's

[5:12] really the forecasting of the long term average return that

[5:15] is expected to be achieved. Most groups would use some

[5:18] amount of a 510 15 year window, right? For. Planning

[5:22] purposes for this. Reno investment. If you're using a one

[5:26] year window or a two year window, you can still

[5:28] obviously come up with investment strategies, but it's going to

[5:31] be difficult if you're using a very short time horizon

[5:34] to kind of. Use statistic processes like you see in

[5:37] the industry, because realistically, It's harder. A one year. What's

[5:42] going to happen in twelve months is actually. More difficult

[5:44] to predict than what will happen in the next ten,

[5:47] because in the next ten there's the law of averages

[5:49] that come into it, which is something you'll see in

[5:51] this process. Right. So the variability of returns is really

[5:54] noting that you have an expectation. What's? The degree at

[5:58] which you think it'll be above or below. So give

[6:00] an example. If you have a gic. What do you

[6:03] think the return is going to be next year? It's

[6:04] almost guaranteed you. Now, there's no variability to that return,

[6:07] but what's? Canadian equity. You assume it might be 10%,

[6:11] but you're saying there's. A very good chance it could

[6:13] be 20 or minus ten. Right. Obviously around that expectation

[6:17] that's. Going to have a lot of variability. And again,

[6:19] it's trying to provide you the. Probability of what is

[6:22] the chance that your expected return is your actual return.

[6:25] Right. And a lot of what you see in these

[6:28] kind of processes. It talks about the correlation of expected

[6:32] returns, right? So not all asset classes perform the same,

[6:35] and they don't all perform the same during. The same

[6:37] events or at the same time and use Covid as

[6:40] examples. One of the most recent. Events. So canadian equities

[6:43] in the first three months of 2020, down 21% right

[6:46] far. Below the long term average. Right? So if anyone

[6:49] said, what do you think equities learn? 8%. So in

[6:52] three months, you lost 21. That would be an outsized

[6:55] event. Right. So. That was below what you thought would

[6:58] happen by quite a bit. Bonds on the other side,

[7:00] federal bonds. Were up five. Actually. That's above what you

[7:03] think they would have made over the long term. And

[7:05] again, the way they did that. Is quite interesting. Ones

[7:08] going up, one's going down at the same time. So

[7:11] correlation measures. The tendency. At which returns tend to be

[7:15] above or below their expectations at the same time. So

[7:18] on. Slide. Five. And again, this one's a bit busy.

[7:21] Sorry to kind of cram a few. Things in this

[7:23] one. Really? What we talk about at the top is

[7:26] expressing correlations, right? So. One of the things that you'll

[7:29] see is correlation is a measure from minus one to

[7:32] plus one, right? So. Perfect negative correlation. When one moves

[7:36] up, the other one moves down by the exact same.

[7:39] Obviously, frequency and amount at any given time. Perfect. Positive

[7:43] is the other way you're moving. Together perfectly. Right. Go

[7:46] up. Tang go up. Tan go down. Tan go down.

[7:48] Ten at the same. Time and then uncorrelate it. There

[7:51] is foreseeability, no correlation to how these two things move.

[7:55] They seem to be disconnected. Right. So there's no relationship

[7:58] that you can draw. So in designing a diversified portfolio,

[8:02] so. Most groups when we talk about diversification, Most groups

[8:06] strive to create a diversified portfolio. So to create a

[8:09] portfolio that doesn't have any. We're going to talk about

[8:13] unnecessary risks that you could diversify away. Right? So. When

[8:16] you're talking about that, you would typically want to see

[8:20] lower negatively correlated asset classes. Or patterns of returns together

[8:24] when you put things together. And we're just showing you

[8:26] an example. And in that first quarter of Covid, if

[8:28] you were an all canadian equity portfolio, You're down -21

[8:32] but if you were half and half, half ball and

[8:34] half canadian. Equity, you'd be down ten. Right. So obviously

[8:38] those bonds provided somewhat of an offsetting. Risk right to

[8:42] being an equity portfolio because they didn't behave the same

[8:45] way. The same event. So if you take that one

[8:47] step further, if you took a sampling of our client

[8:49] base, which is very good portfolio. Portfolios, pension plans, insurance

[8:53] portfolios, foundations announcements, trust funds. They would have been down

[8:57] about minus seven or actually better during that same period,

[9:00] because again, they're even moving beyond just being half equities,

[9:04] half bonds, but have alternatives as well invested in them.

[9:06] Again, those asset classes. Really behaved in a way to

[9:09] dampen that volatility during a very. Extreme event, which is

[9:13] what you would have seen at the beginning of Covid.

[9:15] So the last bullet point there is interesting because all

[9:18] of this, all of this portfolio design is built upon

[9:21] the fact of you're using what you think is going

[9:23] to happen. And that's based on class performance and how

[9:27] capital market theory would tell you things will behave, but

[9:30] typically what you see. In very volatile periods is what

[9:34] we call market contagion. So you have events like the

[9:37] 2008 financial crisis was a big one, where all of

[9:40] a sudden asset classes that didn't. Have a strong correlation

[9:44] become correlated all of a sudden during a market event,

[9:46] and hugely negatively when the market's down. And that can

[9:50] be just a factor that when panic sets. In on

[9:54] the market. Sometimes everyone gets it at once, right? All

[9:56] asset classes can be impacted and it can spread across.

[10:00] Markets quickly. So even it starts in the US and

[10:03] it hits Europe quickly, when typically you wouldn't think that

[10:06] those two different areas would necessarily be impacted by the

[10:08] same event. So a lot of modeling that you see

[10:11] in the portfolio world when somebody comes to you. And

[10:14] helps you design a portfolio. A lot of the times

[10:17] those models have what's built. In it is like a

[10:19] two stage model or a two event where there's a

[10:23] lot of view that. If you're testing the stress of

[10:26] a poor, if you're stress testing a portfolio, trying to

[10:28] see what will happen to it. In a very negative

[10:31] event, they tend to increase the correlation. So there's like

[10:34] a regime switch, is what it would be called, where

[10:36] you go. To correlations that are probably not as favorable

[10:40] as they once would have been in a normal market

[10:43] environment again, that just. Adds another complexity to these kind

[10:46] of processes. But fundamentally, understanding that these kind of contagions

[10:51] happen. Over the long term. Most correlations tend to hold

[10:56] true to some extent over the long term. And can

[10:58] help you build a portfolio that has diversification. And at

[11:01] the bottom there, this process really is about. What is

[11:04] that secret formula, right, that you're using to create a

[11:07] portfolio? That's going to minimize those risks, right? After fees,

[11:11] that's the other consideration. You potentially could create a very

[11:15] sophisticated portfolio. At some point, you have to measure against

[11:17] what's. It going to cost me, right, to do this?

[11:21] So when you look at it graphically, this is very

[11:23] simple. On this chart, if you move to the right.

[11:27] You're becoming more risky. If you move up, you're getting

[11:29] more return, right? So. If you started with just 100%

[11:32] bonds. And you look from that portfolio to the one

[11:35] with 20% equity, it's the next. One up. You've actually

[11:38] reduced your risk and increased your return by doing that.

[11:42] Anyone who's an investor would take that realistically because it's

[11:45] telling you it's less force, more return. Because even adding

[11:48] a small amount of equities and equities as it says

[11:51] at the top, most investment ris. Risk in a portfolio

[11:54] can be very tightly tied to how much equity exposure

[11:56] you have. But taking some equities when you're all fixed

[12:00] income will actually assist you because it's. Going to give

[12:02] you that uncorrelated source of return that the equities. Can

[12:05] offer. But you can see as you increase your equity

[12:07] amount quickly, You start becoming more risky, right? You start

[12:12] moving further to the right, because the equities. Are now

[12:15] dominating the portfolio right now. There's those two question mark

[12:19] portfolios that's what you're trying to get to. If you

[12:22] could be 40% bonds, 60%. Equity. That one in the

[12:25] middle, that's a balance fund. That's the bogey. In the

[12:28] industry for most investors. You can buy those. You can

[12:31] just go to someone and say, give me a balance

[12:33] fund, and. Balance fund is assumed to be a medium

[12:36] term investment. Rise in some bonds, some equities that other

[12:39] portfolio with the question mark is making you more money,

[12:42] and it essentially has less risk. Right. So you would

[12:46] take that if you could. You've got to figure out

[12:49] what is. That portfolio. Right. And obviously you can see

[12:51] by the number of pies in that thing, it obviously

[12:54] has. More and more asset classes than just bonds and

[12:57] equities. Right? So it's showing you. There's more diversification that

[13:00] you can get to inside of a portfolio like that.

[13:03] And fundamentally, that's this whole process is trying to figure

[13:05] out how can you get to those two question mark

[13:08] type portfolios again. From a fee perspective and then liquidity

[13:12] and other issues that you might want to try to

[13:15] manage. So on size seven. This is slide that we

[13:18] show quite often. And what this is, is. Every one

[13:20] of these boxes in this chart is. And you can

[13:23] see. The yellow is the emerging market return. And this

[13:26] is annually over the last 24 years, basically. You've got

[13:30] the EC index, international equities, you got small cap equities.

[13:34] Canadian equities bonds us and then a balance fund. And

[13:38] what we've done is we've just traced the SPSX and

[13:42] the red line. And you can see what's? Happening is

[13:44] there's many times it's near the top and then the

[13:46] next year. It's near the bottom, right? And then it

[13:48] goes back near the top and. It's constantly moving up

[13:51] and down in that chart, canadian equities on whether they're

[13:54] the best or the worst asset class, right? And again,

[13:57] that's the equity roller. Coaster that you're in if you

[14:00] could call all of those peaks and sell off and.

[14:03] Buy back in at the bottom. You'd be an amazing

[14:05] investment manager. It's difficult. To do that. Right. So, what,

[14:08] the balance fund is that gray? Line and goes through

[14:11] the gray boxes. That's 40% bonds, 30% canadian equity, 30%

[14:17] global equity. So that's. A balanced strategy and you can

[14:20] see. It's tops and bottoms, it's peaks and trows are

[14:24] much more muted than the pure equity portfolio is because,

[14:28] again, it's hedging some of the risk off. With the

[14:30] bonds, and it's got more diversification than just canadian equities

[14:34] and we show you the results over 24 years on

[14:36] the bottom. So 24 years in canadian equities. With all

[14:39] the ups and downs would have averaged. A 6.6% a

[14:43] year. Right. Volatility of 15 points. So the standard deviation.

[14:47] Of 15.6%. So that's a pretty high volatility right around

[14:52] that. Mean of 6.6. So if you look at the

[14:54] balance fund, it's made a percent less. So ultimately, yes.

[14:58] If you knew you had a full 24 years and

[15:01] you never had to check in on this. Money, you're

[15:02] never going to need it. 100% equity would have got

[15:05] you better, but. We're only got. You better buy a

[15:07] better percent a year. But the volatility. Of the balance

[15:10] fund is significantly lower. Like half, right, 8.6%. So when

[15:15] you look at the risk adjusted ratio. So that's just

[15:17] the return by the risk, right? The balance. Fund, technically,

[15:21] is a more efficient. Portfolio. So for every unit of

[15:24] risk or every unit of return you're taking or. Sorry.

[15:27] For every unit risk you'd in zero point 65 in

[15:29] return, or the canadian equity for every unit of risk.

[15:32] You're getting zero point 42 and return back to you.

[15:35] Right. So. Again. Equities would have made you more, but

[15:38] would have taken you on that ride to get you

[15:40] that through the whole period, right? So portfolio modeling, all

[15:44] of this stuff, all of these inputs and this correlation,

[15:47] this all comes into a portfolio modeling process, which, again,

[15:51] if you're in a board position, this is typically what

[15:54] you're being shown as somebody's showing you. These are different

[15:57] portfolios and different expectations we've come up with, and they

[16:00] all tend to come out of a stochastic. Model. Like

[16:03] this. What this is. Pretty. This would be the industry

[16:07] standard today of what most groups would do is you

[16:10] look at driving probability distributions out of these asset classes.

[16:15] So for canadian equities, you forecast them out. Over again.

[16:18] I'm going to show you in this example, could be

[16:20] 30 years, and that path you build is based on

[16:23] all the expectations of how you think canadian equ. Equities

[16:27] might perform. In different environments. Maybe a high inflationary environment.

[16:31] Maybe an environment where you have an equity market. Correction.

[16:33] So you make this probability distribution, and again, you can

[16:37] do a single asset class, but what? Typically you do,

[16:39] you start putting different asset classes together. So a portfolio

[16:42] of bonds, equities. May be real estate infrastructure. Again, it

[16:46] considers the past, but. Focus considers future expectations. If you're

[16:50] in a very low interest rate environment, statistically interest rates

[16:53] will probably increase in the future because they, like, won't

[16:56] go below zero unless maybe Japan. But most economies, you

[17:00] would assume. What's the chance of interest rates going up

[17:04] or down? Pretty much depends on where they're at today,

[17:06] right? A lot of the modeling, at least the way

[17:09] Eckler would approach it is, you would assume that if

[17:11] active management would pay for its fees, so you typically

[17:14] wouldn't build in a premium that your investment managers are

[17:17] going to beat the market, that might be a bit

[17:19] of grass. Step to assume that over the whole way

[17:21] you could again. Active management might be the cherry on

[17:24] top, but realistically, we'd assume almost passive is really what

[17:27] this is saying to you. So you model the expected

[17:30] risk return of the various asset. Classes. So, again, someone

[17:33] showed you three portfolios. You could take each portfolio and

[17:35] put it through. This kind of process and see what

[17:37] the outcomes look like. So what we would do here

[17:40] in the example I'm going to show you is modeling

[17:41] 5000. Possible outcomes a year. And we do this over

[17:45] ten to 15 plus year horizon. And what we end

[17:47] up with is an enormous set of returns. Right? And

[17:51] what we try to do is we look. Well, what's

[17:52] the expected return? And it's really the median outcome in

[17:56] that. Universe. So if you're on the prices, right, and

[17:59] you had to bet, you would bet. The media. The

[18:02] middle one. You'd be the least wrong again. What's the

[18:05] chance? It's exactly that number. Almost zero, to be honest

[18:09] with you. But it's the closest want out of what

[18:11] you think the outcomes would be, and then the risk

[18:14] for most groups. Is about? What's that? Lowest fifth percentile

[18:18] return. What's the chance that things go really bad. Most

[18:21] group. Groups aren't concerned with what's the chance everything becomes

[18:23] amazing, we end up in the very 95th. That's great.

[18:26] That probably means you got more money than you think.

[18:28] You would have. And that's just usually, you probably don't

[18:31] have to be concerned. About that one ahead of time.

[18:33] Unless you've got kind of any. Some clients we have.

[18:36] Maybe in negotiation positions, or maybe that would be an

[18:39] issue if they had too much money, but. Most groups

[18:40] are in a position. Of too much money is not

[18:43] really the thing we're worried about. It's what if we

[18:45] lose a lot. Right? And this is what these processes

[18:48] get you, which is slide nine. This is an actual

[18:51] output from this kind of model. This is assuming if

[18:54] you had a balance fund. Right. So that again, what

[18:57] have you had? Kind of a middle of the road

[18:58] investment strategy? So in the one year that first. Column

[19:02] in this chart. What that's telling you is that 5.9%

[19:06] is the median of. That 5000 outcomes in the first

[19:10] year, 5.9 is right in the middle at the very

[19:13] top. It says 19.2 at the very top of that

[19:16] chart. That's the 95th. Percentile. So what that means is

[19:20] 95% of the time you'd be making 19% or less.

[19:26] There's only 5% of outcomes where they would ever be

[19:28] above 19% the same. Thing at the bottom. The minus

[19:31] eight. That's the bottom fifth. So instead of telling you

[19:35] 95% of the time, you should be better than that.

[19:38] 5% of the time it could be worse, right? So

[19:41] if you ask me, in a given year, what do

[19:42] I think you'll? Make. I could go. Well, 90% of

[19:45] the time you're between. 19 and minus eight. And you'd

[19:47] say, that's not very helpful to me, that's. A very

[19:49] big window, and I would say that's the difficulty. If

[19:52] you tried to guess one year out, right. But what

[19:55] you see is if you move across 510, 15 is

[19:58] that that distribution becomes much tighter. Right. So maybe we'll

[20:01] look at the ten years or. Sorry. The 15 one

[20:03] I have in the middle that's highlighted that 15 still

[20:06] has. A median return of about 5.9, but the fifth

[20:09] percentile, instead of being minus eight, is now minus is

[20:11] 1.8. So that's a big change. So the reason why

[20:15] these models work for a lot of groups, and planning

[20:18] over the long term is the chance of you experiencing?

[20:22] A one in 5000 event. Every year for 15 years

[20:26] is statistically insignificant. It's basically very unlikely you would have

[20:31] these multiple, like, seven COVIds back to. Back to back

[20:34] to back to back for eight years. So what this

[20:36] can do is when you use this kind of modeling

[20:39] is it can help you over the longer time get

[20:41] a sense of well, what is the expected return? And

[20:43] what's that bottom return risk that I'm going to have.

[20:46] And you can use this through multiple asset classes. So

[20:49] as you add. Infrastructure you could see. Does infrastructure increase

[20:52] the medium? But what's it doing to the fifth? Percentile.

[20:55] Am I seeing a better result because of these different

[20:58] asset classes? And this is what you will likely see

[21:00] as somebody showing you portfolio modeling in different asset classes.

[21:04] Is this kind of analysis over the time periods that

[21:07] you want to plan over, right? So all this leads

[21:11] into kind of the goal setting, which is really from

[21:13] a board's perspective. What are you trying to do? And

[21:15] what are you trying to probably tell your ocio? Manager,

[21:19] your consultant. Like, what are the goals that we're trying

[21:21] to set that will influence that portfolio modeling. Right? So

[21:26] a lot of it. I mean, we'd ask groups, why

[21:27] are you here? What are you trying to achieve? You're

[21:29] obviously investing a port. Portfolio for some purpose. What are

[21:33] your measurable goals like? What is the success for the

[21:36] portfolio? What do you hope? To achieve. If you can

[21:39] answer some of these high level questions, that should again

[21:42] set the foundation. For your decision making, right? About what

[21:44] are the asset classes? So again, if you said, listen,

[21:47] we. Really need to prioritize liquidity. We might need to

[21:50] spend 20% of this portfolio. At any given. Year because

[21:53] our liability of what we're trying to do is, could

[21:56] be variable that would tell you. Maybe I have significant

[21:59] liquidity requirements, and I don't think I would look. At

[22:02] infrastructure or real estate as an asset class, because I

[22:04] don't know if they'll have the liquidity I need, but

[22:06] you could say, listen, long term, I think we know.

[22:09] The liquidity of the portfolio. We're only going to need

[22:11] to draw a few percent. So we think we can.

[22:13] Take on some of those risks and hopefully be compensated

[22:17] for that. Right. But again, one thing we would always

[22:20] say is that goals and objectives here that you sat

[22:23] typically might set them independent of the investment strategy because

[22:26] you're kind of thinking of them first, right? What are

[22:28] the things? You're trying to achieve, but they should be

[22:29] consistent. And when we give you an example, is, some

[22:32] groups may have es. ESG beliefs. So environmental, social, governance

[22:35] concerns, where they say, listen. We want to have a

[22:39] fossil fuel free portfolio, or you want to have no,

[22:43] say, arms or anything like that, or tobacco or anything

[22:45] in our portfolio. But then you're going to implement the

[22:49] strategy and pooled funds. We're an investment manager selling a

[22:52] pool fund that already exists. You may have an example

[22:54] where the ESG believe can't be implemented through the process

[22:58] of, obviously, the pool funds that you've chosen. So when

[23:02] you think of how your goals are going to be

[23:03] structured, sometimes the tail does wag the dog back and

[23:06] that you'll have to make sure that if. You have

[23:08] a goal that it's likely implementable based on the size

[23:11] of your portfolio. Based on what's available to you, right?

[23:15] So a lot of what we have is you. Make

[23:16] goals smart. This is actually what we do for everybody

[23:19] in Eckler when they set their goals for the year

[23:21] in terms of performance management is try to use this

[23:24] right, which is specific, measurable, attainable, realistic. Time down. And

[23:30] really a good example. So an example we'd have for

[23:31] a portfolio would be achieve a ten year annualized gross

[23:35] rate return of 6% to sport, a real spending target

[23:37] of four while limiting capital impairment. So just give you

[23:40] an idea. So it's specific. That goal is giving you

[23:43] a pretty specific thing. It isn't. Just let's make some

[23:47] money. That would be pretty vague, right? This is giving

[23:49] a very specific goal that you're trying to do. It's

[23:52] measurable. Because you've given exactly what you're hoping to do

[23:54] and you can measure the amount of return you make

[23:58] attainable. That's probably a little harder to assess, but ultimately,

[24:03] are you willing to invest in asset classes that could

[24:06] get you that kind of return. So that would maybe

[24:08] be obtainable. Realistic. So. Realistic. I'll come back to time

[24:12] bound. It's obviously ten years. The realistic one. In the

[24:15] obtainable is the one most groups get probably thinking about

[24:18] is. Do we think that this is realistic for what

[24:22] we're willing to take on for risk? And again, the

[24:25] last bullet point. There is this goal that this group's

[24:28] and again, to be honest, it is a realistic goal

[24:30] that we would have somebody make. Satisfies most of those

[24:33] criteria, but may not be realistic depending on what happens

[24:37] in the first few years. So you can set a

[24:39] goal and it might be realistic in year. One. But

[24:41] by year three, it's not anymore. Again. Any example? You

[24:44] might not want any. Capital impairment. But what if you

[24:47] set this goal in 2019 and then you walk into

[24:50] the Covid environment, and you might have to sit there

[24:52] and go, wow. I think that goal now has become

[24:55] unrealistic for us to achieve based on what's happened in

[24:58] the market and you may have to reassess. Right. So

[25:01] the risk management framework that really you build around this

[25:05] process and your goals, typically when we go through it

[25:08] is try to identify the risks that are most significant.

[25:13] And greatest impact on you to achieve your goals. Call

[25:15] that like a risk ranking? Again, that's? Really that idea

[25:18] of capital impairment, liquidity risk. Can you take that? All

[25:23] of these ideas not making enough money. Inflation, obviously. If

[25:27] you're worried about maintaining spending in real terms, For most

[25:31] institutional investors in that second bullet point, you have to

[25:33] accept some level of investment risk. If you're going to

[25:36] support the goals of the portfolio. So most groups acknowledge

[25:39] at some level, we have to accept some amount of

[25:42] risk to invest. Right? Or else we're just. Holding cash.

[25:45] And again, that comes with a risk in and of

[25:47] itself. We're not even going to maintain spending at inflation

[25:51] levels if we're not willing to take at least some

[25:54] amount of return. Right? And then you decide on how

[25:56] to approach eat. Risk. So this is a pretty standard

[25:59] process in risk management is identify the risk. Obviously, you

[26:02] want to try to identify the risk that are out

[26:04] there. Sometimes. You can only identify or mitigate the risk

[26:08] you know about, right? There may be risk out. There

[26:10] that you just can't even think about and can't assess

[26:13] and there's. Not a lot you can do about that,

[26:15] but you identify it, you assess the risk and then

[26:18] you either assume the risk and monitor it or avoid

[26:20] it and mitigate it, which is really in the next

[26:23] piece, right? So risk realistically for most groups can be

[26:26] class. Classified as rewarded, so you're rewarded for the risk.

[26:29] You're unrewish. I'll give you an example. A rewarded risk

[26:32] could be like illiquidity risk, right? By investing in private

[26:35] markets. Right. So that's a risk you're not going to

[26:37] be able to get your money back quickly if you

[26:38] need it. But typically there's an illiquidity premium that's paid

[26:42] to you for investing in those asset classes. You accept

[26:45] that risk, and you're. Being rewarded for. You're being paid

[26:49] unrewarded. Risk could be like idiosyncratic. Risk in a stock,

[26:52] right? So you invest your entire canadian equity portfolio in

[26:55] RBC, right? That comes with a big risk. What if

[27:00] something happens to that one company? You're going to be.

[27:04] Very impacted by it. You could diversify across all the

[27:08] banks if you wanted to. So again, idiosyncratic or concentration

[27:12] risk typically is not rewarded because you can easily not

[27:16] have that risk and be diversified and not take it.

[27:19] So again, only risk that should be rewarded. Technically are

[27:22] the ones you want to take, the ones that are

[27:24] not rewarding you. You want to try to mitigate or

[27:26] remove. And again, you may want to hedge them. Right.

[27:29] So. Insure against the risk. So for a lot of

[27:32] groups, currency risk is one you can hedge. There is

[27:35] a risk to being a canadian investor and assuming other

[27:38] currencies, because, again, When you invest in Canada in an

[27:43] equity, what you get is the return of the equity

[27:45] that's what impacts your return. But if you invest in

[27:47] the United states, there's the return of the equity and

[27:49] the return of the US dollar to you as a

[27:51] Canadian, that now adds a different risk to it. So

[27:54] you can hedge that you can easily mitigate it or

[27:57] sometimes you can't hedge your risk, right? Something might be

[27:59] harder for you to hed. Hedge away and whether or

[28:02] not you should hedge it or unhedge it typically involves

[28:05] the risk. What are you getting for not hedging it?

[28:09] What's the return? You're going to get and how much

[28:10] is it going to cost you to hedge it? So,

[28:12] again, currency. Is a good example. Some groups currency heads,

[28:15] some groups don't because they view long term they just

[28:18] think that there's not enough there to justify the costs

[28:21] that are involved in maintaining the hedges, right? They think

[28:24] you're better off not paying that cost. And assuming that

[28:27] risk because they don't. Feel that the risk is material

[28:29] enough to wear it. And again, some risks are simply

[28:32] unforeseen or unavoidable, like we get political regulatory. Obviously, it's

[28:35] a very recent political one that's happened. Could you have

[28:39] hedged against that? It would be hard for you to

[28:42] assume how to hedge. Against that? What are the things

[28:44] you're going to hedge against that outcome? And so some

[28:47] things. You have to assume them, and you can't necessarily

[28:50] know what the risk or the outcome. Of that risk

[28:52] is ahead of time, right? So I think that's really

[28:56] the portfolio construction. Process. I don't see any questions to

[28:59] lay that out for you. That's really. About, I think,

[29:02] goal setting, trying to arrive at what's the purpose of

[29:06] the funds, why? Are you investing and then understanding that?

[29:09] When somebody's coming and showing you different portfolios that are

[29:12] trying to achieve the goals that you've outset. What are

[29:16] the inputs to that process? Obviously, the expected returns, variability,

[29:20] all those things you saw, and then the risk part

[29:22] of it, which is, how can different portfolios potentially help

[29:26] you mitigate some of those risks that you've. Had and

[29:29] understanding that some level of risk likely has to be

[29:31] taken to achieve a return. Right, or else. You're likely

[29:36] not going to invest. There for 1 second and see

[29:39] if there's any questions before we move on to implementation.

[29:44] Board member giles. Thank you, chair Hughes. Yeah. A few

[29:53] questions and or comments. So far, so good. Thanks, Kyle.

[29:58] We have to be careful about treating bonds and equities

[30:01] as monoliths. You can adjust. The risk profile of your

[30:06] bond portfolio. Quite a lot. And the correlations will change

[30:11] in your risk profile will change. And one thing you

[30:14] have to think about is what type of bond portfolio

[30:16] do you want to get the total risk for the

[30:19] portfolio that you're looking for. So if you have a

[30:23] bond portfolio with fairly low quality, like a lot of

[30:26] double b's, it's going to react a lot more like

[30:29] the equities do. The economic considerations will be more important.

[30:35] I would agree, Cole. I think for purposes of this,

[30:37] I think we've kind of just given. Again, 10,000 foot

[30:41] view of government bond and a canadian equity, but I

[30:44] agree 100%. Some bonds look more like equities, and how

[30:48] you define that, that probably gets into the implementation very

[30:52] tightly on. You got the strategy, how you're going to

[30:54] implement it. Yeah. There's a huge spectrum of strategies you

[30:58] could pick. I 100% agree. And the last comment you

[31:02] made about currency hedging? To me, it's not so much.

[31:08] Where the security trades, but what its underlying business is.

[31:12] So if you have a canadian listed company, But it

[31:16] does most of its business. In Chile, for example. You

[31:21] may have chile. And currency exposure, which is not easy

[31:24] to either know about or hedge. So hedging is not

[31:28] as easy as just looking at where the current the

[31:31] security trades and hedging that. Yeah, 100%. I think there's

[31:35] almost two ways to think about that. Yeah, you could.

[31:37] Invest in a business and it has exposure. So again,

[31:40] a lot of people, you could say, do you have

[31:42] emerging market securities in your portfolio, right? And you might

[31:46] say, oh, I only invested United. States. I don't. Arguably,

[31:49] there's a ton of companies in the United States that

[31:51] drive revenue from emerging markets. So you're getting. That exposure

[31:54] through those companies, I think for a lot of groups,

[31:57] and they think are currency, hedging I think it's more

[31:59] about what's the security denominated in. Because I think that

[32:03] carries. A very clear, like, canadian dollar to us that's

[32:06] traded every day, and it's posted. And to that point,

[32:09] you can know exactly what it is in hedge it.

[32:13] Exactly. You can't necessarily go to, like, for example, Michelin

[32:16] and try to hedge away. The fact that they're trying

[32:18] to drive more business in China by selling more tires

[32:21] and there's a risk to that. I will say the

[32:23] last piece is a lot of companies. Internally, maybe doing

[32:27] currency hedging on their own. So if you're Michelin and

[32:29] you're selling a bunch of contracts in China, you may

[32:32] already. Be trying to hedge out that currency risk inside

[32:35] of your own business, not necessarily thinking about what investors

[32:38] are doing when they buy your stock, right? It's probably

[32:42] a russian doll. You know what I mean? That you

[32:44] could open up and. There's like ten more that come

[32:45] out. Yeah. So all I'm trying to say is currency.

[32:50] How are you going to do complicated? We could have

[32:53] a two hour run on that easily. Okay, thanks. No,

[32:58] great points. Anything else? So if everyone's good, we can

[33:04] talk a little bit about the implementation. Think everyone's good.

[33:09] Yeah. No, thanks. We'll jump into that. Okay, you got

[33:14] your policy. You've designed these asset classes. You've gone through

[33:17] this. Risk budgeting. You're tired now. Again, how are you

[33:20] going to go and. Put it to youth. Right. So

[33:23] the idea of the investment policy is really the blueprint,

[33:26] right? Like you design a house, you're probably very much

[33:28] concerned about whether it's got five bathrooms or one kitchen

[33:31] or the rest. That's probably what you want to know.

[33:34] What? Color the floor is might be interesting to you,

[33:37] but probably less material. Right, but this is really. I

[33:39] think, kind of how you think about this a bit,

[33:41] the policy. Piece is really good. The portfolio construction is

[33:44] going to be whether you have gym sport where they

[33:46] have corporate bonds, high yield bonds, some of these other

[33:48] things, whether you have equities at all that's coming into

[33:51] the. Portfolio. The implementation now is how you're putting that

[33:54] plan into action. Right? So one of the first. Again,

[33:57] not that you wouldn't be concerned about it, but again,

[34:00] what tends to drive. The biggest risk profile of your

[34:03] portfolio is what asset classes you pick less so exactly

[34:06] who's implementing them. So one of the first things you

[34:09] typically look at is active or passive. Management, right? And

[34:12] we've shown you this year passive management with that little

[34:15] arrow there's going to be a narrow range of results.

[34:18] Active management is huge, right? So passive management is trying

[34:21] to replicate an index. So you can just buy the

[34:24] S and P TSX index and RBC. Will be the

[34:26] biggest holding you have, and everyone else is just based

[34:29] on what their weight is. In the index for most

[34:31] market weighted inde. Indexes. If you go to active management,

[34:34] you now hired someone that says, listen, I think I

[34:38] can outperform the market. Let me outperform it for you.

[34:42] There's going to be a fee to that. Typically, active

[34:45] management costs more than passive because passive is very easy.

[34:48] To implement active management requires more effort. Right? So the

[34:52] buy. And sell decisions. Passive management is constantly trading just

[34:56] to match the index. There's no forethought to trying to

[34:59] do it. Asterisks is a lot of fixed income. Passive

[35:04] management does require a little more. Decision making because you

[35:08] can't perfectly replicate a bond index the way you can

[35:10] an equity. Index. But that's another point. Active Management now

[35:14] is about the investment manager having the decision. On what

[35:17] to buy and sell and how to wait again, there's

[35:19] multiple approaches at the bottom right, like fundamental. The Warren

[35:24] Buffett approach of trying to determine. Do I think this

[35:27] company is going to make money? What are their suppliers

[35:30] saying? Do I think they know something about this business

[35:32] that other people don't. Quantitative is usually more driven. On.

[35:38] You have statistical models now analyzing the price of stocks

[35:41] and the trading of them and the behavior and trying

[35:43] to make decisions based on that. Right. So equity style,

[35:48] so quickly, just a few things. You'll see in your

[35:50] life when you're looking at the implementation. There's 100 ways

[35:53] to skin a cat in the investment industry. There's many

[35:57] ways. The first one being value managers are a big

[35:59] one that have existed. For a long time. That's the

[36:01] idea that you're looking to buy stocks at bargains realistically.

[36:05] So stock trading below its fair price right has the

[36:08] market miscalculated. The value of this stock. So typically, these

[36:12] managers look for low price to earnings ratios, low price

[36:15] to book ratios. They're really concerned about the valuation of

[36:18] the stock relative to the merits of the business. Right.

[36:22] Growth managers are at the other end of the spectrum.

[36:24] They tend to care less about those Matt tricks what

[36:27] they're really concerned about. So if you invest in a

[36:29] company like Apple, Apple can have at times, like, pe

[36:32] ratios of, like, 80, which would be like. That basically

[36:35] means what you're paying for the stock. Would take you

[36:37] 80 years to get your money back. Based on current

[36:40] price to earnings, how much? The stocks worth based on

[36:43] what you're paying on it. So in that scenario, that

[36:45] manager is less concerned about today, but very much focused

[36:48] on what is this company doing into the future. And

[36:51] they're going to increase revenue and increase growth at kind

[36:54] of exponential levels, potentially. That will pay you. For that

[36:57] investment back. A growth manager and a value manager not

[37:00] going to agree with each other. On what is the

[37:02] right way to run a portfolio, and they likely will

[37:04] not hold the same. Stocks and a core or a

[37:07] blended portfolio could be mixture of both. And what we

[37:10] say on the second one is. It's usually not that

[37:12] clear cut. There's a lot of growth managers that do

[37:15] things that are called growth, quality growth, where they're. Saying,

[37:18] okay, I'm a growth manager, but I'm not going to

[37:20] outpay. For what I'm buying. I'm still very much focused

[37:23] on some of these fundamental metrics. You can have value

[37:26] investors that tend to be deep, deep value. And now

[37:29] you're. Looking at like they're going to be very volatile.

[37:31] They might look more like a growth manager in terms

[37:33] of the return profile, but they're focused on different kinds

[37:35] of companies. All right, so. Capitalization approach at the bottom.

[37:41] Again. Classifications can be different here. 's kind of view

[37:44] of it, I guess. So company capitalization is really, again,

[37:48] is there share price by number of shares outstanding? Right?

[37:51] So. Some managers are small cap managers. They're focused on

[37:54] smaller companies in the index. Their view is that small

[37:58] companies are less researched and tend to be areas where

[38:02] you can add value because the market is not covering

[38:04] them as well. If you think of a company. Like

[38:06] again, Microsoft. There are thousands of analysts looking at Microsoft

[38:11] and trying to come up with what's the fair value

[38:12] of Microsoft. Do you think you're going to figure out

[38:14] something that everyone else hasn't. But again, if you're a

[38:17] very small company, right, and. You have one or two

[38:20] bank analysts following you. There might be something getting missed

[38:23] at investment manager. Can pick up, right? So small cap

[38:26] mid. Cap. Now you're coming up, you're a bit bigger

[38:28] and then into large cap. Companies. And there's also mega

[38:31] cap today, so some companies. That can really, once talk

[38:36] alone, can move the index based on its performance, based

[38:38] on how big it gets right. So one thing that

[38:42] you'll often see when you look at different strategies again,

[38:45] correlation. So even though you've talked about correlation of different

[38:48] asset classes, you can see correlation of different investment managers,

[38:51] different strategies. And what we've done here is you can

[38:52] have two investment managers say a value. And a growth

[38:55] manager in the same portfolio, and they're going to be

[38:57] going up and down at different times. Right. But what

[39:00] you can potentially try to create for yourself is that

[39:03] middle line, which is if you utilize more than one

[39:06] strategy, you can sometimes create a portfolio that actually is

[39:09] better than the sum of its parts. Right? So these

[39:11] two managers offset each other, and we'll give you some

[39:14] diversification. And when favors fall in or, sorry, when different

[39:17] equity styles fall in and out of favor of the

[39:19] market. There's many times value investing has been a hard

[39:23] place to be over the last five plus years, the

[39:26] growth managers have won. The kind of contest lately when

[39:30] you look at the US market especially, right? So the

[39:33] kind of stocks, tech stocks, these other stocks that value

[39:35] managers don't like. You might have value managers out there

[39:38] today that are just. They're pretty depressed, right? They're going

[39:41] to their client meetings, and the numbers are. All red

[39:44] and they're saying, listen, I bet you it's going to

[39:46] turn right. And it could. And if it does turn,

[39:49] they're all going to shoot to the top. Right. And

[39:51] the growth managers will crash. Right. And this is the

[39:53] thing, they both have views the value manager, a growth

[39:56] manager. It can be hard to determine who's right and

[39:59] who can see what's going to happen. Potentially, by diversifying

[40:02] across them, you can kind of get yourself some obviously

[40:05] offsetting styles and that's what. Again, we have a lot

[40:07] of clients that utilize this approach and equities. Sometimes in

[40:11] other asset classes like bonds, you may see less ability

[40:13] for managers to create these kind of profiles, but we

[40:16] won't get into that. So one of the things we

[40:19] got asked a little bit about last time. Was a

[40:21] bit about funds and how should boards look at different

[40:24] things. So we just wanted to. Really kind of recap

[40:26] a little bit in a few minutes. There's different ways

[40:29] you can approach implementing a portfolio. Right. One of the

[40:32] ways that a lot that you can do is called

[40:35] again. And the pop bullet point there. Following decisions related

[40:39] to active management and equity style. Those are typically the

[40:42] first ones you might make usually. Then you might talk

[40:45] about segregated or funds. So a segregated account or fund

[40:49] about how you want to set up the investment or

[40:51] the strategy. Both approaches here have pros and cons, which

[40:54] we'll talk about. Segregated accounts were typically years ago, really

[40:58] what most people had, that was actually the standard, a

[41:01] segregated account is where you have a custodian? And you

[41:05] own the securities directly. So if you have a canadian

[41:07] equity manager, you own every single security in your portfolio.

[41:11] And what happens is the manager has authority to trade

[41:14] in your portfolio, so. Basically, they're making the calls of

[41:17] what to buy and sell. But you hold those securities.

[41:20] Directly. Right. They're in your name. The segregated accounts can.

[41:24] Have some advantages, so they can allow you to customize

[41:27] the strategy to yourself. So if you told the manager.

[41:30] Listen, I don't want you to buy this one stock

[41:33] again. This can sometimes happen in the corporate world where

[41:36] you go. Listen, I don't want you buying any. Of

[41:37] my competitors inside of this portfolio, they can say, okay,

[41:41] I won't buy that one. Stock for you. We'll take

[41:43] it out because all the. Securities are in your name

[41:45] and they're trading in the portfolio, and you can potentially

[41:48] make securities lending income. So a lot of portfolios on

[41:51] the segregated side will lend out securities, right? For securities

[41:55] lending to managers that engage in that, you can make

[41:58] some money beyond just holding your securities. Right. The segregated

[42:03] account structures can be difficult sometimes. To implement depending on

[42:06] how much money you have and the market. Canadian equities

[42:10] simpler if you want a segregated emerging market portfolio? Your

[42:15] custodian has to open markets in all of these different

[42:17] parts of the world that are maybe more difficult to

[42:20] do, and it could be cumbersome for you to be

[42:23] able to implement it that way. So depending on the

[42:25] strategy, how big you are, A lot of investment managers

[42:28] tend to would rather have you go into their fund,

[42:30] which is the last one at the bottom. So the

[42:32] industry has moved a lot towards investment manager will make

[42:35] their own pooled fund or a mutual fund. Same idea.

[42:39] Where basically they are managing the strategy, and every investor

[42:42] buys units of the funds. So instead of owning the

[42:45] physical securities. You own units of a fund that owns

[42:48] the physical securities. It's like inception. Right. How many levels

[42:51] down? Right. Do you go before you own the thing?

[42:54] A lot. Of the pool funds that you see today

[42:55] can provide flexibility around having a custodian. You may not.

[42:59] Necessarily need a custodian. You need a custodian for a

[43:02] segregated account? You don't. Necessarily need that for a pool

[43:04] fund and can potentially reduce fees depending on the manager.

[43:07] Scale. Sometimes investment manager will charge you less on a

[43:10] pool fund than they will on a segregated account. And

[43:13] again, pool funds, they'll reduce your ability to have client

[43:16] specific constraints. So in that example, where you might not

[43:19] want to own your competitor pool fund won't allow it

[43:22] because. They can't make one decision for you that affects

[43:25] everyone else in the pool fund. The pool fund has

[43:28] its own investment policy. And you're going in on that

[43:30] policy, right? That's the way it runs. And then typically,

[43:34] trading costs and securities lending are spread across the whole

[43:37] pool, so everyone is paying together for trading. Everyone's receiving

[43:42] their share of the securities lending and again. There is

[43:46] sometimes pool funds can have additional, well, they do it.

[43:47] They have additional operating costs that may or may not

[43:50] be less than what you would pay on your own

[43:52] if you had a segregated account. We can't necessarily say

[43:56] exactly. It depends on the size of the manager, size

[43:59] of your. Portfolio and who the manager is, right? So

[44:01] that's really fundamentally kind of two approaches, right? And when

[44:05] you move over to the, that's really public markets, when

[44:08] you over the private markets. You would have to be

[44:11] very large to have a private market manager, like an

[44:14] infrastructure manager. Make you a segregated portfolio, because in this

[44:17] case, you can think they're not just putting the securities

[44:20] in your portfolio, they're buying you a bridge or a

[44:23] hospital, and they're putting it in your portfolio. Right. So

[44:26] segregated accounts on the private side really exist only at

[44:30] the mega end of the spectrum again. There's asterisks to

[44:33] that. You could potentially have kind of. Co investments with

[44:36] some managers, that would look like a segregated portfolio. But

[44:39] in general. Most investors on the institutional side exist in

[44:44] the private market through fund investment, so the manager has

[44:47] a fund has created it for you. And there's two

[44:50] main structures there's open ended and closed ended. Right. Open

[44:54] ended funds are evergreen exist forever. Right. And so the

[44:57] idea is you buy into a fund, you get ownership

[45:00] of all the assets that are already. In the fund,

[45:03] but again, typically very much on the valuation. Last meeting.

[45:08] There's talk about appraisal policies and the like. That is

[45:11] a factor. In these funds because how the assets are

[45:13] being appraised is how you're going. To move in and

[45:15] out of the fund. So an open ended fund offers

[45:17] you liquidity, but is getting that acquittal off of appraised

[45:21] values. Right? So close ended funds are the other side,

[45:23] where you have an investment manager that goes to market

[45:26] fundraises. For a strategy. And then once they put, it's

[45:30] like an auction. They put up their hand for last

[45:32] calls. You can commit, and after that it's over. They

[45:35] go and implement. The strategy. Nobody leaves or comes until

[45:38] the fund winds up at the end and it's. Fulfilled

[45:41] its investment strategy. More restrictive for redemptions you can't redeem.

[45:45] You can try. To sell your interest in the second.

[45:47] Secondary market. But again, that can be difficult. You can

[45:50] imagine. Try selling your car on Kojigi. Right? Somebody comes

[45:54] in. It looks like you drove it into a tree

[45:56] one day. Right? Imagine when you're looking. At an infrastructure

[45:59] fund and trying to sell that to someone. Right. It

[46:01] comes more difficult as you can imagine to do those

[46:04] kind of transactions. So again, what happens in the private

[46:07] space can be a little bit different than what's available

[46:09] in the traditional, and we want to drive us back

[46:11] to what's the focus for most boards, right? And I

[46:14] would say the decisions made. At the investment policy level.

[46:18] That idea of portfolio construction. They're typically the largest focus

[46:21] for most boards because they have the largest impact on

[46:24] the risk and return. The expected results of the portfolio

[46:27] are really going to be driven by the decisions you

[46:29] make at the policy level. So the second one. It's

[46:32] important to understand what you've invested in from a strategy

[46:35] perspective, but typically where if you utilize an ocio, you've

[46:38] delegated the implementation. To this third party. So again, there's

[46:42] a cost to delegation, right? You've hired. Them to do

[46:45] this for you if you've hired someone to do it.

[46:47] And then again, you hire. Somebody to come in and

[46:50] renovate your house, a general contractor. And then you're constantly

[46:53] over a shoulder. Ask them every decision he's making. You

[46:55] might not be getting the value. What you've hired this

[46:57] professional to go out and do, right? So the idea

[46:59] is most boards, especially in an ocio structure, are focused

[47:03] on the policy. But again, you want to see reporting

[47:06] on the strategies you're in, but there has to. Be

[47:10] a position of the implementation is being delegated and we're

[47:13] retaining these policy decisions. Right again because most boards can

[47:16] commit the time required to review all aspects at the

[47:20] implementation stage. There's a lot of work at the implementation

[47:23] stage that you have to consider. You may not have

[47:26] your fiduciary duty. Maybe better spent in other areas. If

[47:30] you're kind of taking effort that could be spent in

[47:33] areas where you can drive. More value because you're getting

[47:35] into the weeds. In some spots, you might determine is

[47:38] this the best outcome for us. Right? And then ongoing

[47:41] monitoring and strong governance is really what you try. To

[47:43] do. You try to have a feedback loop where obviously

[47:46] you're dictating or. Delegating to someone, they're giving you the

[47:48] reporting you need to determine. That you're satisfied that the

[47:52] implementation, that the policies being carried out. As you wanted

[47:56] to. Right? So I know we've got about another ten

[47:58] minutes for the. Last section, hopefully a little bit quicker.

[48:00] This is really the oversight and the monitoring that we

[48:02] can touch on. So I don't know if there's any

[48:04] questions through the implementation, but. This one's going to look

[48:07] a little bit about the results. Not seeing any questions.

[48:15] So keep going. So that's a mari. So, monitoring function.

[48:17] This is that feedback loop, right? I think on the

[48:19] first day, we showed you, like, a recycling sign, right?

[48:21] Like, policy implementation, monitoring. So monitoring is trying to assess

[48:24] those other two areas. Right. So an institutional and monitoring

[48:27] function in most institutional portfolios, typically monthly to quarterly. Right.

[48:31] You're getting reports sent to you on performance assets. Here's

[48:34] what's happening. All right. And then more and more probably

[48:37] in depth policy reviews are being conducted more annually, right?

[48:41] So there's kind of an annual function for most groups,

[48:43] and then quarterly or monthly, frequently. Reporting. Again, performance reporting

[48:47] should link back to the investment policy. Right. And the

[48:49] metrics benchmark set up by the board. So if you

[48:51] have the objective, if you put objectives in the policy,

[48:53] that says over the next five years, we want to

[48:55] earn. 6%. Well, the monitoring should probably be incorporating. Well,

[48:58] what has been the five year return is it meeting

[49:00] that objective. Right. So we talk about both absolute and

[49:03] relative performance assessments. So how is an invested again. If

[49:07] you're a value manager, you're underperforming the benchmark. But how

[49:10] do you look like next to other value managers? Are

[49:12] you the best? Are you the best of the worst,

[49:15] right? So those. Are things you want to see. A

[49:17] relative assessment can give you some barometer to what a

[49:20] strategy is doing right, and then qualitative assessment, we would

[49:23] say, is crucial, if not more. Important than the quantitative,

[49:26] right? So the numbers are one thing, but what's happening?

[49:29] Obviously. At the investment firms or the OCI managers that

[49:31] you've employed. Those are factors you would want to know.

[49:34] Right? Firm changes. So one of the things straight from

[49:37] the c, if anyone's a CFA Turner. Holder has gone

[49:39] through this. They made you learn this. This is basically

[49:42] how you set a good benchmark. There's this acronym, Samurai,

[49:44] right? So specified in advance. If you're going to have

[49:47] a benchmark, that investment manager is going to be accountable.

[49:49] To. Should be specified in advance. Should be appropriate. Right.

[49:53] So you should know about it. Again. Shouldn't benchmark an

[49:56] equity manager to a bond index that doesn't make a

[49:59] lot of sense, measurable. Should be able to actually calculate

[50:02] it, right? Unambiguous. It should be clear what securities are

[50:05] in it. The relative of current market opinions means. You

[50:09] shouldn't have kind of obscure securities in it that no

[50:12] one can form an opinion. On because there's no information

[50:14] available. Accountable. The manager will take ownership of it and

[50:18] investable. Should be able to recreate it or invest in

[50:20] the benchmark. If you didn't. Want to be active. Not

[50:23] all benchmarks meet all of these, right? So if you're.

[50:26] A real estate manager and you say I'm going to

[50:28] benchmark myself. To cpi plus four. Yeah. That might be

[50:32] somewhat specified in advance might be accountable, but it's not

[50:36] investable. You can't invest in it. So there's always going

[50:38] to be areas where you have to give and take

[50:40] on making a benchmark, but these are technically the concepts

[50:43] you should be. Trying to look at when you put

[50:45] one in place. Right. So we've given you a modern

[50:48] example. This is this example client, right? So you get

[50:50] results, right? June 30. So this portfolio you can see

[50:54] made 1.67% in the quarter, and it underperformed its benchmark

[50:58] by 00:15 so this report you'd hopefully want to see

[51:01] well, what were the areas that underperformed in the benchmark?

[51:03] But over the five years this client might have had

[51:05] a goal of make 6%. Hey, we've exceeded that. We

[51:09] made eight, but also we beat our benchmark by the

[51:11] full percent over. Five years. There's also a relative percentile

[51:15] ranking at the top. So this is comparing the portfolio

[51:18] to other similar portfolios. So again, maybe you made eight,

[51:21] but everyone else made twelve. Maybe the eight doesn't look

[51:24] so good anymore. Right. So what's the relative performance? To

[51:27] other similar funds. And then we also look at the

[51:30] risk on the far right. So what did you take?

[51:33] To get this right. So there's an information ratio for

[51:35] everyone familiar? That's kind of your unit of return for

[51:38] your risk. Then use your capture ratios. A lot of

[51:41] clients we have focus on how does the portfolio perform

[51:44] when the market's up? How does it perform? When the

[51:46] market's down. So this specific fund, every time the market

[51:49] goes up, there's. 112 there on the up market. Capture

[51:52] if you look to the right. That means if the

[51:53] mark goes up ten, they go up, basically. Another 12%

[51:58] above that, the market falls, or capturing 107% of all

[52:02] the markets. So they're doing worse than the market when

[52:04] it's down, but they're exceeding by a higher merch and

[52:06] when it stops. So technically, that relationship has helped them.

[52:10] They've more than compensated for the losses they've had on

[52:13] down markets through the performance and up markets, right? There's

[52:16] a lot of. Statistics that you can get generated on

[52:19] a portfolio. These are just a sampling, but these are

[52:23] some of the ones that we find most groups are

[52:24] somewhat interested in. Right. Relative risk and then absolute next

[52:28] to your benchmark, but all of that is timepoint sensitive.

[52:32] That was all at one date. That was at the

[52:34] second quarter. The same portfolio, you can look at trend

[52:38] analysis over time. So this is every core? These are.

[52:40] Five year returns on a quarterly basis going down. So

[52:43] if you look in that first column of the added

[52:46] value. You can see that starting in the first quarter

[52:48] of 2022, it started to deteriorate, so it starts falling.

[52:53] So this might be something. If you're bored, you could

[52:54] look there and say, hey, listen. The numbers are still

[52:56] green, but there seems to be an alarming trend here.

[52:59] Every quarter we're losing some. Six continues. We're going to

[53:02] be negative soon. What's happening? In the portfolio that's driving

[53:05] this same thing on that bear market capture. You want

[53:08] that? To be less than 100. You want to be

[53:10] better than the market when it's negative. It used to

[53:12] be. And then you can see that something obviously started

[53:15] to get worse. Over a few quarters. But on the

[53:17] flip side, the bowl actually somewhat improved through a few

[53:21] of them. Right. So all this trend analysis might help

[53:25] you try to determine, is there something going on? From

[53:28] a risk perspective in the portfolio that I'd want to

[53:30] be aware of right by. Not just looking at a

[53:33] specific point in time. Every report. A lot of things

[53:37] that you want to know. Is compliance. Right. So you

[53:40] have an asset mix policy that says we got to

[53:42] be this much. Fixed income, this much equity, and there's

[53:44] ranges for most portfolios that you can operate. Within. So

[53:47] this is actually showing you what are you above and

[53:49] below in? Right. So this would show you the current

[53:51] quarter, the previous quarter, and the policy. Right. And the

[53:54] range of what you're allowed to be in to make

[53:57] sure you're within the limits. And a qualitative assessment is

[54:00] an example where. Who do you have managing something for

[54:03] you in this example? Even Ocio, an alternative manager and.

[54:07] Then we've given performance objectives straight from your policy. Are

[54:09] they meeting them? Yes. No, manager. Changes. Is there anything

[54:12] going on with this? So the one manager at the

[54:15] bottom there, we've given an example. Maybe they were doing

[54:17] okay on performance, but they have significant organizational turnover. Maybe

[54:21] they're. Failing so you can have an overall rating. And

[54:24] if you have managers that are failing, you might put

[54:27] them on a watch. Right. So now it's a more

[54:29] formal assessment. You're going to do based on whether or

[54:32] not they're performing, this could be for no CIO. Manager.

[54:34] This could be a very investment manager as well. And

[54:36] then monitoring an OCIo mandate. Which might be applicable to

[54:39] you. So within the ocio governance structure, the Dec. Decisions

[54:43] relating to underlying managers are delegated or strategies are delegated

[54:46] to the oci. So you want to receive ongoing reporting,

[54:49] likely on the results, but also you got to represent

[54:52] that's. Not a decision factor that you're making. You're not

[54:55] picking the strategy, the OCio manager is so again they

[54:59] may sit there and have again. If you see an

[55:01] underperforming. Strategy. You might have a question for them on

[55:04] what's your plan for that, but you wouldn't. Necessarily be

[55:06] making the call to, say, fire that strategy. Right. So

[55:10] monitoring an ocio. Relationship requires aspects of traditional investment manager

[55:14] monitoring but also needs a qualitative assessment around the ocio

[55:17] because those CIO is implementing. But they're typically also giving

[55:20] you advice, right? On the policy on. New asset classes.

[55:24] So you kind of want to get an assessment of.

[55:26] Do I think that advice is adding value. And again,

[55:29] Eckler has quite a bit of experience doing these reviews,

[55:32] so. Obviously where we do them, we think it's obviously

[55:34] quite good to try to determine where you might see

[55:36] differences in opinion. So I'll stop there for the question.

[55:40] Yeah, I think board member test a question. Thank. You,

[55:43] Kyle. Terrific presentation. My question is really to talk about.

[55:48] I think this is a key point. For us who

[55:50] are employing an ocio model. And the question I have

[55:53] for you is whether or not you typically see. The

[55:57] introduction. Of a policy that specifically outlines what's been delegated

[56:03] to the Ocio versus what the governing board retains. And.

[56:10] If that policy lives within a broader investment policy or

[56:13] if it's a standalone document and the reason I'm feeling

[56:16] that is actually post your training. One of the questions

[56:20] that I have is I've seen some areas of our

[56:22] delegation. For example, minor adjustment to policies. And, Jim, I

[56:28] think you've raised it a number of times of how

[56:30] much are we allowing? Investment policy adjustments to go on

[56:35] beyond because. There is. This dual challenge that you face

[56:40] where you want to give the Ocio, the nimbleness. To

[56:43] execute. But ultimately, our role is to ensure that the

[56:47] assets are invested according to an investment policy. So how

[56:50] much flex do you give in adjustments, particularly during the

[56:53] implementation phase when you're onboarding? New provinces. So one, do

[56:58] you advise a policy? To. How tight is that? In

[57:03] particularly implementation phases. Yeah, I think those are great points.

[57:08] So on the first part of your question, so most

[57:10] clients we would have, I would 100%. Agree with you.

[57:12] It should be very clear who's responsible for what that'd

[57:15] be. Fundamentally, I would agree. Whether the policy. Extend. Most

[57:20] groups would have it in the investment policy. To be

[57:22] honest with you, there'd be a clear section at the

[57:24] beginning that talks about governance. Right. So who's responsible for

[57:27] what? And also, again, there's usually a section of responsibilities

[57:32] that goes through. Ocio has to do this. This. The

[57:34] board is responsible for this. The board has delegated certain

[57:37] tasks even to staff or other people that would do

[57:39] that. So to answer that, I don't think there's a

[57:42] set rule on whether it has to be in your

[57:43] investment policy or a standalone what you'll see, though, is

[57:46] you probably have an investment management agreement, some. Somewhere, right?

[57:49] Like an Ima with an OC. Typically what they say

[57:53] in that Ima. You could write whatever you want in

[57:56] your own policy. That Ima is what they're talking to

[57:59] legally, to say, this is what I'm responsible for because

[58:02] you sign this agreement with me. So you'd want to

[58:04] make sure. The IMA is kind of consistent with what

[58:07] you come up with in your policy. And again, most

[58:08] OCI managers would want to see your investment policy to

[58:11] say. You kind of have this thing outlined in your

[58:15] policy. I just want to make it clear to you.

[58:16] Our IMA does not say we're responsible for that. So

[58:20] should we adjust this? Or do you think that we

[58:22] need to talk about this point? But that's how I

[58:25] think most groups would look at that. I can answer

[58:28] you the second one in terms of ranges or flexibility

[58:31] when you're implementing I think is kind of the point.

[58:34] Again. There usually is some amount of. So if you

[58:37] had investment policy, you might have ranges in it. For

[58:40] asset classes. Right? That says this much. This much. Most

[58:43] groups, if you're going through a transition to a portfolio

[58:45] that's going to be materially different than what you're. In.

[58:48] You may have a sentence under there that says, listen,

[58:50] we acknowledge that the portfolio is. Conducting a transition to

[58:54] a new governance structure during. This time period, the board

[58:57] will allow for temporary deviations to the asset mix policy.

[59:01] Any deviation in the policy has to be either you

[59:04] could seek. That has to be approved by the board.

[59:05] In advance or reported to the board within one quarter

[59:10] with an explanation how we will move towards policy. Right.

[59:13] So you typically would have some kind of overarching. Statement

[59:16] that says, listen, I understand these are all our ranges,

[59:19] but we acknowledge that it may not. Be possible to

[59:21] stay within all of them. So again, most groups would

[59:23] have it let's say you commit to real estate, a

[59:25] real estate manager may not be able to take your

[59:27] money. Immediately. Right. So you're going to be underweight, your

[59:29] target. Right. Because you can't. Invest in it. So you

[59:32] might have a sentence that says, listen, I acknowledge that

[59:34] this might happen so to. The extent it happens, I

[59:37] want to see reporting on it, and I want the

[59:39] ocio manager to tell me what the strategy is to

[59:41] get me to policy compliance in the timeline. Right. I

[59:45] would rather not say. We're trying. We'll see what happens.

[59:48] Should be. What are you telling me is going to

[59:50] happen to get me there, right? So that's usually what

[59:53] we would say so, Kyle, I'm retaining a couple of

[59:56] things. One. That the delegation to the OcIo needs to

[59:59] be articulated somewhere. And ideally, some kind of reference should

[1:00:05] be made. To the IMA and the document of what

[1:00:08] the manager themselves has accepted to take on as a

[1:00:11] responsibility. I'm also retaining that in a transition period where

[1:00:16] you may have assets in movement and where there needs

[1:00:18] to be flow that can be called out in an

[1:00:21] investment policy. I know I've used that in my own

[1:00:23] personal. Work relationships where you call out a transition period

[1:00:27] of time. So that there's a natural cessation. Okay. This

[1:00:32] is very helpful. Thank you. No, thank you. Not seeing

[1:00:38] any more questions yet. Do you have maybe one more

[1:00:41] slide? Is that right? Oh, yeah. No, it's just a

[1:00:49] big eckler. I don't have anything on that one. Okay,

[1:00:53] great. Last call for questions, then. No, not seeing any.

[1:00:59] Okay, well. This has been very helpful. All three sessions

[1:01:04] have been very helpful, so thank you. Maybe we'll just

[1:01:08] do some of. The regular admin stuff that we do.

[1:01:14] So could I have a motion to receive the presentation

[1:01:16] from Eckler? Thank you. Board member ready? Makes that motion.

[1:01:21] All in favor, please raise your hands. Thank you. That

[1:01:26] Carrie is very good. So thank you again, Kyle and

[1:01:31] Brad, very much for these sessions. It's great. Thank you

[1:01:36] so much. And obviously, if there's any questions that come

[1:01:38] up after the fact. Feel free to reach out to

[1:01:40] us more. Happy to answer. Okay, great. Thank you. Yeah.

[1:01:43] All right. Have a great day. Thank you. Thanks a

[1:01:46] lot. Now, before everybody goes, can I have a motion

[1:01:51] that the appropriate staff of one jib and one investment

[1:01:53] be given the authority to do all things necessary, including

[1:01:56] executing any documents to give effect. To the board's decisions

[1:02:00] today. Board member Giles makes that motion. All in favor,

[1:02:03] please raise your hands. Any opposed? No. All right. Can

[1:02:11] I have a motion to adjourn? Makes that motion. All

[1:02:14] in favor, please raise your hands. Any opposed? I would

[1:02:22] say that carries so. We are now adjourned. And just

[1:02:26] as a reminder, our next meeting is on Wednesday, November

[1:02:29] 27 at 10:00 so we'll look forward to seeing you

[1:02:33] all there. Thanks very much, everyone.

Joint Investment Board - Special Meeting

Agenda

Transcript