Education: Bachelor of Science in Actuarial Science from the University of Western Ontario, Master of Science in Statistics from the University of British Columbia, Master of Arts in Economics from McMaster University.
Current role: Managing Director, Manager Selection and Portfolio Construction, University of Toronto Asset Management Corporation (UTAM), a not-for-profit corporation that is a wholly owned subsidiary of the University of Toronto. It is responsible for managing the University’s pension funds, its endowment, and other short- and long-term investments.
CFA Charterholder since: 2002
Life’s passions: Traveling and spending time with my wife and four-year-old triplet boys.

Tell us about your career path and what motivated you to join UTAM.

Daren Smith: I started my career as an actuary at a major Toronto-based life insurance company. After several years of traditional actuarial work in valuation and pricing, I realized my true passion was in investment management. I moved to Halifax to pursue an opportunity with another insurance company as a manager in their asset liability management department. After two years, an incredible job opportunity arose at a Halifax-based pension plan serving many of the health care workers in the province of Nova Scotia. So I joined the small team of investment professionals who managed the plan’s assets. I learned a great deal from the CIO and the other senior investment professionals there. They were all independent and creative thinkers, and the fund was invested heavily in alternative assets, hedge funds in particular.

In the fall of 2008, I found out about the opportunity at UTAM. I was impressed with the newly appointed CEO and was attracted by the non-traditional asset mix, which resembled more of a U.S.-endowment-style model than the traditional 60/40 mix. My initial role was to lead a transition of the hedge fund portfolio from what had predominantly been a fund of hedge funds to what is now mainly direct hedge funds. It looked like a great fit, given my experience over the previous five years working on a team that had been allocating to direct hedge funds. Recently, my role has expanded to include overseeing all manager selection and portfolio construction at UTAM.

How does working in Toronto compare to working in Halifax?

DS: The biggest difference is probably the commute! I live in Oakville, and it now takes over an hour to get to the office, compared to less than five minutes in Halifax. The other difference is that a lot more investment managers visit Toronto than Halifax. I was surrounded by smart, motivated people in Halifax, and that is also true at UTAM. A large part of my job is to travel the world looking for the best investment managers, and that can be done just as easily in Halifax as it can be in Toronto.

How do you go about incorporating hedge funds into the overall asset mix for the pension plan and endowment?

DS: Let me start by stating that I do not believe hedge funds are an asset class. They are investment strategies applied to various asset classes.

UTAM recently adopted a risk drivers approach to asset-mix modelling, and this resulted in a number of changes in how hedge funds are positioned within the portfolios. We have carved out a discrete allocation to hedge funds that we are calling the absolute return portfolio. One of the goals of this portfolio is to produce a return stream that, over time, is uncorrelated to traditional equity and credit markets. To achieve this objective, we are focusing on a subset of all the available hedge fund strategies, namely, global macro, managed futures, low net and market neutral equity, and discretionary commodities.

A large percentage of the hedge fund universe is made up of managers with significant net long exposure to equity and credit markets. Based on the risk drivers approach, we will consider these managers as part of our equity and credit allocations, but only if we believe that, after all fees, they are likely to outperform the traditional equity and credit indices.

What are some of the key attributes used in evaluating a hedge fund manager?

DS: The process used to select a hedge fund manager is similar in many respects to the process used to select a traditional manager.

In selecting any investment manager, we follow a disciplined approach that looks at many different variables, with an emphasis on assessing the five Ps:

Philosophy: The manager’s core investment beliefs and guiding principles

People: The experience and skill of the investment team

Process: How the manager implements the investment strategy

Portfolio fit: How the manager and strategy fit in with the rest of the portfolio

Performance: We do not believe that past outperformance on its own is a good predictor of future outperformance. However, it is important to examine a manager’s historical track record to assess issues such as how they performed in various historical market environments and the consistency of their track record with the articulated investment and risk management processes.

In addition to the factors described above, we require investment-process transparency and access to key risk-takers. Preference is also given to firms that are willing to partner with us and provide meaningful sharing of information, including providing access to holdings-level transparency for risk management purposes. Finally, given that many hedge funds pursue more complicated strategies and are smaller in size than traditional managers, both in terms of employees and assets under management, an increased emphasis on operational due diligence is warranted.

How has the CFA designation and the knowledge you gained completing the CFA program helped you in your career?

DS: The CFA designation was absolutely critical in allowing me to transition from the actuarial field to the investment field. It opened up opportunities for me that otherwise would not have been available. The CFA program was very broad and covered a large number of topics. The breadth of the curriculum provided a solid background to quickly get up to speed on any number of investment topics.

What are some of the challenges facing pension plans and endowments over the next five to 10 years?

DS: I believe one of the most fundamental challenges is that the traditional 60/40 asset mix, which has worked fairly well in the past, may result in disappointing returns in the years ahead. To achieve the rates of return that pension plans and endowments require, while adhering to an acceptable level of risk, we will require a new paradigm, and that should include considering alternative assets.

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