Episode #128: Claude Lamoureux, “When You Have to Make A Decision, Always Make the One That Will Let You Sleep Better, Not Eat Better”

Episode #128: Claude Lamoureux, “When You Have to Make A Decision, Always Make the One That Will Let You Sleep Better, Not Eat Better”

Guest: Claude Lamoureux. Claude is an actuary by training, and from 1990 to 2007, he was President and Chief Executive Officer of the Ontario Teachers Pension Plan. Prior to 1990, Claude spent 25 years as a senior financial executive with Metropolitan Life in Canada and the U.S., heading the company’s operations in Canada from 1986 to 1990.

Date Recorded: 10/30/18

Run-Time: 50:44

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Summary: In Episode 128, we welcome pension fund expert, Claude Lamoureux. We start with Claude’s background, which took him from Met Life to running the Ontario Teachers Pension Plan.

When Claude took over the pension, the fund was invested in just Canadian debt, and the size of the pension obligation was underestimated. Claude decided to use derivatives to diversify the portfolio. He expanded into the S&P, recruited an investment department, and within three years, had successfully reallocated the fund into the broad asset classes they wanted.

Meb asks how investing is different for a pension allocator versus an individual investor managing his own portfolio. Claude tells us that in the pension world, people don’t want to take responsibility. He wanted to do the opposite. He wanted to create a culture where people become entrepreneurial.

This dovetails into a conversation about valuations. Claude is a big believer in having a realistic valuation of liabilities and potential returns. He mentions that today, many U.S. pensions are expecting around 7% returns, which he finds unrealistic. Claude says people should earn the money before they spend it.

The conversation eventually turns toward Claude’s general market approach. Claude had a somewhat traditional policy portfolio, yet used lots of derivatives to diversify into stocks and non-Canadian bonds. He mentions how when you have a large deficit, you must go heavily into equities. He also liked private equity and real estate. And there was a great deal of leverage.

The conversation turns toward problems in the U.S. pension system. Claude gives us his take on the issue. In short, many pension liabilities here in the States aren’t measured properly. He also mentions interest rate assumptions and the fees of outside managers. Finally, Claude points toward politicians and how they don’t want to face the facts.

There’s plenty more in this pension-themed episode: the importance of being a student of the market history…the Canadian Coalition for Good Governance…the sage advice of “when you have to make a decision, always make the one that will let you sleep better, not the one that will let you eat better”…and of course, Claude’s most memorable trade.

All this and more in Episode 128.

Links from the Episode:

  • 0:50 – Welcome and a look at Claude’s career history
  • 2:54 – How his career change happened
  • 10:26 – Biggest difference between how a pension allocator thinks about markets vs other investors
  • 11:27 – Fortune and Folly: The Wealth and Power of Institutional Investing – O’Barr
  • 16:56 – How Claude’s investment approach developed
  • 23:30 – Looking at the Ontario fund allocation strategy
  • 28:25 – The state of US pension funds and what can be done to help
  • 35:59 – Global Investment Return Yearbook (GIRY) – Credit Suisse
  • 36:04 – Elroy Dimson Podcast Episode
  • 36:30 – Advice to investors based on lessons learned
  • 40:06 – How Claude’s investing viewpoint has changed over his career
  • 43:18 – The co-founding of the Canadian Coalition for Good Governance
  • 46:44 – Reaction to a quote from an interview in which he said “when you have to make a decision, make the one that will help you sleep better, not eat better.”
  • 48:37 – Most memorable investment

Transcript of Episode 128:

Welcome Message: Welcome to “The Meb Faber Show,” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas all to help you grow wealthier and wiser. Better investing starts here.

Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcasts participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com

Meb: Welcome, podcast listeners. Today, we have a great show for you. Our guest was the first CEO of the Ontario Teacher’s Pension Plan Board, which he turned into one of the most successful pension funds in the world. He’s also co-founder of the Canadian Coalition for Good Governance. We’re happy to have him on the show. Welcome, Claude Lamoureux.

Claude: Welcome, Meb, to you too.

Meb: It’s great to have you on. So Claude, we’ve got lots to talk about today, but I figured a good jumping in point for lots of discussion was it’s interesting to hear your background because it’s a little atypical, I feel like for some, but an interesting, interesting background nonetheless, but you were at Metropolitan Life doing some work before moving into the pension world. Could you tell us a little bit about that before you got…what laid the groundwork for your eventual career in the pension fund world?

Claude: I started at the Metropolitan Life and it was a great experience. I had fabulous bosses and, you know, a few that I learned not what to do, but most of them were excellent, the first one in particular. And eventually, I worked 12 years in New York and 12 years in Ottawa, Canada where the head office was located, and at the end, I was responsible for all the Canadian operations and we were diversifying. But eventually, we decided to go our separate ways and that’s when I went into the pension business, taking over what was up to that point, to all the Ontario Teacher’s Superannuation Fund. Ontario is the largest province in Canada with a population of about 12 million people. And in 1990 when I went there, you had about 160,000 active teachers and 40,000 retired.

Meb: It’s one of my favorite games to play with a good Canadian friend of mine is to try to ask my American friends how many Canadian provinces and territories they can name. Most people can get about three. I’m usually up there. I can almost get them all. So we’re talking to you today from Montreal. So talk to us like what, how did that career change happen? Was it something where you had this chance to take the reins? What did the state of the pension look like at the time you took it over? I believe this would’ve been around 1990.

Claude: The firm was started in 1970, and up to 1990 it only invested in one class of asset, Ontario government debenture that were non-marketable, non-assignable, non-negotiable. So when we took over, there was a new board that was named. You know, up to that point the board was mainly mid-level civil servants and, you know, union member. And you know, I think in terms of investment, there was not too many risks. But in 1990, they decided to create a totally independent…from an organization independent from the government.

And the first person that was named as the chair was a fellow by the name of Gerry Bouey [SP], who had been governor of the Bank of Canada for 14 years. He had a stellar reputation and he then proceeded to recruit a board with the government and the teachers and convince everybody that you should have experienced people on this board. There was $16 billion of assets. The big problem was what’s the deficit because everybody knew there was a deficit. The government had calculated the deficit of roughly $4 billion, but it turned out to be more like $8 billion when we did the work. And the government had promised that they were gonna, you know, pay the deficit over a period of 30 years.

But in 1990, you know, we were able to use the derivative because these allegations were non-marketable. Everybody thought that we were gonna only invest the new cash flow. But the person I hired, a CIO, a person by the name of Bob Bertram, who did an outstanding job, came up with different ideas and one of them was, why don’t we use derivative to diversify the portfolio? And this had, you know, quite a number of advantage for us so rapidly. I remember our first big investment was a swap from Ontario debenture to U.S. S&P 500 of a billion.

So everybody on the board was kind of, “You guys really know what you’re doing?” And I think we demonstrated to them that we knew a little bit. There was no investment people up to 1990. So my job mainly, initially, was to recruit an investment department and that’s how I recruited Bob Bertram. And we proceeded to build an investment organization. At the same time, the board had told me, “Well, don’t worry about the administration because we want you to focus on creating a good investment department.” But I wasn’t there a month that I realized that they were huge problems with the administration and the teachers were not happy, or essentially, the clients were not happy with the service. So, you know, I also started to worry about the administration and we decided that this was something that we had to invest money in. So, you know, I spent a lot of time on the investment but also making sure that we could provide better service and what was done up to that point by the teachers.

So our first big investment that is, you know, a billion dollar, you know, swap. And then we proceeded to use derivative to diversify the portfolio fairly rapidly. I’d say that within probably three years we were pretty much the type of asset mix that we wanted in terms of broad asset classes. But from day one, my idea was that I wanted an organization that would manage about 80% of the money internally and, you know, use outsiders in the area of specialization initially in the private equity. And, you know, the board, I think that I was able to convince the board that this made sense that we could build a good organization as long as we hired good people, that we had a decent compensation plan so there would be no huge turnover of the investment people. And that’s the premise, you know, that I took the job. And I remember Mr. Bouey asked me, “How are you gonna run this?” And I said, “Like a corporation.” And you know, one of his question was, “Well, what does that mean?”

So I explained to him my idea and he never flinched when I mentioned to him compensation that we would have incentives, that we would pay probably the type of compensation…Nothing necessarily initially that an insurance company…I don’t think we had to be as high as some of the banks in Canada, but we certainly had to be competitive. And that was the idea from the start and we were able to do that. Then, you know, as I’ve told many people, the board delivered even more than I ever expected because every time I would come up with a new idea, they essentially would, “Yeah, let’s do it,” or they would ask questions, but you know, having a good board made a huge difference. And even today the board is mainly business people. The teachers, historically, have only had one or two people that you can call teachers or retired teachers. So, and you know, I think the union, although they were not that thrilled by the type of salary I was paying, they understood that that was necessary to be competitive and to attract good people and also to retain the same people.

So we were an early user of derivative at the time that the Orange County was going bankrupt and that bad things were happening with derivatives. So the journalists were all worried about what we were doing. So we spent a lot of time explaining to journalists, Bob Bertram and myself, what we were doing, how we were doing it, the kind of control we had. And you know, I don’t think that we have…To me, the press is very important and, you know, you really have to tell them what you’re doing. And if you do, at the end of the day, I think that they’re not there to just look at the bad things. But once they understood what we were doing, they never wrote really a negative article on this stuff that we did although we made mistakes along the way. But I think they were intended to be supportive and that help us also with the clients, the teachers. And at the same time, in parallel, we were working to improve the service. And over a period of years, we made it one of the best service organizations in the pension world and probably even in the financial service industry.

Meb: I think you’ve hit on a couple…

Claude: I’ll stop there.

Meb: No, it’s good. I was gonna save this question for later, but I think it’s really appropriate now as you hit upon the importance of structure. And we’ve seen in the U.S., particularly in the endowment world, a lot of the challenges of having a culture or competing interests and conflicts. You know, a good example has been a lot of the turmoil going on at the Harvard Endowment for the past decade. And so maybe before we get into like a lot of investment stuff, maybe I’d love to hear a little context for the listeners on kind of theoretically…you know, most of our listeners, it’s a pretty broad spectrum of individual to institution. But kinda what do you see as the biggest differences in how a pension allocator thinks about, you know, the portfolio and the markets and competing interests versus, you know, anyone else who’s just simply managing a portfolio? Because it’s a problem that has many layers of challenges and complexity.

Claude: I think that the challenge in the investment business, and I don’t know if you’ve ever read the book called “Fortune and Folly” by two anthropologists. And, you know, it’s an interesting book and it was published in fact in the early ’90s and somebody probably gave me a copy or I bought a copy. And my idea was I think that the conclusion that these anthropologists gave is that in the investment business, they look at 10 to 12 pension funds, institutional investors in the U.S. and they realized pretty quickly that people didn’t want to take responsibility. My idea was the opposite. You know, I remember talking to Bob Bertram many times and saying, “If we mess up here, we are out of a job, so don’t worry about it. I think we got to do a good job.”

And so you gotta hire good people. You gotta give them responsibilities. You gotta create a culture where people become entrepreneurial. And that’s what we tried to do. And you know, we had a fairly broad mandate from the board. So we were able to get into, initially, for instance, we hired different people, one person to do private equity, another one to do real estate, and we asked them to build a team that would be a first-class in their area. And over time we were able to do that. If you take real estate, the fund today is the owner of the largest real estate company in Canada called Cadillac Fairview. And Cadillac Fairview stayed…we kept it independent. It used to be owned by 40 pension funds. It went bankrupt. And we were able to buy it with the KKR and Blackstone and eventually we bought the whole company. But the board was worried, “What do you know that KKR and Blackstone doesn’t know?” And you know, our answer was simple, we’re here for the long term, this is a great glass of assets. And that’s how we got into it.

With private equity, we asked, you know, a lot of the partners that we had and we wanted to have co-investment. And in 1990 everyone that we…in early ’90s…because this didn’t happen in 1990 exactly, more like ’92, ’93…everybody laughed at us. Well, you asked for co-investment, but everybody does it, but nobody is able, when the time comes, to invest that money. We said, “Well, try us.” And I think one of the initial co-investment was with BC Partner and we were able to reply to them probably in less than a week. And that got us on…you know, I mean, they were very surprised that we were able to do that. But, you know, as I said, the board was very helpful in, you know, approving these things and supporting us. And to me, having the right culture makes a big difference in any organization. And, you know, as I said, when I was reading “Fortunate and Folly,” I wanted to do the opposite of “Fortunate and Folly.” We have to take responsibility, we have to do a good job, and you know, the rest will come as we go.

The other thing that I’m a great believer in pension plan is to have a realistic valuation of your liabilities. And again, you know, there was this deficit at the beginning that we, you know, multiplied by two. But we told people these are realistic assumptions. And for a while, we were probably one of the most aggressive pension funds in terms of return in the early ’90s. But today, if you look at the fund, they’re using assumptions that are nominal term, probably below 5%. Whereas, you know, I remember reading an article in “The Wall Street Journal” where, you know, a lot of U.S. pension funds were using assumptions where to median was certainly above 7%.

Again, you have to discuss this with, you know, the clients, which are the teachers and the government, and you have to make them realize that realistic assumptions, you know, are there and we should earn the money before we spend it. And we explained our assumptions. We had a terrific actuary who made, you know, probably a 10th of presentations and probably over a 10-year period, 50, 60 presentation to the government and the teachers. So they would realize that the assumptions we were using made sense and we were always transparent with them. And in the end, I think this pays because people realize that you’re trying to do a good job and not just try to accumulate assets or a surplus that doesn’t make sense.

Meb: I think you’ve hit upon a really important topic here in the U.S., particularly about what we would consider to be unrealistically aggressive return expectations, and we can weave that in as we talk. I’m curious to how your investment approach was developed. You know, is it something when you started at Ontario that you had in your mind an idea of where you want it to be? You said it took about three years to transition some of these concepts. And you know, the portfolio looks a little more traditional today versus the rest of the world. But in the early ’90s it certainly probably was not the standard. How’d you kind of arrive at this policy portfolio that you guys have developed? And maybe outline a little bit about your framework for investing and kind of the main asset classes and targets if there was any, but how’d you guys arrive there?

Claude: Well, the board before we arrived, there was anybody in the investment that hired a consultant who did the traditional asset allocation study. And I remember explaining to the board the kind of asset classes that were there, what made a lot of sense, how to maximize your return and minimize your risk, and risk here was defined in terms of volatility. So this is a traditional type of study. The one thing that always struck me, coming from a life insurance background was, you know, nobody took into account the liabilities. And it took about four or five years before we created our own research organization and we took into account that the liabilities and how they behave under certain circumstances. And, you know, but initially, we were looking at the traditional classes of asset, as I said, with a wrinkled thrown into it because a lot of our actual assets were not marketable.

So we were using a lot of derivative to diversify and stocks and to diversify it in bonds other than Ontario. But we had enough bonds that that was not so much the concern. The concern was, how do we get into stocks, how do we get into private equity? We bought a few buildings before we bought Cadillac Fairview. And again, with the idea of these were good assets to match the liabilities of pension funds. And don’t forget, the liabilities were also indexed to inflation. So we needed assets that would respond to inflation. And when Canada started real return bonds, we were probably the largest buyer of real return bond because we felt that this was a good asset class for us.

Again, you know, many pension funds took awhile before they got into this. But you know, Bob Bertram was the type of person that new things did not…he was not afraid of new things. And we were able to convince the board, again, I think the right board, you’re able to convince them that this makes sense. So over time we migrated from, you know, the traditional, efficient frontier, looking only at assets to a more pension-like investment frontier including liabilities. And our riskless asset was really a long, long-term real return bonds. And so we were a big fan of these real return bonds. And that’s why, you know, real estate also fits that bill too because, again, you can increase your rent if inflation comes back. So we were looking at these.

And because we were different than a lot of pension funds, you needed the board that understood what we were trying to do and was supportive of that, otherwise you cannot go anywhere. You know, real estate in the early ’90s was not a very popular asset class, but we were looking at the long, long term and we felt, at the time, that a lot of the real estate was…it could get an 8% or 9% return…the cap rate was around 8% or 9%, not the return, the cap rate was around 8% or 9%. So we felt very good about these assets, and over time, it turned out to be a fabulous investment.

On the private equity fund, we were able to invest on our own. We invested with partners, but also once we started the operation, we invested on our own. And again, that has worked out very well. If you look at the history of teachers in private equity, after expenses, we’ve done better than what we got from our partners that invest, you know, the traditional private equity group. So this has been a good decision over time. But again, when you do these things and you’re the only one, or one of the only ones doing it, you know, you need somebody that supports you and that’s where a good board comes in.

Meb: That’s a great investing setup. And I was thinking in my head, you know, one of the most often asked questions we get from particularly individuals that are putting new cash to work or putting cash to work for the first time. And I imagine it was probably something similar for you as you’re transitioning from a pension fund that held really only one type of asset to a much more diversified active allocation that has all sorts of different strategies and asset classes. So many people have the challenge of saying, “Do I invest at all now or do I slowly transition over time?” And if so, at what time period? And it’s a question we get if not daily then certainly weekly and every month. But having a good board or having a good understanding investor base is pretty key to that decision because otherwise you get into the problem of hindsight bias and obviously everything is pretty obvious in retrospect where you said, “Oh man, I should have just waited until next year to implement that. I’ll put private equity on three years from now.”

But having a good, understanding board is certainly crucial and I see a lot of problems where it’s not a good alignment. Just the policy allocation of the Ontario fund and pension, when it was under your helm, is it a pretty similar allocation strategy? Meaning, you know, X amount of equity, X amount in fixed income, X amount in absolute returns, and other striated [SP] private equity. And it looks like it has a little bit of leverage as well. Is that accurate or is that a different policy portfolio then the whole time when you were there?

Claude: No, no, it has leverage. That’s when the thing that we started before I left in the last few years. I think today probably, the fund, if I look at…you know, I think I was looking at the 2017 annual report, you’re looking at borrowing close to, I think, around $40 million. So, you know, when you can borrow at a very low rate and we started that, if I remember, in Japan where at that time we could borrow essentially at, you know, two-tenths of 1% and invest in stocks where the dividends were, let’s say, 2%. So that’s how we got into the leverage business. But at the same time, over time, we expanded that to really have a program of borrowing and, you know, if rates go way up, obviously, this program will be closed. But as I said, last year the fund probably was around $40 billion, what they borrowed.

And again, you need a board that understands why you’re doing that. You also need good controls in case thing change overnight. If rates were to spike very quickly, you gotta be able to close, you know, these positions. Otherwise, it may not be a smart move. But this is something that we started…you know, as I said, I left in 2007 and we were borrowing at the time, but they’ve expanded the program since. So the asset classes, they are similar to what we had, you know, pretty much all along. But today, it’s much more geared…you know, when you have a deficit, it doesn’t matter. You gotta go heavily into equity, especially if you look at the long, long term. But today they are much more in-tune to looking at the risk versus the kind of return they can get, their risk of the liabilities so that they match the asset and that’s what they’ve been able to do.

The other thing that my successor, Jim Leach, was able to do was to convince the teachers that the retirees should participate in the risk. So the inflation protection on future service is not guaranteed. You know, there has to be a surplus so that people could get the inflation protection. And again, this is something that Jim Leach was able to sell. We had started to do that. But I think that over time this will prove to be a very wise decision on the part of the government and the teachers to go along with this because it permits you to keep a defined benefit plan in perpetuity. Whereas if you only rely on the active, you know, chances are that the over time demography, that that’s one of the things. You know, in 1970, you had about 10 active teachers for 1 retiree. When I started, we had four for one.

So you know, if, if you had a hiccup, you know, like 10% losses in your asset, you could increase contributions. But as the plan matured, today you’re looking more at one-and-a-half active for every retired. I think that, you know, this is not sustainable unless the retirees participate in the risk. And that’s one of the things that the plan has and that’s an asset and they’re worried that you can count on, essentially, extra contributions or a decrease in benefit that helps you match your assets and your liabilities. But, you know, coming back to your statement, I think a lot of the asset mix that exists there, it’s more refined. They’ve done a very good job of finding the various…I think we were in into commodities early, but today they have a much bigger program so that there’s different classes of assets that they’ve gone into much more than we ever did.

Meb: It’s very Canadian of you. All my Canadian friends love natural resources and stocks more than most American investors I talk to. Talk to me a little bit, all right, you got a perch up there in Canada at what’s going on south of the border in the U.S. where despite a 10-year monster bull market run in equities where the U.S. has outperformed most, if not all, equity markets around the world. You still have a lot of problems with unfunded pension funds and underfunded by, in some cases, a lot. Do you have any commentary in general on the state of the pension fund world down here? What’s going on? Any possible fixes for the situation and any projections as to what you think could be the future for a lot of these funds that aren’t in great shape?

Claude: I think that they’re not in great shape for a number of reasons. One, you start with the liabilities. Many funds don’t measure them properly and many governments don’t seem to want to even know what’s a proper liability. And in fact, in some states it’s illegal to, or you have to go to the states to get approval for the kind of interest rate assumptions that you’re gonna make in your evaluation. So as a result, you look at, you know, Illinois, a lot of pension funds are in bad shape. Everybody knew this. It was easy to predict. At the same time, when you rely on outsiders to manage a lot of the money, when you have private equity managed by an outsider, you have to think that at this cost, not the 2%, but you’re looking more like at 4% or 5% fee on your investment.

So that’s one thing that a plan like teachers and a lot of the Canadian plans too, they are similar to teachers. When you manage more of the money in-house, you know, if you get an extra half a percent, 1% over time, it makes a huge difference. The other thing that we were able to, because of transparency, convince the union that, you know, contributions in the early ’90s had to go up because it didn’t make sense to ask young teachers to pay for, you know, Cadillac pension for retirees. So, we preach a lot of solidarity. So everybody’s in defined…if you have a defined benefit plan, over time it’s gonna give you a better pension than defined contributions. But everybody has to be aware of the risk and everybody has to be supportive of having the right contributions and making sure that, you know, everybody realizes this has to be done.

The other advantage we had is that we were an independent organization so we could make our calculations on liabilities and tell the government this is the way it is. And you know, for them, they could not just postpone the inquiries or things like that. They realized that some of these increase in the ’90s were necessary. They realized that the insulation protection could not be guaranteed forever unless the retirees participated in the risk. And so, you know, in a way we had maybe a bit of luck, but at the same time, we were able to convince politicians and union member that a realistic valuation was to the benefit of everybody and it helped us being more aggressive on the investment side. And if you can be more aggressive on the investment side, over time you will have better return.

But with better return comes volatility and everybody has to be conscious that volatility could mean risk and how you prevent some of these risks. And I think that we’ve been, in a way, lucky, but at the same time, we’ve followed some of the work that had been done in Europe, especially in the Netherlands. For instance, the idea of having the retirees take the risk of the inflation protection is not an original idea. It’s something that we borrowed from the Dutch. And, you know, again, we had people that realized everywhere in government and in the union that these things were…you know, you had to be realistic in your valuation.

When I see…I’ve mentioned earlier that a number of the U.S. land…this was an article from “The Wall Street Journal,” but it came out from a study by two or three academics. When you see a pension fund using 8% return, and some of them are as high as 9% and 10% return, this thing doesn’t make sense. You know, on a worldwide basis, there’s a great book called “The Triumph of the Optimists” that has been updated, and on a worldwide basis, nominal return on stocks of 7% that probably the best, you know, are the average that we’ve seen from 1900 to 2016, chances are that going forward these returns will be tough to match because a lot of the easy oil has been found, a lot of the easy metals have been found. So I question how…you know, I think the U.S. has probably some of the smartest people in pension and investment, but how the people got in trouble, it’s a lot of politicians didn’t want to face the facts.

And you know, I’m reading Michael Lewin’s [SP] book and I can tell you what I took from the book is that you have three departments where, again, a lot of times people don’t wanna face facts. I mean, it’s kind of interesting, how can smart people make decisions that don’t make sense? And that’s what has been happening in the pension industry. I won’t say in every state because there are some states where the investments are done better and where the assumptions are realistic. But in too many of the states, these assumptions have not been realistic at all.

Meb: Yeah, I was on this soapbox yesterday on Twitter where there’s survey after survey, if you look at investors all around the world, and the number they almost always come up with for what do they expect to improve portfolio returns to be is around 10%. And there’s a full 20% of the people, 1 in 5, that expect their portfolio returns to be 20% or more. So, you know, it’s kind of the ostrich problem, put their head in the sand. But it’s funny you mentioned that book because I often have quoted it on this podcast. That’s my single favorite investing book. And listeners, it’s expensive. It’s like 100 bucks, but it’s a gorgeous coffee table book. You can get free yearly updates if you Google “Credit Suisse Global Investing Returns Yearbook,” they put out about 10 updates that are shorter but still beautiful to the book. We actually had the professor on the show, Professor Dimson, a few months ago. So listeners, check that one out if you haven’t.

But a lot of problem for people too on that is it’s sort of like going to the doctor or getting weight loss advice, like you know, it’s take your medicine, you know what to do, but a lot of people just don’t wanna hear it. So going back to a lot of the concept of having buy-in from everyone around. So you had this luxury of having a great board and a great team. Now, of course, if you did very poorly and did dumb stuff, you wouldn’t have had that luxury because you would have been fired. But you had a buy-in from everyone. So let’s say most investors listening to this podcast, if you’re an individual, their board consists of their husband or wife and that’s about it. They have no investment team. Or even if you’re a professional investor, you know, the traditional advisor here, and essentially their clients, they have their clients, which hopefully are educated and have an understanding of what the plan is. Are there any good takeaways from your time spent in Ontario that could be broad-based, sort of, advice for people on…it could be on the investment theory, that the biggest one you probably already mentioned is expectations being somewhat realistic. Any other thoughts come to mind as to how people could have some takeaways from your experience at the helm of Ontario for a couple of decades?

Claude: Well, I think in the investment business, one of things you always have to do is study history, and I think I’ve mentioned this book, “Fortunate and Folly.” If you look at returns, this is a great place to start. John Bogle has written a lot about this. You know, I think the takeaway, you start there, you look at what returns have been over time, in the past, and you look where you are today and I think that you have to make projections. But you know, to me, it’s having good people, you know, decent compensation, making sure that you’re totally transparent. I mean, one of the things we tried to explain in the annual reports for years was why we were doing what we were doing. Having annual meetings. I think the annual meeting of the Ontario Teacher’s Pension Plan, sometimes the questions had been as long as two hours. And to me, you gotta be transparent.You’ve gotta explain what you’re doing, you gotta explain to the politicians why you’re doing different things. And at the end, you know, this is what you need, in my mind, to run not just a pension plan but a decent organization of any kind, of any kind. And you know, I don’t think there’s any secret in what we’ve done.

I think in Canada, most of the pension plans, maybe we were there a little bit earlier than they were, but a lot of them have the model that…you know, a similar model to Ontario teachers. And some of them, hopefully, I’ve improved on that, and I think that the secret is having total transparency with the right people. I think U.S. has probably some of the best people in the world of investment, but it doesn’t show in the way that the pension funds are run because I think that the politicians, a lot of times, have very little interest in what’s gonna happen in the future. And that’s what you have to look in pension funds. You have to look not at this week, but you have to look at 50 years from now. And I think that that’s where teachers spend a lot of money today in having stochastic model showing that, demonstrating what will happen, what the risks are, and hopefully that, you know, enters into the decisions that people make. You know, to me, it’s not more complicated than that.

Meb: Yeah. And so as you look back on the last few decades, I mean, is there anything, upon reflection, where it’s kind of today’s different, or you know? And it could be any number of topics, it could be the challenge of high fee portfolio managers in a world where indexing has become more prevalent. It could be, hey, you know what, private equity is too hard these days. Or you say, “You know what, I still love managed futures. I didn’t like them five years ago.” Anything possible? Anything in particular you’ve changed your mind on over the years or come to any sort of different belief today then you may have had 5, 10, 20 years ago.

Claude: I think you have to adjust you a belief. You know, I think we had a heck of a nice run, especially in the U.S. in terms of returns. This cannot last forever, so you gotta take that into account when you look at the future and be a little bit conservative. So you know, I think I mentioned earlier, I’m a great believer in making the money before you spend it. When you look at the future, you have to be somewhat conservative and make sure that you’re not promising more than you can deliver because people will be disappointed. And demography, that’s the other thing that we don’t pay enough attention in the pension business and even in managing healthcare is that demography is a very powerful thing. And when you have a lot of young population, it’s very easy to correct mistakes, but as the population ages, it is much tougher to correct your mistakes. And you have to take that into account when you manage a plan, when you manage almost anything where, you know, you gotta look at the 50 and 100 years forward.

In some ways, I think we were able to do that,. And to this day, I think people accept that, you know, here’s how much a plan costs and, you know, there’s just so much you can get out of return. If you look at the kind of return that we’ve obtained since 1900 to 2016 on bonds, real rate is less than 2%. Nominal rate, you’re looking at 4%. You know, it’s hard to predict that you’re going to do much better than that than the next 100 years, same thing on stocks. You know, when I look at private equity and infrastructure, which a lot of people say, “Oh, there’s magic there,” there’s no magic. Over time, these returns will come back similar to what we see in the stock market and probably may not be as good because a lot of the easy returns have been a pain. I mean, you can restructure a company just so many times.

Meb: Well, but see, they can just keep selling it to each other and then taking it private and then re-leveraging it up and buying it out again and then going public. But that’s very sober, thoughtful advice. And it’s spoken like someone who’s done it but also been a student of history as well. So Claude, post-Ontario, I know you’ve kept busy, you’ve been doing a bunch of boards, but also we saw that you co-founded something called the Canadian Coalition for Good Governance. Maybe you could tell us a little bit about what that is and what the purpose is.

Claude: I think that when you invest, for instance, initially we invested a lot in index fund. So the old story goes is that you really have to care about governance of you index an index fund. One of the things that…the coalition was founded by a good friend of mine, Steven Kozlowski, who was a fabulous a investor, and you know, he called me one day and we invited a group of pension funds and we decided that we were the owner of the Canadian company. So we had to make our views known and one of the early views that we had is that we wanted to separate chair and CEO. And we were able to convince Canadian companies that this made sense that these were two jobs and today this is accepted. So the coalition today regroups all the institutional investors in mutual funds, pension funds, there are maybe even some foundations there. You know, I’m not as up-to-date, but the idea was to regroup everybody and make our views known in terms of good governance in my view leads to good results over time.

And we’ve seen that and I think that we were able to convince companies of making changes and many…but the biggest changes we were able to do is to separate chair and CEO. And in many companies, especially in the U.S., the same person wears two hats when we felt that this was, you know, two separate things. But we’ve also…I think the coalition has been there to represent the investors when regulations or a law changes. And this is a voice that the people take seriously. We’re not there…you know, we’re there to help essentially the companies do a better job. I think at the end of the day, what the coalition is trying to do is make sure that getting in companies and today, you know, because these similar institution that exists around the world, that the corporations do a better job because everybody benefits if the corporations do a better job.

Meb: Yeah. It is interesting and it’s becoming very topical in the U.S. The media has really been starting to pick up on it because you have a lot of these very large of passive institutions. I think I just saw…and I get this wrong, so I apologize if I do. But there is now a company stock in the U.S., I think it’s REIT…REITs, in particular, have a very large passive ownership here that’s majority owned by passive investors. And you know, that’s a somewhat atypical situation and there’s a pretty wide spectrum of beliefs as to what sort of responsibility those institutional investors have to governance. And I think you’re on the right side of this. I think it’s challenging for a lot of people though. But an interesting takeaway, you had a great quote in an interview that we could probably weave in here that I just love. It says, “When you have to make a decision, always make the one that will let you sleep better, not the one that will let you eat better.” You have any more thoughts on that? Do you remember saying that?

Claude: Well, the quote doesn’t come from me. It comes from famous actuary by the name of Ed Lou. And when I became an actuary, that’s the only thing I remember from this speech that he gave at the time and I’ve used a lot in speeches that I’ve made over time to actuaries or other organizations because, to me, it’s always very important that, you know, you do what makes sense and you don’t necessarily look as to how much money you’re gonna make because of the decisions. And so I’m a great believer in that, and having said this, I also believe in paying people fairly. But I always wanted the people that I’ve worked with to make sure that they did what was right and if they felt that, you know, I was going the wrong way, that they would tell me because, to me, it’s something that I’ve tried to live by and do what’s right. Don’t cut corners and you’ll sleep better.

Meb: I like it. It’s a similar quote that we kind of echo a lot all the time when people are thinking about investing, particularly during bull markets, you know, is that they tend to optimize on potential return rather than see the rest of the picture. And I think in our very first book we had a quote along the lines of old Chinese proverb says, “Fish see the bait but not the hook.” So people are always looking at the return side, but very rarely the other side, which is a lot more challenging for people.

Claude, this has been a lot of fun. The question we usually ask everyone at the end of the podcast is looking back over the years, and this can be your personal life, it could be something that happened at Ontario or elsewhere, is there a most memorable investment that comes to mind? It could be something good. It can be something bad. It could be something simply that just sparks a memory. Anything off top of your head?

Claude: If you ask a lot of the teachers, the one investment that comes to mind for them is we invested in the Toronto Maple Leafs, and that became the Raptors and the, you know. So we were very early in investing in the sport business and I think that has been a great investment. But probably the best investment, the one that is most memorable for me is our investment in Cadillac Fairview. And Cadillac Fairview, as I said, is the largest real estate company in Canada. Today, they have something like 90 people developing new investment. But probably, as I said, the one that most teachers and a lot of people in Canada would remember us by is our investment in the hockey team, the Maple Leafs, and this year they’re doing very well, but we were there when times were a bit tougher, but it was a great investment for us.

Meb: I love it. I used to always ask my Canadian friends there, I said, “Why isn’t it the Toronto Maple Leaves instead of the Maple Leafs?” It’s a thing I always remember when hockey season comes around. I love it. Claude, this has been a blast. Thanks for taking time to chat with us today.

Claude: Okay. Thank you. Thanks for your time also.

Meb: Listeners, we’ll add show links to everything we talked about today including links to a few of the books as well as everything else. You can always find the show notes and mebfaber.com/podcast. Leave us a review. We love to read them. I think it’s almost 500 reviews now, Jeff, 498 of them are really thoughtful, just kidding. Download. Listen to us on Stitcher, Overcast, Breaker. Thanks for listening, friends, and good investing.