“Chuck is an alpha machine, with 20 years of experience hunting for and finding alpha. He joined UTAM in 2011 and over time restructured all of our public equity sleeves. Through hard work, collaboration, and skilled investment decisions, Chuck turned an underperforming program into a consistent outperformer. It’s difficult to outperform in public equities, but his track record is extraordinary, and it’s been a key driver of our long-term success in adding value to the portfolios we manage. Chuck didn’t do this alone. He’s a great leader and mentor and has built a strong team around him. Everyone who has worked with him talks about how much they learned from him and how much they love working for him. Not only is Chuck a skilled investor, he’s also a nice guy (which, given he’s Canadian, shouldn’t be a surprise). In the depths of COVID-19, his family coordinated a weekly food donation among a group of neighbors for a local walk-in center.”
—Daren Smith, president and CIO, UTAM
It was a happy accident that Chuck O’Reilly wound up as an allocator at the University of Toronto Asset Management Corporation (UTAM). In the late 1990s, O’Reilly was working with the treasury team at Ontario Power Generation and was planning for a career in corporate finance. At the time, the company was starting to set aside money into a trust to ultimately pay for the decommissioning of its nuclear power plants and the disposal of high-level nuclear waste. O’Reilly found his treasury role expand as he began investing the nuclear fund cash in internally managed fixed-income portfolios. As the nuclear fund portfolios grew, his role evolved into manager selection, as new asset classes were introduced to the portfolios and the investment management of the portfolios was outsourced to third party asset managers.
Today, O’Reilly, CFA, CAIA, has been with UTAM for more than a decade, and his consistent outperformance in public equities has garnered him respect from his colleagues and peers. Since completing a restructuring of UTAM’s public equity portfolio in 2012, the fund has outperformed its benchmark by nearly 1.5 percentage points net of fees on an annualized basis despite considerable passive exposure. O’Reilly credits a disciplined underwriting process and a strong team for the manager selection track record that has driven the portfolio’s long-term outperformance.
More recently, the investor has been working on the endowment’s absolute return portfolio, upping the exposure to 11% of the endowment, from 8%, and has been seeking additional uncorrelated external managers for the portfolio.
“The challenge of outperforming markets is something that motivates me,” he said.
CIO: How would you deal with rising inflation and interest rates?
O’Reilly: While the investment risks associated with extended periods of rising rates and inflation are certainly well documented, we have not lived through such a period in North America in a long time. At UTAM, our investment approach is anchored to our long-term strategic asset mix—also known as the reference portfolio—which is designed to achieve the university’s long-term investment objectives. In designing the reference portfolio, periods of rising rates and inflation are considered, so we do not veer significantly from our target allocations to equities, government bonds, and credit.
Having said this, we do have flexibility, subject to risk and liquidity constraints, to implement strategies that fall outside of the public market strategies that are included in the reference portfolio. As an example, we believe that our alternative credit program is well positioned to outperform in a rising rate and inflationary environment. In this investment program, we have constructed a diversified portfolio of global private credit strategies with investments that are typically based on floating rates, which means little to no duration exposure. I believe the strategies that comprise this program will protect and grow capital in a rising rate and inflationary environment.
CIO: What are your favorite alts, and why?
O’Reilly: I am fortunate that my career has focused largely on evaluating the investment strategies that I’m most passionate about: active public equity strategies and public equity-focused long-short hedge fund strategies. The broad range of approaches to public equity investing makes this asset class particularly interesting for me. For example, at UTAM, we believe there are many different ways that equity managers can outperform, so we seek out great managers with diversifying investment approaches and characteristics, regardless of whether they are fundamental, systematic, diversified, concentrated, regional-focused, long only, long-short, etc. This vast exposure to so many different approaches to public equity investing, combined with the opportunity to meet great investors and to learn about their investment processes, makes this space very compelling. The constant evolution of markets and the challenge of identifying the next great manager keep it interesting.
CIO: How will the pandemic have changed the economic/financial world?
O’Reilly: Responsible investing, including the incorporation of material ESG risk factors into investment decisionmaking, has been an important part of our investment process at UTAM for many years. I believe that many sustainability themes, such as resource efficiency, health and well-being, and climate change, have accelerated and gained further traction as a result of the pandemic. I further believe that many of these themes continue to have a lot of runway, and, over the long term, they will continue to impact how governments and corporations spend money and manage their supply chains.
The pandemic has also had obvious impacts on the way many of us have worked since March 2020. It has been more than 15 months since UTAM employees started working from home, and we will continue to do so for the immediate future, as the vaccine roll-out in Canada has been slower than in the US (although the pace is picking up). I expect that experiences gained from working remotely for such a long period will drive changes in how many of us do our jobs in the future, whether it’s continuing to work from home more often or traveling less frequently.
CIO: Where do you see the most exciting areas to specialize further over the coming years?
O’Reilly: My focus is on public market equities, including equity long-short hedge fund strategies. I believe that the massive inflows into passive equity investment vehicles from retail investors and from institutional allocators who have given up on active management has created, and will continue to create, very interesting alpha opportunities for great stock pickers who are willing to build their portfolio without regard to a benchmark.
CIO: What asset class or investment troubles you most right now—and why?
O’Reilly: I’m probably not alone in my concern about the future role of nominal government bonds in allocator portfolios in the current environment. Not only are the expected returns from such instruments extremely underwhelming—particularly if we are in an extended rising rate and rising inflationary environment—but as a result of their low yields, one cannot expect government bonds to provide the same level of protection against equity market drawdowns that they have in the past.
CIO: What should be an investment trend, but isn’t (yet)?
O’Reilly: For years, we have advocated for fee arrangements where manager compensation is driven primarily by the outperformance of a strategy relative to an appropriate hurdle. Our objective is to pay a manager a low management fee and then further compensate the manager with a performance fee that is based on the manager’s alpha generation. The nuance is that the performance fee should be based on true alpha, so it’s important to establish an appropriate hurdle in the performance fee calculation. We have successfully negotiated such arrangements with some managers, and we know from talking to peer allocators that we’re not alone in this push, but we continue to be surprised that there isn’t more traction.
CIO: What investing decision have you made that you’re most proud of?
O’Reilly: I’ve been involved in manager selection for close to 20 years. Not surprisingly, over this period some allocations have worked out very well, while others have been less successful. I have also passed on some managers that have gone on to post great returns, while other managers I have passed on have shut down their businesses due to weak performance. There are a handful of manager relationships that I’ve been instrumental in establishing at UTAM that I’m particularly proud of. If I am forced to select one decision, it would be seeding a beta-one extension strategy in 2012 with a manager that was much better known for its equity long-short hedge fund strategies. Importantly for our client, we sized the allocation at the high end of our range, which has played out very well, as this strategy has outperformed significantly. Subsequent to this allocation, we expanded our relationship with this manager in a customized vehicle that allocates to the manager’s market-neutral and low-net equity long-short strategies. This manager remains one of our highest-conviction managers, and, depending on the day, is the largest exposure in our client’s portfolios.
CIO: Who is the manager you don’t currently work with whose brain you’d most like to pick for an hour?
O’Reilly: Warren Buffett [of Berkshire Hathaway]. I tried hard to think of a more original name, but who am I kidding?!
