On a Sunday in May, as European finance ministers huddled in Brussels, devising a plan to keep the Greek debt crisis from spreading, senior decision makers at the Caisse de dépôt et placement du Québec huddled in Montreal debating how to protect its depositors' money from the encroaching debacle.
Fourteen months had passed since Michael Sabia strode into the CEO's office, charged with turning around one of Quebec's key financial institutions after a series of disasters. Mr. Sabia, a manager with a reputation for cracking the whip, moved quickly to put his stamp on the organization, replacing most of the Caisse's executive team and installing new risk controls. His urgent goal: to protect the Caisse, which manages the assets of 25 provincial funds, including the Quebec Pension Plan, against the type of surprises that led to a $40-billion loss in 2008 and wiped out a quarter of its portfolio.
The first big test of Mr. Sabia's risk-reduction efforts came as Greece's debt problems threatened to drag down world markets. If the Caisse made the wrong move, it could expose itself to yet another round of devastating losses.
Over a week, as the Greek crisis unfolded, Mr. Sabia and his investment team met daily, sketching out scenarios, assigning probabilities, probing where weaknesses might lie.
"We basically lived the experience," Mr. Sabia says. "We did umpteen stress tests and asked ourselves how the portfolio would react to this, to that. Where are we overexposed, where are we underexposed?"
Poring over the results, they spotted what they believed to be opportunities to fortify their $132-billion portfolio, the largest pool of pension assets in the country. Now, on this May weekend, with Greece's fate still up in the air, it was time to make decisions.
"We took actions that, I'm never going to say insulate us or completely protect us from big market events - because you can't - but I am going to say that we took actions that meaningfully mitigate them," Mr. Sabia says.
In other words, the Caisse passed its first test under his leadership. It's just the first of many tests that lie ahead as the Caisse fights to restore its reputation and its returns.
THE PRICE OF SAFETY
Mr. Sabia's efforts to turn around the Caisse will affect the future of millions of Quebeckers, who look to the pension manager to provide them with at least a portion of their retirement income. His success, or failure, also has wider significance, pointing to the dilemma facing many pension funds as they grapple with a looming retirement crisis.
Across North America, pension funds are reaching for high returns to fulfill the promises they made years ago to future retirees. But as baby boomers start retiring, and those promises come due, pension funds find themselves in a world of low returns, with bonds generating minuscule yields and stocks well below their peaks of years past. Compounding the problem, "we're still all licking our wounds from 2008 and having to try and make up the losses that we all faced at that time," says Jim Leech, the chief executive officer of the Ontario Teachers' Pension Plan.
Many pension funds are ratcheting up risk to achieve higher returns. But the Caisse's recent history demonstrates that taking on more risk can backfire. Under Mr. Sabia's predecessors, the pension fund manager moved into derivatives, asset-backed commercial paper and currency trading, strategies that blew up during the financial crisis.
The market turmoil exposed gaps in the fund's risk management. For instance, many money managers use a yardstick called value at risk, or VAR, to assess their potential losses every day. The Caisse was measuring it only once a month.
The $40-billion loss in 2008 shattered faith in Quebec's iconic pension fund. Henri-Paul Rousseau resigned from the CEO post in mid-2008, after six years. He was replaced by Richard Guay, who lasted just months in the role before leaving, citing burnout.
Mr. Sabia, who arrived in March, 2009, is betting he can achieve both higher returns and lower risks - a mix that usually doesn't go together. His strategy is to simplify the Caisse's investments, focus the pension manager on what it does best, and institute rigorous risk controls. Given the competitive pressures of money management, he won't specify the exact moves that his team made in May, but they were part of his overall goal of reducing risk.
In many ways, Mr. Sabia is attempting to do at the Caisse what he did at BCE Inc., where he served as CEO, and at Canadian National Railway Co., where he held several senior positions. In both those cases, his primary strategy was to prune complex organizations.
"Businesses are good when they know what their competitive advantages are and when they focus on them," he says. "When I was with Paul [Tellier]at Canadian National, there were a whole pile of assets in there, but the only thing that Canadian National really knew anything about was running railroads. So, one job there was [to say] let's make this a railroad because that presumably is something we know about.
"Same kind of thing at BCE. BCE had all kinds of assets, but at the end of the day BCE really knew about one asset: telecom. BCE was very good at telecom; that's what BCE needed to be."
The Caisse, though, is unique. It has been a crucial part of Quebec's efforts to develop business and industry within the province since it was founded 45 years ago, and operates with a mission statement that requires it both to invest profitably and also to contribute to Quebec's economic development.
The dual mandate makes other pension managers wince. For Mr. Sabia, the first anglophone to head the Caisse, it means an extra level of political scrutiny.
Critics have already lambasted Mr. Sabia, with Jean-Martin Aussant of the Parti Québécois saying "he should not be at the helm of the Caisse."
The highly political environment around the Caisse means that Mr. Sabia "has one of the most difficult jobs in Canada in terms of finance," according to a senior businessman based in the province. In a telling sign, the businessman did not want to be identified, fearing how the provincial government might view his quote.
"I'm not sure in English-speaking Canada that the nature of the role that the Caisse has played in the history of Quebec is well understood," Mr. Sabia says. The idea that the Caisse does what the government of Quebec asks is a myth, he said. But while Mr. Sabia can, to a large extent, chart his own course, he reports to a board appointed by the province.
Mr. Sabia's critics are ready to pounce if his efforts to focus the Caisse fail to improve its returns, which over the past five years have amounted to a meagre average of 2.7 per cent a year. To meet its commitments to Quebec's present and future pensioners, the Caisse has to deliver long-term returns on the order of 6.5 per cent a year. "That doesn't grow on trees. You've got to work to get that," Mr. Sabia says.
After its disastrous 2008, the Caisse recorded a solid if unimpressive 10-per-cent return in 2009, as markets everywhere rebounded. The question is whether its new focus on steering clear of risk is going to pinch its future profits. In the investing world, where low risk usually means low returns, the danger is that the price of safety may be persistent underperformance.
The link between risk and returns is the inescapable reality of investing. "To make money, you have to take risks," says Leo de Bever, head of Alberta Investment Management Corp. "The question is where can you take risks that have an acceptable return. In other words, you don't want to take dumb risks."
The Caisse has taken several dumb risks in recent years. Bernard Morency, executive vice-president of depositors' accounts management and strategic initiatives, who has been with the Caisse since November, 2007, and was appointed to his current position in April of 2009, says the pain came in three waves.
The first was the asset-backed commercial paper fiasco, which occurred when the market for $13-billion of securities held by the Caisse seized up in 2007. The second followed the stock market crash of 2008, when the Caisse performed considerably worse than the average pension fund. The third wave came shortly after Mr. Sabia took the helm, when risky commercial real estate loans soured.
"That was the low point," Mr. Morency says. "People said, 'Okay, enough of this. Do we have the whole story here?' And we said 'Yes, to the extent that we know we're not hiding anything and we've looked in every goddamn cupboard there is in this place. We may have missed something, but we're telling you we've looked everywhere, and everything we've found we're telling you.'"
Mr. Morency says rebuilding trust is a vital part of answering the question that hangs over the Caisse: "How is this place going to regain the lustre that we had and that it has lost?"
In pursuit of an answer, Mr. Sabia is devoting most of his waking hours to reforming the organization. He quips that sleeping and eating are optional in his life and talks of walking the dog at midnight.
He is a man of both carrots and sticks, but he has a reputation for using more of the latter. For instance, he extols the virtues of a positive corporate culture, but quickly explains that he doesn't like the term much "because it brings up images of campfires and Kumbaya. Culture's a hard concept, culture's how the work gets done. It's not 'How are we feeling today?' It's the thinking process behind decision making."
Those who have worked for Mr. Sabia say he drives them hard and doesn't suffer fools gladly. But Mr. Sabia will also pop into the room when he spots a reporter speaking with chief economist Oliver Fratzscher, frame Mr. Fratzscher's head with his hands, and describe him as the real genius behind the organization.
He makes no apologies for replacing about four-fifths of the Caisse's executive committee. "In a turnaround situation, you need to make people changes," he says.
The team he's assembled is earnings kudos in many quarters. "Looking from the outside, he's been able to retain and attain strong talent," says Louis Vachon, the CEO of National Bank.
Mr. Sabia sought to promote from within the Caisse to send a message that the organization itself is not the problem. He also brought in fresh blood, seeking high-calibre talent to send a message that the Caisse can still attract the best. Among the new hires is Roland Lescure, the Caisse's highly regarded chief investment officer, whom Mr. Sabia recruited from one of the largest asset management firms in France, Groupama Asset Management.
Mr. Sabia wants to focus on businesses where the Caisse excels and get out of areas where it doesn't. He decided to exit commodities trading, for instance. "Why would you think that the Caisse de dépôt et placement du Québec has a competitive advantage relative to Goldman Sachs and Morgan Stanley in trading commodities?" he asks rhetorically. "I don't think we do. That business is all about whoever had the last insight into something that's going on in Tanzania that will affect the value of X raw material."
He's also started a daily assessment of the Caisse's risk profile and pulled out of some areas of derivatives trading and structured credit. "Through the course of 2009, we got out of just under $15-billion of derivative products," he says. "It's all part of 'Invest only in the things you fully understand.'"
The challenge for the Caisse is to find areas in which it can excel - and to keep on finding them. Mr. Sabia has yet to unveil a strategy for what lies ahead.
Mr. de Bever of the Alberta Investment Management Corp. says top pension managers show a knack for spotting opportunities early and nimbly moving from one to another.
"The areas where you used to be able to deploy a lot of money and make a superior return - infrastructure, private equity - there's so much money flowing into them that it's becoming harder to make money," he says. "The notion of having a couple of things that you're really good at, and sticking with them for 10 years--I'm afraid nothing lasts that long any more as a lucrative opportunity."
For now, the Caisse's primary strategy appears to be safety at all costs. "I think that the best way of enhancing long-term returns - not only for the Caisse, but for a lot of investors - is to avoid a year like 2008 ever appearing again," says Mr. Lescure, the chief investment officer. "Because a year like that can wipe out long-term returns big time. Sometimes mitigating risk is a good way of enhancing return."
As millions of Quebeckers look to the Caisse for financial security in the decades ahead, Mr. Sabia must find investments that are both safe and generate the results he needs. His biggest tests still lie ahead.
Michael Sabia, 56, is one of Canada's most experienced CEOs. Some key dates in his life:
1953: Born in St. Catharines, Ont., the son of Michael Sabia, a surgeon, and Laura Sabia, a well-known feminist who served as the first president of the National Action Committee on the Status of Women.
1970-1993: Enters the University of Toronto (B.A.), where he studies economics and politics. He proceeds to Yale (M.A., M.Phil), where he completes the course requirements for a doctoral degree. He goes to work for the federal government, becoming director-general in the Department of Finance and deputy secretary in the Privy Council Office
1993-1999: Leaves government to work on the turnaround of Canadian National Railway Co., where he serves as chief financial officer.
1999-2008: Joins BCE in 1999, serving as chief operating officer until 2002, when he becomes CEO. After BCE signs a $35-billion buyout with a group of private investors in 2007, Mr. Sabia announces he will be leaving the company as part of the deal. Attempts to finalize the deal drag on for more than a year, and it eventually dies.
2009: Joins the Caisse as CEO on March 13, 2009.