How HOOPP’s Jim Keohane Beat the Crisis

Art by Jasu Hu

Jim Keohane, the outgoing president and chief executive officer of the Healthcare of Ontario Pension Plan (HOOPP), has been a mainstay at the fund for more than 20 years and has accomplished a rare investing feat: He beat the global financial crisis.

Keohane, who will retire from the $58.7 billion plan in March 2020, first noticed something bad was coming in 2005, when he was overseeing equities and derivatives for the plan. 

The honcho’s skepticism of too-good-to-be-true investments was reinforced during the 2000-03 tech bust, when the fund quickly went from being overfunded to underfunded. It didn’t do nearly as bad as others, but that wound taught HOOPP a lesson.

“Most of the risk impact came from asset liability so we tried to think about ways to more effectively manage that risk,” he told CIO. That meant assessing risks ranging from a stock market slide to long-term interest rate decreases to mounting inflation. “What we tried to do is restructure the portfolio to reduce the risk premium and increase the inflation sensitivity and the industry sensitivity of the portfolios,” he said.

That meant an overhaul in 2007. Keohane, elevated to chief investment officer that year, converted 30% of the fund’s stocks into long-term bonds, real return bonds, and real estate. The bonds were a buffer for rate moves while real estate was targeted because real estate has a high correlation to wage inflation, a significant factor for a pension plan.

“It was really a risk driven decision,” he said.

That’s not to say the fund came out unscathed. When the crash hit and slammed most of the world’s pension reserves and financial institutions, notably destroying Bear Stearns and Lehman Brothers, HOOPP took a 11.96% hit. But in relative terms, compared to the drubbing others suffered, that was just a scratch for the Canadian plan.  It only dropped to 97% funded in 2008. The fund bounced back and then some the following year, returning 15.18% to bring funding levels to 102%.

“We did a lot of things right at that point,” he said modestly.

“We were not immune to the effects of the crash, but we weathered it much better than many other pension plans,” HOOPP Vice Chair Dan Anderson told CIO.

Keohane’s savvy drew widespread praise. So in 2012, the fund named him CEO, succeeding John Crocker.

“I joked with him: ‘That’s it, Jim, I’ll only hire you twice,’” said Anderson, who’d also been on the hiring committee when Jim was promoted to CIO. Today, the plan is 121% funded.

Not bad for a guy who left hedge funds to start a derivatives program at HOOPP in 1999, where he really proved himself.

Keohane’s investment approach has helped navigate the plan through other rough patches, such as in 2018. Trade tensions, Fed hikes, and stock swings caught many an institution off guard after a decade-long bull run. Some, such as Danish fund ATP, saw negative returns, and a plethora of hedge funds shut their doors. HOOPP returned 2.17% that year; not great, but when compared to its 0.01% benchmark, pretty decent.

“He is very well-respected in the industry,” said Anderson, adding that Keohane has built a strong team over the years. “People are loyal to him. If you look at turnover at HOOPP, it’s minimal—particularly in the investment area.”

“Jim and I began at HOOPP within a few months of each other and have worked together for 20 years,” Jeff Wendling, the fund’s executive vice president and chief investment officer said. “He’s got a vision, and he’s building and innovating, and people see that and they get inspired by it.”

The executive veep added that Keohane sees opportunities during market swings, when other investors either show too much optimism or are beginning to panic.

“He makes good calls, and has led an investment team that has made a lot of good calls,” said Wendling.

HOOPP’s top performers have been alternatives, specifically private equity and real estate. The classes returned 13.7% and 8.88% in 2018. They account for 12% and 18.1% of the total portfolio, which is split into two halves‑-a liability hedge portfolio (which houses bonds and real estate) and a return-seeking portfolio (stocks, private equity, corporate credit, short-term money market and foreign exchange, among others).

“We always kind of look at both sides of the equation, if our valuation is OK we tend to be more aggressive about buying things,” Keohane said. “If our valuations are high we tend to be less aggressive. So that drives a lot of our decision making – relative value and valuations. We also do [spend] a lot of time on risk thinking and how big of a draw down can you have.”

For the 10- and 20-year period, the fund has returned 11.19% and 8.52% yearly, surpassing its 8.43% and 6.88% benchmarks. Keohane said he is always aware of investment behavioral traps.

“I think people tend to get caught up on one side or the other,” he said, meaning investors tend to be too focused on risk if things are not going well, and too focused on return when things are going well.

“We try to keep balance of those things all the time and make balanced judgments and understanding both sides all the time,” he said, adding that while we’ll see the occasional recession, we won’t see another 2008 anytime soon.

“That said, if we knew when the next crash would be, it wouldn’t happen,” he said. “It always surprises you.”

To protect against the next downturn, the plan is constantly assessing the structure of its asset allocation.

“We only actually deal on a fairly narrow part of the universe right now, so it’s cool for us to add things but we want to do things that really play into our strengths and capitalize on things we do well already so that’s what we’re working on,” he said.

The departing CEO is also credited for being a leader of liability driven investing in Canada. Thanks to his foresight, the fund emerged largely unscathed from 2008, and cut the funded ratio’s overall volatility.

“Jim was an architect of LDI,” said Anderson. “We’ve done exceedingly well, and we’ve had world-class results since LDI was introduced.”

Keohane announced his retirement in March, but plans to stay on for another year to aid the fund’s transition with his replacement. “I don’t want to leave the board in the lurch  where they suddenly have to get somebody in the door next week … but I’ve given [the board] lots of time and we want to have an orderly transition to make sure we have continuity and no sort of bumps created by that,” he said.

While he’d like to join “a number of boards” after he departs, the fund’s board isn’t one of them. The outgoing CEO said if he had a seat, it might be too challenging to sit back and watch instead of making the executive decisions. Instead, he’d rather stick to skiing, golf, and traveling with his wife.  

“That’s one of the opportunities you can get once you retire is to go and spend a couple of months [somewhere else],” he said, mentioning his recent journeys to Australia, Vietnam, and Cambodia. With the newfound time, he plans to revisit those places and seeing more of Asia in general.

“I’ve traveled around the US pretty extensively at different times and I’ve traveled in Europe quite a bit too, so more of that would be good,” said Keohane.

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