Innovator Awardee
At the 2023 Public Funds Roundtable in Los Angeles, Institutional Investor launched the Innovator Award, to recognize a true leader and innovator for their contributions to the industry. The first recipient of the award, OPTrust’s Chief Investment Officer James Davis, is someone who personifies leadership and innovation. A graduate of Dalhousie University, he has held senior roles across Canada, including at the Royal Bank of Canada (RBC) and the Ontario Teachers’ Pension Plan.
At OPTrust, one of Canada’s largest pension funds, James has designed and implemented the fund’s investment strategy around the goal of keeping the Plan fully funded to pay the pensions of its over 100,000 members. OPTrust’s portfolio, invested in all asset classes globally, is built on a foundation of risk management, actively leveraging the skills of its in-house investment team, incorporating environmental, social, and governance (ESG) considerations into its investment decisions, and embracing new technologies and innovation.
As James continues to cultivate a culture of continuous improvement, openness, and member-driven focus, Institutional Investor is delighted to recognize James with the inaugural Innovator Award for his work in risk management, team building, and problem-solving.
The following has been edited for length and clarity.
How did you get into the investment industry?
I saw investments as a giant puzzle where the pieces were always changing, so that was exciting, and it still is, for me. After having gained a lot of capital markets and investments experience at RBC, I joined Ontario Teachers’ in 2006. I was the Vice President, Strategy & Asset Mix and Chief Economist, and it was a remarkable experience. I was part of an organization that had such an impressive reputation, and it was focused on pension investing. My prior background was in traditional asset management, and Ontario Teachers’ provided me with the opportunity to understand pension liabilities and be involved in all different asset classes, which is unique.
At Teachers’, one of the things that I really began to appreciate was this idea of a Total Portfolio Approach. When I came to OPTrust, we created our own version of the Total Portfolio Approach, which we call Member-Driven Investing or MDI.
At OPTrust, we make sure the investment teams are fully involved in the mission of keeping the Plan fully funded without taking excessive risk. The funded status is the metric that matters the most.
How do you deal with the challenge of liquidity?
Liquidity is something we think about a lot. We must take risk to earn returns sufficient to keep our Plan fully funded. MDI focuses on taking risk purposefully and efficiently. For us, illiquid assets provide the best opportunity for value creation, but we are mindful that liquidity is a scare resource. We need to ensure we have sufficient liquidity in market stress events so we can pay our obligations and not be forced sellers.
We give a lot of thought to managing our Total Fund liquidity and have a prudent and integrated liquidity risk management framework, which is essential to meeting our MDI objectives.
How do you factor risk into strategic asset allocation?
Similar to liquidity, risk is a scarce resource. Everything we do is driven by our liabilities, so our focus is on funding risk, which we define as a decline in our funded status. A key driver of funding risk is what happens with interest rates and equity prices. These are our two most important risk factors.
We’re a mature pension plan, managing the pensions of over 100,000 members. When we take risk, we need to ensure we are being adequately rewarded and that we are not exposing the Plan to unnecessary risks. We have a defined risk budget and start our portfolio construction by determining how much of the interest rate risk embedded in our liabilities we wish to hedge. This is the goal of our Liability Hedging Portfolio. We also have a Return Seeking Portfolio, which is designed to take risk and is invested in many asset classes, but with a focus on value creation and maximizing risk-adjusted return. Finally, we have a Risk Mitigation Portfolio that is designed to smooth volatility cost effectively. This is very important for a mature pension plan.
How did you structure your governance to meet OPTrust’s objectives?
Governance must begin with a clear understanding of our investment objective. It is crucial to ensure that everyone is aligned and working towards our goal of providing long-term pension security for our members. Our governance framework establishes operating processes that support effective risk management and process diligence, while empowering our internal teams to make decisions with agility in a complex and ever-changing investment environment.
We also have a strong and independent investment risk function that provides both insight and oversight and acts as a second line of defense.
Culture also plays a role. We foster a risk-conscious culture. Our people are our greatest asset, and we ensure their success is aligned with the retirement income security of our members.
Where does ESG fit in?
ESG is an important part of MDI. In order for us to deliver on our pension promise, we have to be mindful of risks that can sometimes be longer-term and slower-moving, and how they can impact not just the overall economy or the political system, but by extension how they will impact assets and the returns we’re likely to get.
Our members care that we are investing responsibly, and we also think responsible investing is just good business and is core to delivering long-term pension security. Who wants to invest in a business that is polluting the environment or exploiting children through child labor? How is that investing in a sustainable business?
In late 2019, we created a Sustainable Investing and Innovation (SII) team to invest capital at the intersection of sustainability and innovation. I wanted to ensure that we were intentionally investing into the opportunity side of sustainability, and to date our focus has been exclusively on businesses addressing the climate crisis. The team also leads our broader responsible investing program and our overall climate change strategy.
Over time, our thinking on ESG has evolved so we consider ESG factors from both a risk and opportunity perspective and have built a culture where all investment professionals are expected to understand the long-term strategic importance of ESG.
What makes you an innovator?
Innovation is a mindset, it’s a culture, and it’s something that must be encouraged and fostered in investment teams. Innovation takes time and requires organizational transformation.
I care deeply about empowering my team so they can try doing things differently. If someone wants to try to build a machine-learning algorithm and thinks that’ll be a gamechanger, I encourage it. From my perspective, it’s all about risk management. We want to be innovative but must do so in a risk-controlled way.
The investment industry is hyper competitive, and what has worked in the past might not work in the future. We must keep up and stay ahead of the curve.
What advice would you give an incoming Chief Investment Officer?
Be very clear about your objectives, surround yourself with the best investment team possible, communicate with your stakeholders and reinforce the need for alignment.
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