Claude Macorin, Macor Capital Management
Claude Macorin is the founder and president of Toronto-based boutique investment consulting firm Macor Capital Management. He is the newest participant to take part in IMMP's "5 Questions."
IMMP: Given 2011’s dismal performance numbers for institutional investors in the endowment, foundation and pension plan space, how do you think Macor Capital Management’s (MCM) customized investment services will help to alleviate future worries?
Macorin: Macor Capital Management offers select investment services that are important levers for creating value. At MCM we put a lot of weight on process and people as well as aligning interests wherever possible. Our experience indicates that a successful investment program requires a comprehensive and practical approach that reflects market realities and investment strategies that are tailored to meet specific client objectives. MCM is independent and privately–owned with revenues coming exclusively from investment consulting thereby aligning our interests with those of our clients.
The low yield, high volatility environment has created a dilemma and is forcing investors into making some difficult choices. Many investors are choosing strategies that have the appearance of improving risk adjusted returns but have the potential to lead to further hardship. For example, there is ample academic literature to support increasing exposure to alternative investments and while we agree with the theory, the reality of the situation is that alternative investments have attributes that make it difficult for the average organization to access economically and add value. This is due to a number of factors including high fees, complexity and a lack of required skills to name a few.
Investors who have tried to emulate the “Yale model” have been disappointed because, much to their chagrin, they have discovered (the hard way) that the model is not simply about increasing exposure to alternatives but more importantly about process and people, and an alignment of interests.
Another distinguishing characteristic that differentiates MCM is how the firm approaches risk management. Risk has many definitions and while we incorporate several into our analysis, we find that defining risk as the “currency” needed to purchase performance puts greater emphasis on the process and allows us to better capture a difficult concept in a more versatile manner. How an investor chooses to spend risk will influence the outcome and impact key measures such as volatility and liquidity.
The challenge is that investment risk is multi-faceted and not always apparent or well understood, thus making it difficult to budget and manage. The complex nature of risk requires that our analysis include both quantitative and qualitative factors. The ability to properly interpret these factors and to develop well reasoned investment strategies is extremely important and an area where MCM has demonstrated experience.
IMMP: With your past experiences as an investment decision maker at Ontario’s University of Guelph and Montreal’s McGill University, what do you think are the major problems facing endowment portfolios in Canada?
Macorin: The challenges facing Canadian endowments are not much different from those facing our U.S. counterparts. There is concern over the difficulty with maintaining the real value of the endowment during a period of low returns and persistently low interest rates. Many endowments are still recovering from the effects of the 2008-2009 financial crisis, a period that saw spending curtailed in order to maintain real values and avoid encroaching on capital.
Most universities in Canada are publicly funded with diverse funding streams and these endowments are most often designed to provide funding for scholarships and special projects and do not (with some exceptions) form a regular component of the operating budget. This makes it easier to navigate troubled waters.
This is not to say that Canadian universities are not facing financial challenges with increasing costs and a reduction in government funding but these are not new issues and have been prevalent for several years. Although, one could argue that the situation is worsening.
Endowments in Canada are, for the most part, in better shape than they are south of the border. The primary reason for this is that the asset mix in Canada is more heavily weighted toward fixed-income and less on alternatives. I know that this sounds like an oxymoron but this is where we find ourselves. Also, when Canadian institutions invest internationally, U.S. equities usually get a healthy allocation and the U.S. markets have performed well in recent years, notwithstanding the strong Canadian dollar.
Recent financial events remind us that fixed-income is not only about yield, but also acts as an important anchor and softens market volatility in a diversified portfolio of assets. I am not making a case for the asset mix going forward but simply stating the facts. The future may be quite different and institutions need to position themselves according to their unique objectives and risk tolerance.
IMMP: The benefits of outsourcing CIO and investment decisions are readily apparent in many smaller endowment and pension funds incapable of guiding their pools. However, how would you respond to critics that label the outsourcing CIO structure as unaccountable to the institutions they serve?
Macorin: The outsourcing of CIO responsibilities is growing rapidly in the U.S. and less so in Canada. It is important to remember that these arrangements are, in large part, still in their infancy and the relationships and associated agreements are evolving to accommodate the particular needs of clients.
Outsourcing doesn’t change who has legal responsibility for meeting policy objectives. It is the fiduciaries as outlined in the plan document that are held accountable and an outsourcing arrangement won’t change this. An outsourced solution is a method for an investment organization to achieve their stated objectives. The arrangement frees up resources and allows for timely decisions, and should add value if it is done well.
An outsourced CIO is no more or less accountable than an investment manager acting as a co-fiduciary and this relationship works fine with the exception of when there is a breach of the agreement or policy. The important matter is to ensure that the operating agreements properly capture the governance and accountability aspect of the relationship.
Where the water gets muddy and conflicts occasionally arise are when the consultant acts in his role as a fiduciary and recommends proprietary multi-manager funds. In our view this is a conflict of interest and MCM does not support this type of arrangement. At MCM we believe that the most important aspect of a consultant relationship is independence. Our experience suggests that in order for investment consulting to work effectively, it has to be transparent and offered on a totally separate platform, and this does not mean a Chinese wall but rather a totally separate organization.
When it comes to investment consulting and fiduciary management, organizations need to realize that there is wide range of talent and that credentials do not mean much if an advisor doesn’t have practical and relevant experience. The client has a role to play in ensuring that they hire experienced professionals and hold them accountable.
IMMP: Over the next six months, do you see international and emerging equity products improving? How will such vehicles hurt or help attraction to alternatives from endowment and pension plan sponsors?
Macorin: At MCM we do not believe in market timing because there is no evidence that it adds value over the long-term. We will, however, attempt to capitalize on market trends or dislocations if we determine that circumstances warrant such a move.
Most diversified portfolios will have an allocation to international and emerging markets. The allocation and method of implementation will vary according our clients’ objectives and risk tolerance. International/emerging markets are not a substitute for alternatives because the liquidity and risk/return characteristics are substantially different. They are two very different asset classes.
The expected growth rates of the world’s emerging economies are expected to significantly exceed the developed markets, albeit with a higher level of volatility. It would therefore make sense to have a presence in these markets and we acknowledge that the quality of implementation will have a significant impact on the results.
We believe that independent thinking is essential to creating value and following the crowd leads to mediocrity at best. This is one of our investment beliefs and we use it in practical terms subject to our clients’ objectives and are very careful to avoid market timing.
IMMP: What is your take on the National Hockey League’s lockout?
Macorin: There was a time when NHL players were so poorly paid that many lived in relative poverty during their retirement years. It is a well-known fact that one of the greatest hockey players to ever play the game, Maurice Richard, sold fishing gear in his old age to help make ends meet. Many players of his era met a similar fate.
Times have changed and players now sign multi-million dollar contracts in short order. The players know what is available and with revenues on the rise they want what they consider their fair share. The owners claim that expenses are rising faster than revenues and they also want their fair share, and more importantly want to determine what is fair.
There is plenty of money to go around but there doesn’t seem to be much good will. Hockey appears to be going through a period of maturation following decades of expansion. Let’s hope that good reason will prevail.
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