Secrets of a master investor: Tullio Cedraschi

Pierre Obendrauf, CanWest News Service
Tullio Cedraschi, head of the Canadian National Railway’s pension fund, in his CN office in Montreal. His strategy has always been to invest with a long-term horizon in a basket of good, solid companies. …

What a delight to read Sean Silcoff’s profile of our friend Tullio, and to see in print what a very clever man he is! The only thing we didn’t like was the picture, which, in our opinion did not do him justice.

Public pension fund pioneer who ‘wrote the book’ shunned the spotlight
Sean Silcoff, Financial Post
November 23, 2007

Tullio Cedraschi hasn’t sat down for an interview since Joe Clark was prime minister, and if he had his way, he wouldn’t be talking to the Financial Post on this mid-November day. “I’m doing this under duress,” he says dryly, sitting in his Montreal office.
Consider this an exit interview, then, at the end of one of the most successful careers of a Canadian investment manager that you’ve probably never heard of. Mr. Cedraschi, 69, retires on Jan. 31 as head of Canadian National Railway’s pension fund, on the heels of his close friend, Claude Lamoureux, CEO of Ontario Teachers Pension Plan.
Mr. Lamoureux may be one of the most celebrated pension fund managers in Canada — but the person HE looks up to is Mr. Cedraschi. “He’s one of the best in Canada, and he’s done it in a quiet way,” Mr. Lamoureux says.
For 40 years — 30 of them under the leadership of Mr. Cedraschi — the CN Investment Division has earned a reputation as one of Canada’s most consistent, successful — and cutting edge — pension funds. CNID was the first to invest directly in real estate, oil and gas properties and venture capital. It was an early investor in foreign stocks and one of the few funds to not fall into a deficit during the 2002-2003 pensions crisis. The CN fund, with $15.5-billion in assets as of last Dec. 31, averaged a 10.1% return per year over the past decade – without owning one CN share, due to a policy dating to the 1995 IPO – and grew its surplus to $475-million, an achievement given CN has one of Canada’s most mature plans, with 2.6 pensioners per contributor.
Through it all, Mr. Cedraschi has shunned the limelight (he’s doing this interview after some cajoling by past and present CN directors) — though he could have rightfully basked in it, and sought far greater fortune elsewhere, as have many of his portfolio managers. “This is the guy who started it all for public pension plans,” Len Racioppo, an ex-CNID fund manager who now runs investment counsel firm Jarislowsky Fraser said. “He is the real pioneer and has a damned good track record. He did private deals and venture capital before OMERS and Teachers existed. Everyone talks about Mr. Lamoureux. But Tullio wrote the book.”
Before the Swiss-born bachelor moves on to the next chapter — he’ll likely chair a corporate board and work with a couple of universities and think tanks — we asked if he could offer some thoughts about the market and what risks and opportunities lie ahead. Given the current turmoil, a bit of perspective and wisdom couldn’t come at a better time.
Bear in mind, Mr. Cedraschi invests for the long-term. He prides himself on CNID’s stable returns and notes that the fund’s trading room is small, since “we don’t trade much.”
“Tullio doesn’t care where his fund ranked last year, because he’s trying to produce a multi-decade series of returns that leaves the CN pension plan in good shape,” says Keith Ambachtsheer, a Toronto-based pension consultant.
That said, the fund has substantially increased its cash position, from about 1% of assets to 9%. It has sold off some stocks, but the big change has been to lower the average duration of the bond portfolio. “You’re trying to protect yourself against increasing interest rates,” Mr. Cedraschi says. He believes “ownership of things will outperform [ie-interest-bearing investments] over the next five to 10 years, hands down. The only question is how much ownership risk can you afford.”
Much of CNID’s cash will likely end up in equities and other ‘owned’ investments. “You have some cash ready in case the stock market should correct,” he says. His call on the US economy: no recession, but “a slow down in growth rates.”
Real estate is another area of interest, particularly as a hedge against inflation — but not at current prices. CNID has invested in real estate since the 1970s, — but has pared back in the last three years and now owns just $250-million worth of buildings. “Prices were too high, and still are,” he says.
If there’s one area CNID is long, and overweight, it’s oil and gas. The fund has owned Canadian drilling operations since 1979 and also invested heavily in oil company stocks. Close to 30% of CNID’s profits in the past 10 years have come from oil and gas. Though CNID recently sold its stake in Western Oil Sands for $450-million – it paid $58-million in 2000 – Mr. Cedraschi is bullish for the foreseeable future. “I can easily see a 10% annual return to the passive investor and another 10% to the investor that takes an active stance” over the next decade, he says.
“We are burning up this incredible resource as mankind, in a few lifetimes.. And when the resource is becoming rare the price of that resource will go up and continue to go up. I won’t guarantee you that it will not go down to $50, but it won’t stay there…The cost of projects is going up and up. The existing fields are going down and down, and a lot of the reserves are in countries that you cannot trust. And China and India are adding cars. If there is a sure thing in the next 20 years, it looks like a sure thing.”
Beyond that, Mr. Cedraschi sticks to his long-time strategy. He’s a disciple of Warren Buffett who likes brand names and top performers in simple businesses, which explains why he stayed away from Enron and asset-backed commercial paper. “We basically agree with him that you invest [in good companies; forever,” he says. “But that doesn’t mean you don’t sell when you see red flags. When you see red flags, you sell at the speed of light.” Tullio’s red flags
Mr. Cedraschi has never been keen on diversification, owning no more than about 100 stocks around the world. “If you have fewer companies you know the management well,” he says. “Once you have a certain amount of stocks you have most of the diversification you need.”
His successor is expected to stick largely to the Tullio Way. Still, says CN chairman David McLean, he’ ll be sorely missed. “He has run the CN pension fund like it’s his own money, like a Swiss banker. We’re luck to have had him as long as we did.”

TULLIO’ S GREATEST HITS

Tullio Cedraschi has gained a reputation as one of the steadiest and smartest investment managers in Canada during his 30-year leadership of the CN Investment Division. Here’s a look at some of his best moves:
– Oil and gas: First pension fund to invest directly in oil and gas, starting with 1978 acquisition of Siebens properties in Western Canada. That $53-million investment has grown to $800-million. In the last 10 years, its oil and gas portfolio has returned 24% on average.
– Nortel Networks: Bailed out in summer 2000, when the stock was trading for $86 a share, cashing in more than $1-billion of shares. Nortel topped out a few weeks later before beginning its long descent. Quote: “It took guts [to sell] because everyone said it was going higher” – David McLean, CN chairman
– Luxottica Group: A typical investment for CN: a global leader in a simple field: eyeglass frames. CN bought into the Italian company in 1994 and held; its investment has grown by more than 800% in value. Quote: “We don’t intend to sell as long as the management continues to do well.” – Mr. Cedraschi
– Hollinger Inc.: Invested $66-million in Conrad Black’s newspaper empire in the1980s, bulking up after its purchase of the Daily Telegraph. Sold when Hollinger bought Southam in 1997, cashing in $225-million worth of stock. Quote: “We bought for the right reasons and sold for the right reasons.” – Mr. Cedraschi
– Asset-backed commercial paper: the CN fund didn’t buy this investment class, which has melted down during the credit crunch. “We said No, not necessarily because we immediately saw the risks, but because we were not paid enough for the risk.” – Mr. Cedraschi.
– Enron: CN stayed away from the energy company that flamed out in 2001. Quote: “We simply couldn’t understand how these people were making money.We try to avoid things that we cannot understand.” – Mr. Cedraschi
– The pension funding crisis of 2002-2003: Unlike many other pension funds that fell into deficits, CN stayed in a surplus position, which it has maintained since 1998