What are some of the highlights of your career?

Dan Lavallee: Getting hired as an Associate in the Corporate Finance department at Yorkton Securities without having a business degree or the CFA designation was a big break for me, and a wonderful experience to start my career in finance. Moving to the buy side at HOOPP in 1999 was also a career highlight, and each progression from analyst to director of public equities has been rewarding. Recently my election to the board of Directors of the CFA Society Toronto has given me a very exciting opportunity to interact and exchange ideas with other committed and highly engaged investment professionals, and hopefully a chance to give something back to the Society.

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

DL: The CFA program has been instrumental in providing me with the technical skills required to be in the industry as a portfolio manager. Even concepts like net present value were foreign to me when I started the program. The CFA program also exposed me to a wide range of investments that gave me familiarity with areas outside my expertise, like fixed income or derivatives. The curriculum also exposed me to the concept of economic value added (EVA®), which I found to be an intellectually robust way to analyze companies. Developing EVA to help value public companies, in addition to a strong belief in discounted cash flow analysis, was part of the reason I was hired at HOOPP.

How do you see the industry evolving over the next few years?

DL: The finance industry has lost a lot of credibility since the Financial Crisis in 2008, and arguably it has been on the wane since the bursting of the Tech bubble in 2000. As a result, the prospect of increased regulation is high, and more questions are being raised by individual investors like the amount of fees paid in light of generally lackluster performance. Subsequently, this has led to a dramatic rise in low-cost passively managed exchange-traded funds (ETFs), which I believe will continue. Investors are also dealing with an investment environment that is driven by macro influences like central bank activity. This produces a “risk on” or “risk off” environment and makes it a highly uncertain time to invest. Consequently, institutions are less active, which makes it difficult for the brokers, and for many equity strategies the uncertainty is making it difficult to attract investors and raise funds publicly.

This seems likely to continue for the foreseeable future, so I suspect we will continue to see consolidation of assets on the buy side, and rationalization of excess capacity on the sell side. Much like the early 1980s, there will be a point when equities will begin a new secular bull market and the environment will be more suited for a buy and hold strategy. Unfortunately, I think we will see single-digit earnings multiples in north American markets before we get there.

What are the main risk management and governance issues that you must address in today’s environment when looking at potential investments?

DL: Risk to the public equities group at HOOPP is risk of loss and not volatility, beta, VaR, or other metrics often cited by academics. Specifically, this means assessing business risk and competitive advantages and ensuring companies do not have excessive leverage. Most important for us, however, is valuation. We try to minimize the risk taken in our investments by ensuring that we have a reasonable margin of safety between the stock price and the intrinsic value of the company. Since we are long/short managers, these principles apply to our shorts, but from the opposite perspective, we add other limits like a minimum market float that is required to short a stock. We also consider the valuation of the market as a whole. When the market looks expensive and investor optimism seems high, we see heightened risk to being long equities.

HOOPP has a low-key but active approach to corporate governance, and the more recent and frequent issues have been say on pay, proxy access, separating the role of chairman and CEO, and majority voting for directors. We assess environmental, social, and governance (ESG) practices of the companies we invest in, and we are strong advocates of good capital allocation. We generally do not condone share buybacks given the poor track record of most companies, and would prefer to see dividends used as the primary approach to returning cash to shareholders. We also like to see management’s interests aligned with ours through direct equity ownership and not through options that are asymmetrical, with upside but no downside.

What are the greatest pension fund investment issues that you are facing?

DL: The challenge is to remain fully funded and pay the pensions our members expect. This is partly an investment challenge, but the biggest variable is our liabilities. They vary with interest rates, inflation, and changes in life expectancy, so for the organization as a whole, measuring and understanding those factors is a key part of the equation.

How do you see the new realities of extremely low interest rates, slow economic growth, and a rapidly aging population affecting the pension fund investment field in the years ahead?

DL: Extremely low interest rates driven by central banks punish all savers, and pension plans are no exception. Not only do low rates increase the present value of our liabilities but they also make earning adequate returns to fund those liabilities very difficult. We are fortunate at HOOPP to have a relatively young membership and a plan that is fully funded, thanks in part to very good investment performance. We are also benefiting from some prescient decisions made by the executive team and the board of Trustees on the direction of the fund in recent years. Many corporate pension plans will not be as fortunate, and 2012 will be another year of increasing unfunded liabilities and higher pension contributions.

Can you share some of the best advice you have received in your career or in life?

DL: I have been fortunate to work with some very intelligent people in my career, but a lot of what I have learned has come from studying successful practitioners over the years, from Buffett to Rappaport, Bolton, Montier, Templeton, Kahneman, Ware, and many more.

Howard Marks wrote that “the biggest investing errors come not from factors that are informational or analytical but from those that are psychological,” and at HOOPP we constantly remind ourselves to stay balanced between greed and fear, or the risk of loss versus the risk of missing gains. I continually remind myself that often the greatest risk is not taking one. In our group, we also try to maintain the right mix of bottom up and top down analysis, since both are important, and we like to place a much higher emphasis on measurement over projection, realizing that forecasts are prone to disappointment.

Investing is all about expectations. As Michael Mauboussin said, “You don’t make money knowing which horse will win or lose. You make money determining which horse has odds that are mis-priced.” I have learned that in this business it is important to be humble, to be skeptical but not cynical, and to never stop learning. Continuous education is something the CFA institute and the CFA Society Toronto strongly endorse, which is why I am a strong advocate of the organization.

CHARTERHOLDER PROFILE is a regular feature of The Analyst. Do you have suggestions for members that we should profile? Email us with the member’s name and a few sentences about who he/she is and why this person would make an interesting choice for a profile. TheAnalyst@cfatoronto.ca