Regular readers of my commentary will know that I am absolutely against the idea of our Federal and Provincial Governments expanding the Canada Pension Plan. I call this Bad Idea #17 and have written about it a couple times (you can read those commentaries here and here) and have a third installment on the way. One reader asked where they can find the entire list of bad ideas. The truth is that I had to keep some open spots in the list because I knew more bad ideas would be forthcoming.

On May 1, 2014, Ontario’s Liberal Government presented its budget which included the Ontario Retirement Pension Plan. I don’t have all the details, not because I didn’t look, but because the government doesn’t have all the details to offer at this stage. Apparently their strategy is to tell you they are doing something and then leave some room to figure out the details later. Sadly, I wish they figured out how ill conceived this idea is in all its details before rushing the news – it will be embarrassing when they have to back track or worse when they push ahead and waste a bunch of taxpayer money (think Ontario gas plants).

I guess the Liberals thought that they had no choice but to go this route after so publicly pushing the Feds and other Provinces to get on board with a CPP expansion and playing the ‘if you don’t do it with us we will do it on our own’ card. I can’t believe that they can’t find a single soul in the Ministry of Finance that can help them understand how complicated this thing is going to be (think gun registry).

The implication is that it will be just like the CPP except:

• Employee contributions will be 1.9% of earnings up to a maximum of $90,000
• Employers will be required to make a matching 1.9% contribution
• Self-employed may not be required to join
• Workers with a ‘comparable’ workplace pension plan will not be required to join
• Not all employers will join together – rather larger employers will join first – smaller later

So – here are problems that mirror the problems that would come with an expanded CPP:

• Funding a defined benefit plan means you need to set a benefit level and guess at a contribution rate. If the contribution rate is inadequate – the next generation of workers has to over-pay to compensate for the under-contribution by the generation ahead.
• Additional savings of 3.8% will be meaningful to those retiring in thirty or forty years but will do little for those retiring in the next decade – especially when the program doesn’t even start until 2017.
• CPP/ORPP are social programs and not pension plans – there will be winners and losers in the cross-subsidization game. My fear is that the losers will continue to be the low income workers that are often in poorer health and have inconsistent earnings and the winners will be those that are well educated, well paid, and already looking forward to a healthy and long retirement.
• There is a risk – not a guarantee but a risk – that pulling these dollars from consumers and businesses might stall an already fragile economic recovery in Ontario.

But wait – before you say ‘no sir’ to this proposal, there is more – problems that are unique to Ontario’s super special go-it-alone strategy:

• There is absolutely no leverage of the CPP infrastructure to receive contributions, invest funds, or calculate and pay benefits. To be clear – the CPP spends more than $600 million in operating expenses – how much will Ontario spend to run their mini-CPP?
• The flat employee contribution rate of 1.9% of pay likely means that you are taking valuable take-home pay from minimum wage workers who may not need more retirement income nearly as much as they need more dollars to pay their ever increasing hydro bills.
• It won’t be universal – some employers and their employees will be in – some will be out – so figuring out what you get when you retire will be a little less difficult than solving the Rubik’s Cube. What is really frustrating about this feature is that level contributions in a defined benefit plan only work if employees stay in the plan for a lifetime – otherwise younger workers always subsidize older workers. I can’t wait to see who they pick for Chief Actuary or the assumptions that he or she makes to justify the wonderful benefits promised for the low, low, price of 3.8% of pay.
• Small employers, those that are least likely to already offer any sort of pension are the last to join – if they ever join at all. Maybe this compromise was intended to satisfy the Canadian Federation of Independent Business – but once again we have created the optics of helping people when we really aren’t doing anything for the people who need the help most.

I don’t know what more I can say – someone in the Ontario government is convinced that this is the way to go and either they don’t have anyone around them telling them it isn’t – or they just aren’t listening.

"In a nutshell, I find that ORPP is as good as a CPP expansion and therefore the best alternative thereto. Therefore, I find that the comments made at 'Actuarial Solutions" are unjustified complaints, overly pessimistic and not objective."

As one of the fathers of the Ontario Retirement Pension Plan, I must admit I was pleased to see it introduced into the last Liberal Budget in Ontario. The one difference between the version I had proposed a decade ago in Benefits and Pension Monitor's Oct. 2004 issue, and the current ORPP that is causing me concern, is its mandatory nature.

Many so-called policy experts cling to the belief that Canadians are too dumb to act in their best interest, and given a choice between saving and spending, they will spend. When one holds that belief as sacrosanct, then it follows that any new saving scheme must be made compulsory. I, on the other hand, do not think Canadians are dumb. I believe that if presented with a smart, well-thought out solution, Canadians will jump on it.

Let me provide you with some historical examples: if you compared the percentage of savings in Canada to the prime interest rate, you would see that the two move hand in hand. When interest rates were high in the 1980s, the savings rate was also quite high. Now that interest rates are rock bottom, it is no secret that Canadians look for other places to put their money.

Other examples taken from the financial world in Canada include: in the past, if you wanted to purchase a mutual fund, you had to pay a front load fee, say 6%, and then, the mutual fund would also levy an ongoing management fee, so long as you had your funds with that manager. Altamira came and said, let's get rid of that front load. Canadians responded. Altamira went from a few hundred millions in assets, to over 9 billion. ING Direct introduced no-fee, high interest savings accounts using online banking. Canadians responded and contributed billions in dollars over a relatively short period of time. CIBC copied them by creating Amicus Bank which sponsors President's Choice Financial. More recently, the federal government introduced the Tax Free Savings Account. 100% voluntary. No employer match. You'd think Canadians would have spent any discretionary income instead of going to the bank to open up a TFSA. The evidence is overwhelmingly to the contrary. 8 million Canadians got off their couch and filled out the paperwork transferring billions of dollars into these accounts.

Many retort that only the rich can afford to use TFSAs and that it isn't evidence that the average Canadian is smart about saving. I don't think Canada has 8 million wealthy people, so there has got to be middle class Canadians in that group.

Thus, the philosophical difference as to how much credit should be given to Canadians is the only difference between my original 2004 proposal to create a voluntary supplemental account to the CPP, and the 2014 ORPP.

"If you are going to provide a supplement to CPP, it should not be done in Ontario alone. It should be done across the country to avoid replicating the bureaucracy that is already in place for the CPP. That alone saves the taxpayer millions of dollars. And furthermore, to avoid a payroll tax that will impact small businesses, you make the program voluntary. Good voluntary programs work well. TFSA, Canada Savings Bonds etc. All of these solutions were put on the table a decade ago. It's too bad the politicians don't always pay attention."

CalPERS portfolio managers have begun cutting the system's $5.3 billion hedge fund allocation in half, signaling a shift away from the asset class for the nation's largest defined benefit plan, say multiple sources familiar with the pension plan's operations.

The $289.1 billion California Public Employees' Retirement System's hedge fund program has been under review by top investment staff since January, spokesman Joe DeAnda confirmed in an interview with Pensions & Investments.

But Mr. DeAnda said no decision will be made on the future of the pension fund's hedge fund program until recommendations are presented to the CalPERS board sometime in the third quarter. Asked how cuts could be made in the meantime, Mr. DeAnda just repeated no decision had been made about the program.

Nevertheless, Curtis Ishii, a senior investment officer for fixed income who is conducting the hedge fund program review, in late March ordered Egidio G. “Ed” Robertiello, CalPERS' senior portfolio manager for absolute-return strategies, to start making major cuts, said the sources, who declined to be quoted by name because they are not authorized to talk about the issue.

Neither Mr. Robertiello nor Mr. Ishii returned phone calls for comment for this story.

The pension fund board's investment committee was informed in closed meetings during March and April that the cuts were being made, said two sources familiar with the discussions.

Other sources said portfolio managers for the absolute-return strategy made phone calls to all 13 CalPERS hedge fund managers in the past several weeks, telling them about the reduction. Three hedge fund managers will be terminated, and the remaining 10 will see their allocations cut.

The process of redeeming hedge fund assets varies among managers and can take several months. But by September, the sources say, the CalPERS hedge fund program will be reduced to around $2.5 billion.

In addition, the hedge funds-of-funds program is being reduced to two funds of funds from five, the sources said. Mr. Robertiello already has terminated four other hedge funds-of-funds managers during his nearly two years at CalPERS.

The hedge funds-of-funds segment has been a particular drag on performance, the sources said. They said that portion eventually will be cut to 15% to 20% of the portfolio from about 30%.

It is unclear why Mr. Ishii decided to reduce allocations while the program review is underway. The hedge fund program has underperformed in the past, but performance has improved under Mr. Robertiello.

The hedge fund portfolio returned 9.2% for the year ended Dec. 31, compared to the CalPERS custom hedge fund benchmark of 5.3%, CalPERS statistics show. The custom benchmark is the one-year U.S. Treasury note plus 5%.

But for the three-year period, the hedge fund portfolio returned an annualized 3.3%. vs. 5.4% for the benchmark. For five years, the hedge fund portfolio returned an annualized 6.2% and the benchmark, 5.6%.

The hedge fund program over the 10 years ended Dec. 31 returned an annualized 4.9%, compared to the benchmark's 7.3% return.

Sources say Mr. Ishii was appointed to review the hedge fund program by acting Chief Investment Officer Theodore “Ted” Eliopoulos in early January, right after Mr. Eliopoulos took over for Joseph Dear, who was ill at the time. Mr. Dear died on Feb. 26.

Around the same time, Mr. Robertiello, who had reported directly to Mr. Dear, began reporting to Mr. Ishii.

Mr. Dear supported an expansion of the hedge fund program, but Mr. Ishii has been a key opponent of the program. At a CalPERS asset allocation workshop in November, Mr. Ishii advocated scrapping the program, saying the risk of investment losses was too great.

Tense closed-door reviews have occurred twice monthly since February, sources said, with Mr. Ishii dominating the meetings and repeatedly attacking the hedge fund program. They said Mr. Ishii said he plans to take about $2.5 billion from the hedge fund program and redirect it to fixed income.

Hedge fund pioneer

In 1992, CalPERS became one of the first U.S. public pension funds to invest in hedge funds. Since then, the program has been restructured multiple times in hopes of developing a winning formula.

The latest restructuring was occurring under Mr. Robertiello's watch, as he reduced hedge funds of funds and invested in three hedge funds focused on Asian investments, and looked for new investment strategies.

Mr. Robertiello joined CalPERS to lead the absolute-return program in June 2012, following stints at Russell Investments and Credit Suisse. Mr. Robertiello had been pushing for expansion of the program that had only accounted for 2% of CalPERS' total assets. He had argued at staff meetings that the program could not meet one of its key goals, an efficient diversifier of CalPERS large equity risk, with such a small allocation, the sources said.

In an interview with Pensions & Investments in March 2013, he argued the same point.

“When you put all of the ingredients in a sausage-making machine and look at the results, the role of hedge funds in the portfolio is to add diversification,” Mr. Robertiello said. “To do that effectively, the allocation has to be much larger than the current 2%.”

After the cuts, the total hedge fund allocation at CalPERS will amount to just 1% of the pension fund's total assets.

CalPERS' hedge fund cuts run counter to increased investments by other large pension plans.Investments in hedge funds among the 200 largest U.S. retirement plans jumped 20.3% in the year ended Sept. 30, to $134.7 billion, according to data from P&I's Feb. 3 special report.

Despite those inroads, fee issues have had the opposite effect, Stephen Nesbitt, CEO of Cliffwater LLC, an investment consulting firm in Marina del Rey, Calif.

“The recent attention given to fees puts pressure (on pension funds) to cut hedge fund allocations to lower expense ratios, particularly among those systems that haven't clearly been able to demonstrate their value proposition, ” Mr. Nesbitt said in an e-mail.

This is the time of year when publications that cover the hedge-fund industry do their annual rankings, and people get irate about the vast sums of money that the top hedgies make—in some cases, billions of dollars. At the top of this year’s list, according to a survey from Institutional Investor Alpha, are four familiar names: David Tepper, of Appaloosa Management, who made $3.5 billion; Stephen Cohen, of SAC Capital ($2.4 billion); John Paulson, of Paulson & Co. ($2.3 billion); and James Simons, of Renaissance Technologies ($2.2 billion).

Questions can be raised about these and similar figures from other publications, which are rough guesstimates based on the size of the funds and the returns they made last year. The hedge-fund industry is famously secretive. Folks like Tepper and Paulson don’t take ads out in the Times or the Wall Street Journal announcing that another ten figures has been added to their net worth. But let’s assume, for now, that the numbers are broadly accurate, at least in terms of magnitude. Nobody, not even the paid defenders of hedge funds, contests the fact that some of them generate gargantuan profits for their owners and managers.

Now and then, this stirs up moral outrage. Last week, Vox’s Matt Yglesias pointed out that the $21.1 billion accumulated by the top twenty-five hedgies in 2013 was more than the combined salaries of all the kindergarten teachers in the country. Paul Krugman picked up on that fact and called for higher taxes on the hedgies, who benefit from the scandalous “carried-interest” deduction, a drum that I and many others have been banging for years.

I’ll believe that Washington is getting serious about rising inequality the day it consigns the carried-interest deduction to history. But my point here is different, and it receives rather less attention: How the heck do these guys make so much money, year in and year out? A big part of the answer is the hefty fees they charge. To put it a bit more technically: Why do investors in hedge funds—the people whose money is at risk—continue to allow the managers of the funds to dictate such onerous terms to them?

Years ago, defenders of hedge funds argued that they earned their money by delivering above-market returns on a consistent basis, but this argument is much harder to make these days. For five years in a row, hedge-fund returns have trailed the stock market. Last year was a real doozy for the industry. The S. & P. 500 had a great year and generated a thirty-two-per-cent return. According to Bloomberg, the typical hedge-fund return (net after fees) was 7.4 per cent. That’s a differential of almost twenty-five percentage points.

Not to belabor the point, but investors in hedge funds paid through the nose for this underperformance. You can invest in an S. & P. 500 index fund through Fidelity (or any large brokerage firm) for an annual management fee of about 0.1 per cent. For every $100,000 you invest, you pay $100. If you invest in a well-known hedge fund, you will probably be asked to pay a management fee of about $2,000 for every $100,000 you invest, plus a “performance fee” of twenty per cent. This is the industry’s standard “two-and-twenty” formula.

Of course, the hedgies at the top of the rankings did considerably better than the average fund. But even they didn’t beat the broader market by very much. Again, we don’t have the figures, so we have to rely on published estimates. Appaloosa’s flagship funds reportedly gained forty-two per cent. One of Paulson’s funds gained more than sixty per cent, but the firm also runs funds that didn’t do as well. Those were the top performers. In many other cases, hedge-fund managers were paid hundreds of millions of dollars even as they failed to beat the market by a considerable margin. Because of their hefty management fees and the fact that they have billions of dollars of investments under management, some hedgies can make handsome returns even when they are generating what is known in the industry as “negative alpha.”

Does this really matter? Decades ago, investors in hedge funds were almost all very rich people. If they were willing to pay two and twenty for the privilege of boasting that George Soros or Paul Tudor Jones was managing their money, it didn’t matter to the rest of us. These days, though, institutional investors, such as pension funds, charitable endowments, and even government investment funds, are big investors in hedge funds. To some extent, at least, the hedgies, with their exorbitant fees, are pocketing money that could be going to teachers, firefighters, and ordinary taxpayers.

So how do they get away with it? In carrying out their normal business, institutional investors are eager to get a break on the fees they pay to firms that manage their money. That helps to explain the rise of index funds and exchange-traded funds, which are much cheaper than actively managed mutual funds. (Index funds purchase all the stocks in a given index. Actively managed funds try to beat the market by selecting various individual stocks.) Last year, the California Public Employees Retirement System, known as CalPERS, announced that it was switching more and more of its assets to index funds and other passive investments. In the United Kingdom, the government has just announced that almost half of all the assets controlled by local authority pension funds will be switched to index funds in order to save cash.

How has the hedge-fund industry escaped this cost-cutting trend? Part of the answer is that it hasn’t, or not entirely. Institutional investors are forcing some hedge funds, particularly the newer ones, to back off the old two-and-twenty formula. Earlier this year, citing figures from Hedge Fund Research, a firm that tracks the industry, The Economistsaid, “Investors have succeeded in amending the formula to something more like ‘1.4 and 17,’ at least for newcomers to the business.”

And yet, the biggest and most successful funds have been largely immune to this austerity drive. Some them charge even more than two and twenty (SAC, before the government effectively closed it down for being a hotbed of insider dealing, was reputed to charge three and fifty). And, of course, a fee structure of 1.4 and seventeen is still very generous to the hedgies. If, last year, I ran a hedge fund with five billion dollars under management, had charged those fees, and had merely matched the stock market, I would have made more than four hundred million dollars.

Even after deducting the considerable costs of a running a big hedge fund, that’s serious moolah. So, again: How on earth do they get away with it? It’s a competitive industry, and there’s no obvious reason why the normal laws of economics shouldn’t apply. Competition and entry should drive down prices. At the very least, you would think that there would be a movement to change the performance fees so they are assessed relative to the market return, rather than relative to zero. But it hasn’t happened, and the question is: Why not?

Answers on a postcard, please. And note: saying that investors are willing to pay for performance won’t do. That’s begging the question rather than answering it.

The prices that U.S. companies receive for their goods and services rose in April by the most in 19 months, a sign that inflation may be picking up from very low levels.

The producer price index rose a seasonally adjusted 0.6 percent from March to April, the Labor Department said Wednesday, after a 0.5 percent increase from February to March. April's increases were led by higher food prices and greater retailer and wholesaler profit margins.

Over the past 12 months, producer prices have risen 2.1 percent, the biggest 12-month gain in more than two years. That figure is roughly in line with the Federal Reserve's 2 percent inflation target. The producer price index measures price changes before they reach consumers.

Excluding the volatile categories of food, energy and retailer and wholesaler margins, however, the month-to-month increase in April was smaller: Core prices rose 0.3 percent from March.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, noted that the profit margins dropped sharply over the winter before increasing in the past two months, "so we can't yet say an upward trend is emerging."

Still, the report suggests that inflation may be picking up after coming in below 2 percent for two years. That could reflect better economic health: Higher inflation is generally a sign of rising consumer demand.

Paul Dales, an economist at Capital Economics, noted that a sharp gain in profit margins for machinery and equipment wholesalers drove overall margins higher. That's a sign that companies are stepping up their purchases of large equipment after a weak first quarter, Dales said.

A key question is whether the sharp increases in producer prices of the past two months will flow into consumer prices. Wage increases have been weak, and unemployment remains high at 6.3 percent. The squeeze for consumers means that manufacturers and retailers haven't been able to raise prices much. April's consumer price index will be released Thursday.

Dales forecasts that consumers will pay a bit more by 2015.

"We are expecting the stronger economic recovery and rising wage growth to push core (consumer) inflation above 2 percent next year," he said.

The two months of big increases have lifted wholesale inflation from historically low levels. The producer price index rose just 1.2 percent in 2013 after a 1.4 percent increase in 2012.

Food costs jumped 2.7 percent in April, the highest in more than three years, driven by an 8.4 percent increase in meat prices.

Profit margins received by retailers and wholesalers rose 1.4 percent in April, the same as in the previous month. Margins are rebounding after sharp drops over the winter months. Profits had been held down by discounting after the winter holidays and by harsh weather in January and February that kept shoppers at home.

Low inflation has enabled the Fed to pursue extraordinary stimulus programs to try to boost spending, hiring and economic growth. It has begun to unwind some of its stimulus, cutting its monthly bond purchases to $45 billion from $85 billion last year. The bond purchases are intended to lower long-term interest rates.

But the Fed has kept the short-term interest rate it controls at nearly zero since December 2008. Higher inflation could raise pressure on the Fed to increase that rate earlier than it had planned.

US consumer prices advanced in April at their strongest rate in nearly a year, a sign of modestly increasing inflation pressures in the economy.

The consumer price index, a gauge of what households pay for everything from rent to rice, increased a seasonally adjusted 0.3 per cent in April from the prior month, the Labor Department said Thursday. It was the largest gain since June 2013. So-called core prices, which strip out volatile food and energy costs, rose 0.2 per cent last month.

Both gains matched expectations of economists surveyed by The Wall Street Journal.

April prices were up 2.0 per cent from a year earlier compared with the 1.5 per cent annual advance in March. The gain reflects steady price increases since last spring when consumer costs fell due to temporary factors such as government cuts to health care payments.

Federal Reserve Chairwoman Janet Yellen told lawmakers last week that the central bank is "monitoring inflation developments closely." Inflation has been running below the Fed's 2 per cent annual inflation target, as measured by the personal consumption expenditures price index. That separately calculated gauge rose 1.1 per cent in March from a year earlier.

Low inflation is a sign of a sluggish economy with slack in the labor market and weak demand putting little pressure on prices. A pickup in inflation could suggest the economy is gaining steam.

The path of inflation could influence the Fed's strategy for winding down bond purchases this year and for when to start to raising short-term interest rates. Ms Yellen said the current near-zero rates will be in place for a "considerable time" after the bond-purchase program ends.

April's price gains were largely driven by increased costs for staples such as gasoline, food and shelter.

Seasonally adjusted gasoline prices rose 2.3 per cent in April, the largest monthly jump since December. Still, gasoline prices are up just 2.4 per cent from a year earlier.

Food prices rose 0.4 per cent last month, the fourth straight increase. Meat prices posted their largest gain since 2003 and fruits and vegetables also cost more.

Shelter prices, which account for almost a third of the total index, rose 0.2 per cent last month.

Electricity costs fell 2.6 per cent in April, the biggest one-month drop since 1986. Much of the decline can be attributed to "climate credits applied to utility bills in California," the Labor Department said.

Medical care prices rose 0.3 per cent last month and are up 2.4 per cent from a year earlier. Last year, medical inflation fell behind the pace of overall gains. However, that trend has reversed in recent months, coinciding with some eight million Americans signing up for insurance coverage made available under the new healthcare law.

A separate Labor Department report Thursday showed inflation-adjusted average weekly earnings decreased 0.3 per cent in April from the prior month. The decline reflects flat wages and accelerating inflation.

Top U.S. hedge fund managers in the first quarter zoned in on the consumer sector, with investments that included eBay Inc, Dollar General Corp and Walgreen Co.

Leon Cooperman's Omega Advisors opened a new stake of 1.7 million shares in discount retailer Dollar General, while Barry Rosenstein's Jana Partners increased its stake in drug store operator Walgreen by 4.8 million shares to 12.1 million shares, regulatory filings showed on Thursday.

EBay, which became a darling among top U.S. hedge funds in the fourth quarter just before billionaire activist investor Carl Icahn urged the company to spin off its PayPal payments business, continued to find fans in the first quarter.

Omega increased its stake in eBay to 2.9 million shares from 854,800 shares and Jana opened a new stake of 3.9 million shares during the first quarter.

The quarterly disclosures of manager stock holdings, in what are known as 13F filings with the U.S. Securities and Exchange Commission, are always intriguing for investors trying to divine a pattern in what savvy traders are selling and buying.

But relying on the filings to develop an investment strategy comes with some peril because the disclosures are backward looking and come out 45 days after the end of each quarter.

Still, the filings offer a glimpse into what hedge fund managers saw as opportunities to make money on the long side. The filings do not disclose short positions, bets that a stock will fall in price. And there is also little disclosure on bonds and other securities that do not trade on exchanges.

Upon request, the SEC also permits managers to omit sensitive stock positions from 13F filings. As a result, the public filings don't always present a complete picture of a manager's stock holdings.

Here are some of the hot stocks and sectors in which hedge fund managers either took new positions or exited from in the first quarter.

COCA-COLA ENTERPRISES

Tiger Global Management LLC, led by Chase Coleman and Feroz Dewan, slashed its stake in soft drink producer and distributor Coca-Cola Enterprises Inc by 14.5 percent to 6.7 million shares.

JPMORGAN CHASE & CO

Omega Advisors increased its stake in JPMorgan Chase & Co by 1.6 million shares to 1.7 million shares in the first quarter. The bank's shares rose 3.8 percent in the quarter, compared with a 2.2 percent gain in the S&P financial index , which includes all financial shares in the benchmark S&P 500 stock index.

GROUPON INC

Jana Partners increased its stake in Groupon Inc's class A shares by 9.8 million shares to 40.8 million class A shares. Chase Coleman and Feroz Dewan's Tiger Global Management got rid of its entire stake in the operator of a "deal-of-the-day" website.

GENERAL MOTORS CO

Jana Partners sold nearly all of its stake General Motors Co , cutting its holding by about 8 million shares to just 7,100 shares. Omega Advisors sold its entire stake of 1.05 million shares. Shares of the automaker fell 15.8 percent in the first quarter.

Since February GM has recalled 2.6 million cars because of defective ignition switches prone to being jostled into accessory mode while the cars are moving. That would shut off engines and disable power steering, power brakes and air bags. The problem has been linked to at least 13 deaths.

Top hedge funds shed their stakes in high-profile Internet names such as Netflix Inc and Groupon Inc in the first quarter, moving to peers viewed as more mature and less volatile.

High-growth Internet software and biotech companies were the darlings of 2013, but their shares started to fall sharply in early March. Netflix, last year's biggest S&P 500 gainer and an important hedge fund holding, is down more than 24 percent from its closing high this year.

Hedge funds invested in technology and healthcare fell 3.65 percent in April, the biggest monthly decline since October 2008 and extending March's 1.8 percent decline, according to data from Hedge Fund Research.

Among prominent hedge fund managers, Carl Icahn cut his holding in Netflix by 15.8 percent in the first quarter, reducing it to about 2.2 million shares. Tiger Global Management sold its entire stake of 663,000 shares during the quarter.

Netflix was up on the year for most of the first quarter, so the fund is likely to have sold at the right time.

Tiger also dumped its stake of 11.46 million shares in Groupon. That position was worth $134.9 million at the end of 2013 and $89.9 million at the end of the quarter.

The Internet software and services sector now accounts for about 10 percent of the top 100 long positions for equity/long short hedge funds, down from 20 percent to 25 percent in January, according to Credit Suisse data.

Long/short hedge fund managers moved to short bets in Internet names amid a meltdown in the group, according to Credit Suisse. Long positions in the group now account for about 25 percent of the overall gross exposure to the group, which adds together both long and short positions. That's the lowest rate in at least three years.

Some funds added to their "momentum" exposure, with Jana Partners increasing its stake in Groupon by almost 32 percent to 40.8 million shares.

Other funds moved to technology names with less lofty valuations and that are viewed as more established. Third Point sold its stakes in both Yahoo Inc and biotech company Gilead Sciences Inc but increased its Google Inc holdings by 31.3 percent.

EBay Inc, which became a darling among top U.S. hedge funds in the fourth quarter just before billionaire activist investor Carl Icahn urged the company to spin off its PayPal business, continued to find fans in the first quarter.

Omega more than tripled its stake in eBay, bringing it to 2.9 million shares, while Jana opened a stake of 3.9 million shares in the first quarter. Icahn, who backed down from his demands, disclosed a new stake in eBay, holding 27.8 million shares as of March 31.

Hedge fund Paulson & Co in Q1 maintained its stake in SPDR Gold Trust, the world's biggest gold-backed exchange-traded fund as bullion prices rebounded from their biggest annual loss in 32 years in 2013, while PIMCO dissolved its gold ETF investment.

George Soros raised his stake in Barrick Gold Corp and gold mining companies ETFs, suggesting the big names in hedge funds took advantage of lower gold prices to increase positions in the precious metal used by many as a hedge.

Investors pay close attention to the quarterly filings by Paulson and other notable hedge fund managers because they provide the best insight into whether the so-called "smart money" has lost faith in gold as a hedge against inflation and economic uncertainty.

"Some institutions are stepping up to buy gold this year just like you would expect them to do when they find an asset valued at these attractive levels," said Adam Sarhan, CEO of New York-based Sarhan Capital.

Paulson & Co, led by longtime gold bull John Paulson, owned 10.2 million shares in the ETF worth $1.27 billion on March 31, unchanged from its holdings on December 31, a filing with the U.S. Securities and Exchange Commission showed on Friday.

That represents a gain of around $76 million as the price of gold gained 6.5 percent in the first quarter, following a drop of around 9 percent in the fourth quarter.

This marks the third consecutive quarter Paulson has stuck to his stake in the gold ETF.

"It's a plus for the market as big players are still holding onto gold to a degree, but I don't think that's reflective of the market tone," said Bill O'Neill, partner at commodities investment firm LOGIC Advisors in New Jersey.

Gold prices were still 7.5 percent higher for the year but market watchers said the yellow metal's failure to rally on geopolitical tensions and lackluster physical demand suggested downside risks.

In the second quarter of 2013, Paulson slashed its stake by more than half when bullion prices plummeted $225 between April 11 and 15, a record two-day drop for gold.

Among large institutional investors, PIMCO has dissolved its position in SPDR Gold Trust, marking its sixth consecutive quarterly cuts. PIMCO held 6.3 million shares of the gold ETF in the second quarter of 2012.

Some institutional investors continued to remain bearish on gold investments as the metal's price came under heavy pressure from rallying equity markets and an improving economic outlook.

SPDR Gold Trust held near a four-year low at about 800 tones of gold at the end of the first quarter, largely unchanged from its fourth-quarter level.

Institutional investors' massive stakes in SPDR Gold Trust have tremendous influence in gold prices as redemptions of their massive ETF mean dumping the metal in the open market.

From Asian Internet stocks, which have boomed over the last year, to food and paper products companies, prominent hedge fund investors listed their favorite stocks on Thursday at an industry meeting dominated by talk of where markets will move.

John Burbank stuck with the Chinese Internet stocks that helped boost returns at his $3.8 billion Passport Capital last year. Real estate Internet portal Soufun Holdings, which climbed 121 percent in the last year, and discount online retailer Vipshop Holdings, which climbed 417 percent in the last year, made the list as his favorites.

"I am not negative on U.S. Internet companies but China is trading at a bigger discount," Burbank said at the annual SkyBridge Alternatives Conference known as SALT.

Burbank, whose picks have long included international companies and who taught in English in China decades ago, said "China is fundamentally changing and there is something to bet on." This year Burbank's flagship fund is up 0.5 percent through April, a person familiar with the number said.

Leon Cooperman, who runs $10.5 billion Omega Advisors, still likes banking company Monitise, listing it for the second straight year as a favorite and saying that its price can double in a year.

Cooperman also sounded a more positive note on the U.S. stock market at a time some other prominent hedge fund managers have issued a note of caution about how much higher equities can move. Although stocks moved to record territory earlier this week, the S&P 500 has been struggling to move meaningfully higher this year after gaining 30 percent last year.

He said U.S. stock prices are not a bargain but noted that the market "isn't priced to perfection" either, forecasting that the S&P 500, now trading at 1,870 could end the year at 2,000.

Steve Kuhn, head of fixed income trading at $14 billion Pine River Capital Management, advised selling out of bonds and moving into low volatility stocks, calling these types of companies "boring but beautiful."

He included food company ConAgra and paper and packaging manufacturer Rock-Tenn as picks. With Rock-Tenn he joked "this is a company that will not be disinter- mediated by Google."

Cooperman said stocks are still the best alternative among financial assets and likened investing in U.S. government bonds to trying to walk in front of a steamroller to pick up a dime.

Meanwhile Michael Novogratz, a principal at Fortress Investment Group, said that a sizable bet against U.S. Treasuries "makes sense."

Billionaire investor David Tepper, who runs hedge fund Appaloosa Management, sounded a cautious note on stock markets on Wednesday and told an audience "I'm nervous."

"I'm not saying go short, just don't be too friggin' long," Tepper, who has one of the best investing records in the industry said at the SkyBridge Alternatives Conference in Las Vegas.

David Tepper is arguably the most influential “smart-money” voice in the markets right now.

While hedge funds have persistently underperformed the market of late, there are at least a handful of talented money managers with some undeniably jaw-dropping track records. Tepper is in that category.

SkyBridge Capital’s Anthony Scaramucci, the host of the SALT hedge fund conference in Las Vegas, says that $1 million invested with Tepper’s Appaloosa Management when it was founded 20 years ago would be worth $149 million now, net of fees.

Tepper’s public pronouncements remain rare.

So it was a nice coup for the well-connected Scaramucci when he got Tepper to agree to an on-the-record chat Wednesday at this year’s conference.

Tepper, who had previously been adamantly bullish, struck a decidedly cautious tone. He didn’t advocate a stampede for the exits, but he notably warned that it’s probably not a good idea right now to be “so freakin’ long.” The interview was the signature event of this year’s conference. The nervous tone may have helped sink stocks on Thursday.

Josh Brown of The Reformed Broker blog argues that Tepper has now earned a spot in the pantheon of elite market-moving investors:

David Tepper is becoming today’s Hedge Fund God. He’s younger than Soros and Cooperman, less cantankerous than Loeb and Icahn, can claim higher returns than Einhorn and Ackman, carries none of the regulatory taint of Steve Cohen and has all of the garrulous authenticity that almost none of his peers possess when in a public setting.

This is his moment, whether he wants it or not. The apotheosis of David Tepper is now complete.

Indeed, Andrew Wilkinson, chief market analyst at Interactive Brokers, wondered in a note if Tepper’s remarks at SALT were serving as something of a bookend to a market rally tied to Tepper’s bulish comments around this time last year:

It was May 14, 2013, when Appaloosa Management LP founder David Tepper appeared in pre-market trading on CNBC‘s “Squawk Box”. Before Tepper spoke on that day futures were trading lower; as he pounded the table about how the economy was improving the market turned around. The S&P 500 index jumped by 17 points that day in what was dubbed “the Tepper Rally.” Prior to Mr. Tepper’s appearance the S&P closed at 1633 and has since surged over the past year by 16.35% to 1900 earlier this week.

Still, investors should always treat pronouncements by market gurus carefully. It may be better to treat their opinions as valuable data points, but not as triggers to blindly buy or sell. Here’s options strategist Bob Lang, writing at Trader Planet:

“We know there are a million reasons to sell but only one reason to buy. Markets were modestly overbought by early Wednesday as the SPX  reached the 1900 milestone for the first time ever. With no buyers left, why not take some money off the table? Did we really need to hear from Mr. Tepper to make that happen? Of course not.”

Investment officers at the UK’s £180 billion Local Government Pension Scheme today added their voices to a growing chorus calling for better disclosure of asset managers’ “hidden” costs and fees.

Executives responsible for running the council workers’ pension scheme, which consists of 100 sub-funds administered by local authorities across the UK, gathered in the Cotswolds Tuesday for the annual NAPF Local Authority conference.

Investment fees were top of the agenda. Jonathan Hunt, head of treasury and pensions at the Tri-Borough, a co-operative venture between Westminster, Hammersmith & Fulham and Kensington & Chelsea councils in London, told delegates: “As a user of fund managers, we are very aware that many costs are ‘hidden’.

“I don’t mean this in a malignant sense. I only mean there are many costs – transaction costs, taxes, trading costs, third-party brokerage fees – that I don’t get an invoice for, and so it’s difficult to challenge them.”

Hunt – who said he was quite happy for asset managers to receive fair compensation – said it was arguably more important for the investment industry to convince “regulators and legislators” that these costs were reasonable, as well as the pension funds themselves.

The UK national government has heaped pressure on council pension funds to reduce costs in the past year. Earlier this month, the local government minister, Brandon Lewis, set out plans for forcing or encouraging the funds to shift billions out of actively managed mandates and into index-tracking funds, saying this would save £190 million a year in transaction costs.

This has proved controversial in the sector. Joanne Segars, chief executive of the National Association of Pension Funds, which is organising the conference, said she had spoken to many delegates who argued that public funds already have low running costs, and many had successfully used active managers to beat their investment targets. Segars argued the government should allow funds "flexibility" on the question.

Lewis will address the conference on his reform plans later today.

Rodney Barton, director of the West Yorkshire Pension Fund, said he had pressed for, and got, full disclosure of transaction costs from managers through “contract notes”.

He said: “These identified all the costs, including stamp duty and commissions paid, because in certain markets, we found that managers were not supposed to be paying these away and they were.”

But Hunt said that many smaller local government schemes might not have adequate in-house staff resource to pore through all the investment information in such notes.

The debate at the LGPS conference comes against a wider backdrop of pressure on asset managers' costs. Two weeks ago, the Financial Conduct Authority said most managers were not disclosing enough about their charges on £131 billion of funds in the retail market.

The Investment Management Association has responded with a plan for “all-in”, “pounds and pence” fee disclosure, and a consultation with its members on how they should disclose portfolio turnover.

The recent release of Institutional Investor Alpha’s hedge-fund survey has everyone asking how the fund managers continue to make so much money. Academics and journalists alike point out that hedge funds, as a class, haven’t delivered above-market after-fee returns for quite some time. Hedge funds, of course, get paid whether the market goes up or down, so the real question is why hedge funds continue to receive large inflows of capital from pension funds and other investors. The New Yorker magazine’s John Cassidy has a good roundup of the most prominent theories. He includes some good links to research on the question of whether hedge funds deliver superior risk-adjusted returns, or offer significant diversification potential.

But the real question is: Why would people expect hedge funds to deliver superior returns in the first place?

People often seem to treat the term “hedge fund” as if it’s a shorthand for “money manager of unusual skill.” At the Skybridge Alternatives Conference (SALT) last year, host Anthony Scaramucci told attendees that “Mutual funds are the propeller planes…while hedge funds are the fighter jets.” And of course we’ve all heard of those famous world-beating billionaire hedge-fund managers like John Paulson, Ken Griffin or Cliff Asness.

But is there any fundamental characteristic common to all or most hedge funds that makes them “fighter jets”? “Hedge fund,” after all, is just a legal category. There are regulations governing what kind of assets a fund is allowed to trade, and what kinds of clients the fund can service. Hedge funds are only allowed to sell to certain types of investors -- rich people, large institutions and those who qualify as so-called sophisticated investors. In exchange for this limitation on who can invest in them, they are exempt from most restrictions on what kinds of assets they can trade and how much leverage they can take on.

Theoretically, this exemption should mean that hedge funds offer the potential for diversification. Since they can invest in things other funds can’t, buying into hedge funds can theoretically give an investor access to a wider universe of assets.

But beyond that, there is little reason to believe that hedge funds as a group offer anything special. After all, any Tom, Dick or Harry can start a hedge fund. That’s right -- all you need is a business license. You can start a hedge fund without ever having managed a dime of money in your life. That’s called “free entry.” In economics, free entry means that average profits in an industry (net of opportunity cost) should be competed away to zero. Why should hedge funds be any different?

In other words, if a pension-fund manager or rich investor hurls his money at a fund just because it's called a “hedge fund,” he isn't making a sophisticated, market-beating choice; he is paying through the nose to take a lot of risk and get a bit of diversification. Thus, it’s no surprise that during the past couple of decades, even as money has continued to flow into hedge funds, their return hasn't impressed. Free entry has competed away the ability of the hedge-fund class to beat the market.

So how did hedge funds get such a good reputation? Well, it’s possible that their eye-catching early performance was a kind of loss leader. In the beginning, investors probably shied away from this scary new asset class, so higher after-fee returns were necessary to convince them that hedge funds were for real. After the word got out about the high returns and hedge funds became known as “fighter jets,” hedge funds were free to charge higher fees and a huge flood of scrubs entered the profession. The net result was that after-fee returns to the hedge fund class as a whole collapsed.

Now, this doesn’t mean there aren’t hedge-fund managers who can beat the market. As in the venture-capital industry, there seem to be a few superstars who really can deliver superb performance, year in and year out. You already know many of their names. The catch is, these superstars are unlikely to need your money. By the time we discover them, they already have a lot of capital, and taking on more would make it hard for them to keep generating market-beating returns. In other words, the only way to find a hedge-fund who can reliably beat the market for you is to pick one who’s not yet a star, but is destined to become one.

So here’s the real question: Do you, as a pension-fund manager, or rich individual investor, think that you have an above-average ability to pick out the non-superstar hedge funds that will outperform in the future? And if so, why? Also, is your superior fund-picking ability worth the average hedge-fund fee?

If you decide the answer is “no,” then you should consider investing in an index that tracks average hedge-fund returns (like the HFRX Global Hedge Fund Index), in order to get that bit of diversification without paying the big hedge-fund fees.

...any guy who would surgically implant fat cells in his penis needs to get his head examined. And any pension fund that needs to be invested in the "biggest" hedge funds no matter what the fees and performance needs a reality check. When it comes to penises and hedge funds, bigger isn't always better! 

The Canada Pension Plan fund saw its assets swell by $36-billion over the past fiscal year after recording its highest annual rate of return on investments in the past decade, but warns that good investment deals are harder to come by as more large investors flood into acquisition markets.

The Canada Pension Plan Investment Board (CPPIB), which manages Canada’s largest pool of pension assets, said total assets hit $219-billion as of March 31, up from $183-billion a year earlier, which is the highest annual gain in dollar terms that the fund has ever earned.

“At the end of the day, the reason we’re most pleased about that is that it’s really what pays pensions,” chief executive officer Mark Wiseman told reporters Friday. “Those returns will help pay pensions for the next 75 years and beyond. ... It continues to enhance the overall sustainability of the Canada Pension Plan.”

CPPIB says its long-term rate of return is on track to cover all anticipated CPP payments for at least the next 75 years, which is the time frame measured by Canada’s chief actuary. The fund needs to earn a 4-per-cent annualized rate of return above the rate of inflation to be sustainable for the long term, and currently has a 10-year rate of return of 5.1 per cent, which is ahead of the required level but a decline from 5.5 per cent at the end of 2013.

The 16.5-per-cent rate of return on investments in fiscal 2014, ended March 31, is the second-highest annual return earned by CPPIB in its 15-year history, outpacing all annual performance results except 2004, when the fund earned a 17.6-per-cent rate of return.

A major part of the return last year came from a $9.7-billion gain from converting foreign holdings into Canadian dollars for reporting purposes.

CPPIB said its 2014 return almost exactly matched the rate of return that would have been earned by a passive “reference portfolio” that simply invested in public stock indexes and government bonds. CPPIB earned $62-million less than a passive investment strategy would have produced after including operating costs.

The performance measure is closely watched because CPPIB decided eight years ago to begin actively investing its assets instead of passively investing in investments that matched indexes.

Mr. Wiseman said public stock markets earned “exceptional gains” during CPPIB’s fiscal year, ended March 31, so it was a difficult year to outperform public market benchmarks in the reference portfolio.

He said returns are typically expected to lag the passive benchmark over the short term when public markets perform strongly because there is a a valuation lag for private market holdings – including private equity and real estate – that are difficult to revalue on an annual basis. CPPIB has about 40 per cent of its portfolio in private investments.

Mr. Wiseman said he remains committed to a strategy of increasing investments in private markets, which reduces risk by adding diversity to the portfolio. He said private investments have a lot of “embedded” value that is not easily measured until they are sold.

“We believe it’s an extraordinary result to keep up with the reference portfolio in a period of time where there is extremely bullish equity markets,” he said. “We would have expected generally in market conditions like these that we would have underperformed the reference portfolio, and we were quite pleased we were able to keep up with it.”

In the eight years since CPPIB created its reference portfolio, the fund said it has earned $3-billion of additional returns above the passive benchmark after excluding operating costs.

Mr. Wiseman said Friday that the fund is seeing increasing competition for investment deals as more investment funds look to invest in alternative assets such as private equity and real estate, especially while interest rates remain low and credit is plentiful.

As a result, he said the fund is in a period of “patient” investing, selling some assets that are highly valued and being careful about new investments.

“In my career as an investor, this is probably the toughest market today to operate in as a value investor,” Mr. Wiseman said.

He said most assets are “fairly priced,” and better deals are often more complex or involve emerging markets like China and India that require time and expertise to handle well.

The fund said its $35.8-billion increase in assets last year included $5.7-billion from worker and employer contributions, and $30.1-billion from investment returns earned on the portfolio.

CPPIB also published its executive compensation report Friday, showing Mr. Wiseman earned a total of $3.6-million last year, up from $2.8-million in fiscal 2013. Most of the increase came from incentive programs based on CPPIB’s four-year investment return. André Bourbonnais, senior vice-president of private investments, earned $3.5-million, an increase from $2.6-million last year.

The 2013-14 financial year was an unusually strong one for the Canada Pension Plan Investment Board, which earned a 16.5 per cent annual return on the billions of dollars in assets it manages for the national retirement system, but its CEO cautions that level of growth likely won't soon be repeated.

"Although we are pleased with these annual results, this relatively short-term performance is far less meaningful than our long-term results as financial markets can move sharply in either direction over shorter time horizons," CPPIB chief executive Mark Wiseman said Friday as the fund manager released its annual report for the year ended March 31.

Wiseman said all of CPPIB's investment teams made material contributions last year, producing CPPIB's largest level of annual investment income since inception, but noted the Canada Pension Plan isn't expected to need to draw money from the fund until at least 2023 and, even then, at a relatively small amount for several years.

$219B in assets

For the financial year ended March 31, CPPIB had $219.1 billion of assets under management, up from $183.3 billion a year earlier, with the vast majority of the increase coming from investments.

About $30 billion of the increase was due to investments and $5.7 billion came from excess contributions paid to the pension plan by working Canadians and their employers outside of Quebec. By comparison, investments provided only $16.2 billion of net contributions in fiscal 2013 and only $9.5 billion in fiscal 2012.

The CPPIB, one of Canada's biggest pension funds, invests money not currently needed by the Canada Pension Plan to pay benefits. The plan receives its funds equally from payroll contributions from the people who work in Canada — outside of Quebec which has a separate plan — and matching contributions from their employers.

The board has been dealing with the volatility of publicly traded stocks and low returns from government bonds by diversifying into other forms of assets, including equity in private companies and investments in infrastructure such as highways and real estate.

There has been a public debate about whether Canadians will have sufficient income in retirement given that generally people live longer, that there are more people of retirement age and that savings rates are low debt levels high.

Public or private pension savings?

In Ontario, for instance, Liberal Premier Kathleen Wynne has included a separate provincial pension counterpart as one of her party's key election promises ahead of the province's June 12 election. On a federal level, the Harper government has steered clear of calls for increasing mandatory employee-employer contributions to the CPP in favour of a policy that enables voluntary contributions under professional management.

Wiseman says the CPPIB takes no position on whether the Canada Pension Plan is sufficient given overall retirement needs or what changes may be required, but says it has the organization has a "platform" of people, relationships and assets that can be expanded if policy-makers decide that's necessary.

"We are built for scale," Wiseman said. "We know that the fund today is going to grow by 2050 to something like a trillion dollars and we are designing our platform to be able to invest in scale."

Wiseman cautioned that the CPPIB — despite its large size in Canadian terms — competes against much bigger investors in the global market such as private equity funds, sovereign wealth funds and other public pension plans that are also on the hunt for similar types of investments.

He said that makes it difficult to find new investments at a price that provide the returns that are required so the Canada Pension Plan can deliver on its commitments.

"My view is that, at least in my career as an investor, this is probably the toughest market today to operate in as a value investor," Wiseman told reporters in a briefing Friday.

Looking for opportunity

"When you look around the world, you don't see assets are grossly overpriced and you don't see assets that are grossly under-priced."

"In areas where there is opportunity, it tends to be complex and hard to transact."

Wiseman said there may be opportunities in China but there's a limit on what foreign investors can do there and while there may be opportunities in India, they can be complex to execute.

Earlier this year, the fund partnered with residential developer China Vanke Co. Ltd. to invest US$250 million in the Chinese residential market.

CPPIB also recently launched a couple of strategic alliances in India, one focused on office buildings and another on financing for residential projects.

Canada's biggest pension fund on Friday posted a 16.5% return for its latest fiscal year, led by gains in its public and private equity holdings in developed and emerging markets.

CPP Investment Board had 219.1 billion Canadian dollars ($201.1 billion) of assets under management at the end of its fiscal year on March 31, up C$35.8 billion from a year ago. The increase included C$30.1 billion in investment income, after subtracting costs to operate the fund, which is the largest level of annual investment income since the fund's inception, CPPIB said. The remaining C$5.7 billion reflects pension contributions.

The fund's performance, despite the big gain, was largely in line with CPPIB's internal benchmark return of 16.4%.

Mark Wiseman, CPPIB's chief executive, said the fund's relative performance isn't surprising, and was actually better than it might seem, when the greater diversity of the fund's holdings compared with its benchmark is taken into account.

CPPIB's internal benchmark comprises a passive portfolio of about 65% publicly traded equities and 35% publicly traded bonds. By comparison, it only has about 60% of the fund in publicly traded securities and the rest in private assets. That means CPPIB couldn't reap the full benefit of equities that soared in 2013 in the U.S., Europe and Japan amid growing investor confidence over the global economic recovery. The fund's private assets include real estate, infrastructure, farmland and equities in private companies.

CPPIB's more diversified portfolio "ought not to keep up in a bull market" in public equities, but in a bear market, "we should outperform" because of the fund's relatively lower exposure to public markets, Mr. Wiseman said at a news conference. In addition, the value of private assets typically declines at a slower rate than public securities in a bear-market environment. But the fund actually outperformed on that basis, since the return was in line with the benchmark, Mr. Wiseman said.

Increasingly, Canada's pension funds are investing more of their money in private assets. That diversification strategy guards against overexposure to any one particular asset. Historically, private assets have also proven to generate bigger relative returns, in part because private markets tend to be less efficient. While public-market gains typically average in the mid- to high-single digits, private assets are expected in some cases to generate gains close to 15% to 20% on average.

Over the last five years, the value of CPPIB's private-asset holdings have more than tripled to C$89.1 billion from C$25.6 billion, and now represent about 40.6% of the fund's holdings.

In the latest year, some of CPPIB's private-equity investments included the acquisition of U.S. life insurance and reinsurance provider Wilton Re Holdings Ltd. for $1.8 billion, giving it a platform to expand into that sector. It also closed the $6.0 billion acquisition with U.S. private-equity firm Ares Management of luxury retailer Neiman Marcus Group Ltd. In the real-estate sector, it formed a new venture with China Vanka Co., China's biggest residential developer, and new real-estate ventures in India.

CPPIB's large size and its long-term investment horizon that it measures over decades, can give it an advantage over other institutional investors in scouring and bidding for investments. But Mr. Wiseman says the current investment climate "is probably the toughest" he has seen in his career for a value investor like CPPIB.

That is because assets are "by and large fairly priced," making it difficult to find investments the fund believes the market is mispricing or undervaluing, he said.

Some opportunities exist in China and India, but the complexity of operating in those countries makes investing there difficult, Mr. Wiseman noted.

The Canada Pension Plan Investment Board, one of the world's biggest dealmakers, said it is hard to find good deals because most assets are fully priced, but it will be patient and focus on emerging markets to find deals that offer long-term value.

CPPIB, which manages Canada's national pension fund, said on Thursday its assets rose to a record C$219.1 billion ($201.39 billion) at the end of fiscal 2014, as its investment portfolio returned 16.5 percent for the year ended March 31.

Chief Executive Mark Wiseman said CPPIB will put a disproportionate amount of effort into finding deals in developing markets because its long-term investment horizon allows it more time than many competitors to reap the benefits.

"We are continuing to try and develop our portfolio in growth markets, places like India, Brazil, China - we see those markets providing good long-term value for the fund over all," Wiseman told Reuters following the release of the fund manager's results.

CPPIB opened an office in Sao Paulo in April to access Latin American markets including Brazil, Peru, Chile, Colombia and Mexico.

Wiseman said the flow of acquisitions will likely remain subdued in 2015 because competitors have come back into the market after stepping back in the wake of the financial crisis, and there are lots of capital chasing investment opportunities.

"In my career as a investor this is probably the tightest market to operate in as a value investor," he told reporters. "Assets are by and large fully priced ... and if I had to use one word to describe the mentality around here it is 'patient.'"

The fund manager struck 103 global deals in fiscal 2014, 45 of which were over C$200 million.

Wiseman said CPPIB will focus on assets like infrastructure, real estate and private equity, and build out its public market capabilities in those developing markets.

The eighth year of active management of the fund has boosted foreign assets to 69 percent of the portfolio, while Canadian assets make up 31 percent of the book.

The 16.5 percent 2014 investment gain was up from 10.1 percent a year earlier and its fifth straight gain after the fund manager suffered losses in 2008 and 2009.

Investment returns were led by a 36.8 percent gain in private emerging market equities, a 35.1 percent rise in private foreign developed market equities, a 30.1 percent gain in Canadian private equities, a 26.3 percent gain in public foreign developed market equities, a 20.0 percent gain in "other debt," an 18.0 percent gain in real estate and a 16.6 percent gain in infrastructure.

Weaker parts of the portfolio included investments in Canadian public equities, which returned 15.6 percent, public emerging market equities, which returned 5.8 percent, bonds and money market securities, which returned 0.3 percent, and non-marketable bonds, which notched a negative 0.1 percent return.

• Except for bonds, these results are very strong across the board. If you look at the table above, you will see exceptional returns in both public and private markets except for bonds which were basically flat in fiscal 2014.
• Almost $10 billion of the gain came from foreign exchange as the Canadian dollar slid in FY 2014 (I warned all of you to short Canada back in December). And it could have been better if CPPIB didn't hedge F/X. Footnote #4 in the table above explicitly states that the total fund return in fiscal 2014 includes a loss of $543 million from currency hedging activities and a $1 billion gain from absolute return strategies which are not attributed to any asset class.
• CPPIB should follow AIMCo and others and report net returns in their headlines. Their press release, however, does state the following: "In fiscal 2014, the CPP Fund’s strong total portfolio return of 16.5% closely corresponded to the CPP Reference Portfolio with $514 million in gross dollar value-added (DVA) above the CPP Reference Portfolio’s return. Despite the strong CPP Reference Portfolio return, we outperformed the benchmark due to strong income and valuation gains from our privately-held assets.Net of all operating costs, the investment portfolio essentially matched the CPP Reference Portfolio’s return, producing negative $62 million in dollar value-added."
• The press release, however, emphasizes long-term results: "Given our long-term view and risk/return accountability framework, we track cumulative value-added returns since the April 1, 2006 inception of the CPP Reference Portfolio. Cumulative gross value-added over the past eight years considerably outperformed the benchmark totalling $5.5 billion. Over this period cumulative costs to operate CPPIB were $2.5 billion, resulting in net dollar value-added of $3.0 billion."
• I realize CPPIB is running a mammoth operation and is being "built for scale" but operating costs matter and they include fees being doled out to external public and private managers. This is why I'm a stickler for transparency on all costs, fees and foreign exchange fees. At the end of the day, whether you are running a pension fund, hedge fund, mutual fund, or private equity fund, what matters is the internal rate of return (IRR) net of all fees and costs, including foreign exchange transactions.
• Mark Wiseman is a very smart and nice guy. I've spoken to him on several occasions and he knows his stuff. He's absolutely right, in markets where public equities roar, CPPIB will typically under-perform its Reference Portfolio but in a bear market for stocks, it will typically outperform its Reference Portfolio. Why? Because private market investments are not marked-to-market, so the valuation lag will boost CPPIB's return in markets where public equities decline. Over the long-run, the shift in private markets should offer considerable added value over the Reference Portfolio which is made up of stocks and bonds.
• But while I understand the diversification benefits of shifting a considerable chunk of CPPIB's assets into private markets, this shift presents a whole host of operational and investment risks which need to taken into account. My biggest fear is that too many pensions and sovereign wealth funds are chasing big deals around the world, enriching private equity and real estate gurus, and bidding up the price of assets. Lest we all forget the wise words of Tom Barrack, the king of real estate who cashed out right before the financial crisis in 2005, stating back then: "There's too much money chasing too few good deals, with too much debt and too few brains."
•  Shifting more and more assets into private markets has become the new religion at Canadian public pension funds. It goes back to the days of Claude Lamoureux, Ontario Teachers' former  CEO, who started this trend, made the requisite governance changes and started hiring and compensating people properly to attract and retain talented individuals who know what they're doing in private markets. But I agree with Jim Keohane, CEO of HOOPP, a lot of pensions are taking on too much illiquidity risk, and they will get crushed when the next crisis hits.
• Of course, CPPIB and PSP investments have a huge liquidity advantage over their counterparts in that their cash flow is positive for many more years, which means they can take on a lot of liquidity risk, especially when markets tank.
• But right now, the environment isn't conducive to making  a lot of deals in private markets which is why Mark Wiseman and André Bourbonnais, CPPIB's senior vice-president of private investments, are going to sit tight and be very selective with the deals they enter. CPPIB's size is more of a hindrance in this environment because they need to get into bigger and bigger deals which are full of risks when other players are bidding up prices to extreme valuations.
• As far as India, China and other BRICs, there are tremendous opportunities but huge risks in these countries. Hot money flows wreak havoc in their public markets and if you don't pick your partners carefully, good luck making money investing in their private markets.
• In terms of compensation, I note that both Mark Wiseman and Mr. Bourbonnais both made almost the same amount in fiscal 2014 ($3.6 million and $3.5 million). I contrast this to PSP's hefty payouts for fiscal 2013 where Gordon Fyfe, PSP's CEO, made considerably more than other senior executives (all part of PSP's tricky balancing act). This shows me that CPPIB's compensation, while generous, is a lot fairer than that of PSP which has the same fiscal year. PSP is outperforming CPPIB over a four-year period but still, the difference in comp is ridiculous considering the outperformance (value added over a four year period) isn't that much better and the fact is that PSP is based in Montreal which is way cheaper than Toronto in terms of cost of living (I have to give credit to Gordon, however, he sure knows how to ensure he and his senior managers get paid extremely well. He's a master at charming his board of directors).
• Finally, one area where CPPIB is killing PSP Investments is in plain old communication (you can even follow CPPIB on Twitter now). I embedded four articles from Canadian and U.S. sources in this comment (there are more). The pathetic coverage of PSP's results isn't just because its results come out in July when Parliament approves the annual report, it's because PSP's public relations and website stink when it comes to communication. Again, that's all Gordon's doing, he doesn't like being discussed in the media, keeps everything hush, and basically thinks the annual report suffices.

A specter is haunting Europe -- the specter of deflation. Countries throughout the European Union have been struggling for the past several years with stagnant or falling prices. In Hungary, inflation has fallen to its lowest level since 1974. In Bulgaria, Cyprus, Greece, Ireland, and Latvia, consumer prices fell on a year-over-year basis in 2013. Over the same period, consumer prices remained static in Portugal and Spain, and they rose by the statistically insignificant rate of 0.5 percent in Denmark, Lithuania, Slovakia, and Sweden. Aggregate inflation in the EU has declined to a five-year low of 0.5 percent, well below the target of two percent set by the European Central Bank (ECB).

As long as incomes remain stable, deflation has a positive impact on consumers’ purchasing power; they can buy more goods and services as prices fall. Their savings also increase in value as prices decline, unless banks begin to charge negative interest rates -- basically, a fee for holding money.But deflation can be devastating for citizens with loans: as the value of their money remains stagnant or even decreases, they must continue to meet their debt obligations, the nominal value of which does not change. At the same time, whatever assets they have pledged as loan collateral decline in price, prompting lenders to demand further security against default. Deflation is also bad news for individuals and companies who do business across borders. Imports may become more expensive, and exports can generate lower revenues. Deflation also threatens citizens and companies with loans and other credit facilities.

For evidence of the ill effects of deflation, look to Japan in the 1990s, which closely resembles Europe today. There, too, the financial sector struggled under a large burden of bad loans. Like Europe, Japan also faced an aging population that consumed less. Another disquieting similarity is that the ECB, like its Japanese counterpart, seems unwilling to dramatically counteract these ominous monetary trends. The ECB has some reasons for its reticence -- but they aren't good enough.

MISSED OPPORTUNITIES

The ECB has already missed its best opportunity to effectively ease Europe’s money supply to counteract deflation. Two years ago, inflation in Europe dipped below the central bank’s two-percent target, and the European economy was at the lowest point of its four-year downturn. But the ECB was strongly influenced by Germany’s Bundesbank, which has historically been much more concerned about inflation than deflation. Now that the economy has started to revive and inflation has likely reached its lowest point, monetary expansion would not have much of a positive impact, at least not for Europe's leading economies.

For Europe's smaller economies, monetary expansion might still facilitate a recovery. If the ECB adopted a quantitative easing program involving the direct purchase of national bonds and collateralized loans, Spain, which has a huge stock of such debt, might come out ahead. But the implementation of such a strategy would be far more challenging in Europe than in the United States or Japan because of structural problems within Europe’s banking sector. Financial institutions within Europe’s fragmented banking sector still hold savings within the confines of their national borders.

It is also unclear whether quantitative easing is likely to have a significant impact across Europe right now. In the United States, quantitative easing seemed to help the most during and immediately after the financial crisis, because it brought stability to asset prices and to the financial sector generally. Beyond immediate damage control, though, quantative easing has had a relatively small effect in the United States. Japan’s recent policy of quantitative easing, which was much more ambitious than that of the United States had its greatest impact last year, stimulating GDP growth, at least temporarily, and boosting inflation to 1.5 percent per year, its highest level in years. Yet despite these achievements, quantitative easing has not been sufficient to bring an end to Japan’s long-term stagnation.

The ECB, furthermore, has already pursued a type of quantitative easing, which might have accomplished all the EU can hope to achieve through such policies. The ECB’s most effective measure to date was its program of long-term refinancing operations, which greatly improved the liquidity of the banking sectors in Europe’s smaller economies while decreasing the risk associated with their government bonds. For these effects alone, the policy was a success. But it had only a minor impact on inflation and GDP growth. Further rounds of quantitative easing, then, would likely lead to effects similar to those in the United States and Japan. It might contribute a few percentage points to GDP growth and the inflation rate, but it would not have any lasting effects on Europe’s economic recovery.

BETTER LATE THAN NEVER

Nonetheless, further quantitative easing by the ECB would be worth the effort. First, for Europe's weakest economies, an increase in economic growth by even a few tenths of one percent would make a tremendous difference. Second, further quantitative easing would allow the ECB to refine its use of extraordinary monetary measures. It could identify which assets are the most effective to buy and at what quantity. If the ECB is ever called on again for quantitative easing, that information would prove to be very useful.

But the ECB should be cautious. Unlike the U.S. Federal Reserve, the ECB does not have the legal authority to buy broad asset types, such as federal bonds and mortgage-backed securities. Instead, it would likely have to focus on more defined instruments, such as corporate bonds. And that would raise the political pressure on the central bank to choose assets based on political expediency, rather than sound financial and economic reasoning.

Moreover, European governments will have a hard time rallying citizens around deflationary policies. Over the last two decades or more, Europeans have been told by their governments that inflation leads to negative consequences, such as rising prices, the devaluation of savings, and a slowdown in social and economic development. Now, governments will have to convince them that, rather than fight inflation, the EU should hope for it.

EXTRAORDINARY MEASURES

The ECB continually emphasizes the differences between Japan and the eurozone. Yet it shouldn't deny the very clear similarities. Demographically, Europe and Japan both have aging populations that are consuming less, which produces slower economic growth. Europe and Japan are both heavily indebted as well, which increases the negative effects of deflation.

Although the ECB did not mention deflation in its 2013 economic report, current conditions make it a real possibility. European countries, especially the Baltic States, already see the reduction of wages and prices as an unavoidable form of internal devaluation necessary to correct economic imbalances with other EU countries. Meanwhile, Europe’s banking sector remains fragile. Once inflation reaches zero percent -- which may happen soon -- the ECB would be forced to acknowledge the risk of deflation. By then, however, it may be too late.

That's why the ECB must take steps now to counter the possibility of deflation. It should start by putting downward pressure on interest rates until they fall slightly below zero. This would encourage consumers to spend rather than save their money, which would lead to higher economic growth and lower unemployment. The ECB should also continue purchasing government bonds under the Securities Markets Programme (SMP), without “sterilizing” those purchases by removing an equal amount from banks of those countries. But since these measures alone will not reverse the slide toward deflation, the ECB should also proceed directly to another round of quantitative easing.

Speaking at the ECB's inaugural Forum on Central Banking, Krugman suggested the eurozone could sleep walk into Japan-style deflation.

It would be easy to convince oneself there is no problem, Prof Krugman said, adding: "There is not that explosive downward dynamics in the euro area, or in the United States.

"But then there has never been explosive downward dynamics in Japan either, and yet we do think that Japan has had a persistent deflation problem."

Opening the ECB's Sintra Forum, billed as the European version of the Federal Reserve's renowned Jackson Hole conference, Mr Draghi warned on Monday that there was a risk of disinflationary expectations taking hold.

I must admit, I'm a high beta junkie and love trading stocks that move. Bonds just don't do it for me, never did. In fact, I don't understand why anyone would invest in bonds given the historic low rates we're seeing. Nonetheless, I think the bond panic of 2013 was way overdone and given the risks of deflation, investors would be wise to invest in high quality bonds and carefully choose high dividend stocks of companies with low debt and strong cash flows (the backup in yields is presenting good opportunities on some interest rate sensitive sectors, like utilities and REITs).

Gold won't shine again until ECB moves: In my last comment on hot stocks of 2013 and 2014, I discussed why gold shares (GLD) are way oversold and it's a good time to start accumulating at these levels. And as I stated in my comment from tapering to deflation, the ECB will have to crank up its quantitative easing, and when it does, gold shares will rally hard.

But be careful with gold. Just like other commodity shares, you'll see plenty of false breakouts due mostly to short covering. These counter-trend rallies are great to trade but don't be fooled, gold will not take off until the ECB starts cranking up its quantitative easing (short the euro, it's overvalued).

When will the ECB move? I don't know but I will tell you this, there will be another Greek haircut and it may come sooner than you think now that Greece has achieved a primary surplus by ramming through troika's insanely deflationary policies. Periphery Europe remains a huge concern for the global recovery and there is no doubt in my mind the ECB will have to crank up its quantitative easing. This is bearish for the euro but bullish for gold.

Benchmark-oriented active managers will fall behind.

That’s what Yariv Itah, managing partner at Casey Quirk, argued at an Alternative Investment Management Association event in Toronto on Wednesday.

A paper he co-wrote, Life After Benchmarks, says clients will soon care more about outcomes, such as specific cash-flow needs, than outperforming a benchmark.

But “to get away from the benchmark, you need a lot of courage,” says Jean-Luc Gravel, executive vice-president of global equity markets at Caisse de dépôt et placement du Québec. That’s particularly the case in Canada, where we have fewer names to choose from.

Even though clients will compare your performance to the benchmark over the long term, it can be dangerous to try beating it over the short term. For instance, when Nortel comprised 35% of the TSE 300 (now the S&P/TSX Composite Index), many managers Gravel spoke to knew it was overpriced. But they refused to sell, because they’d lose their jobs if clients didn’t see the stock in the portfolio.

Gravel says the Caisse has moved away from benchmark-oriented investing globally. “You don’t want to be down 48% even if the benchmark is down 50%,” he says. “In terms of risk-adjusted returns, it’s a better approach.”

Success without benchmarks

Managers may feel lost if they can’t compare their performance to the S&P 500 or S&P/TSX 60. The solution, says Gravel, is to create your own comparisons.

His team does 10-year forecasts to determine expected returns for their chosen allocations – for equities, he’s aiming for 7.5%, but with less risk than a typical manager. Then, they tell clients, so managers are kept accountable.

Ray Carroll, CIO of Breton Hill Capital, agrees that setting expectations will calm clients clamouring for comparisons. At the outset, walk them through scenarios where your approach should perform well, and explain which risk management tools you’ll use in down times.

Carroll says running and explaining simulations is time-intensive, but worth it. For instance, one of his largest investors gave him more money during a period of underperformance thanks to such explanations. “We see you’re down,” the investor said, “but it’s in a scenario where you said you’d be down. And, we’re impressed with how you’ve applied your risk management tools.”

Prepare for the future

In a non-benchmark world, static asset allocation isn’t enough, says Itah. Managers should start allocating portfolios by risks: cash, duration, credit, equity and correlation. And instead of setting an allocation to run for three years, for instance, managers should be taking advantage of opportunities as they arise, subject to that predefined risk profile.

They should also move away from narrow mandates (e.g., large-cap value equities) and broaden their asset classes. He predicts between 2013 and 2016, Canadian plan sponsors will increase their non-benchmark strategies by 23.1% at the expense of active equity, passive and cash allocations.

To prepare, every active manager should be comfortable with derivatives, short-selling, quant modelling, FX and commodities, Itah adds. “In the future, alternative investing will be the default method of active management. Hedge funds will be mainstream.”

• Mario Therrien, Senior VP External Mandate, Caisse de dépôt et placement du Québec (moderator)
• Yariv Itah, Managing Partner, Casey Quirk (presenter of findings)
• Jean-Luc Gravel, Executive VP Global Equity Markets, Caisse de dépôt et placement du Québec (panelist)
• Jacques Lussier, President, IPSOL Capital (panelist)
• Mihail Garchev, Senior Director, PSP Investments (panelist)

Ah benchmarks, one of my favorite subjects and the one topic that makes Canada's pension aristocrats extremely nervous. It's all about the benchmarks, stupid! If you don't get the benchmarks right in private equity, real estate, infrastructure, hedge funds, stocks, bonds, commodities or whatever, then you run the risk of over-compensating pension fund managers who are gaming their benchmark to collect a big fat bonus. And as we saw with the scandal at the Caisse that the media is covering up, things don't always turn out well when pension fund managers take stupid risks, like investing in structured crap banks are dumping on them.

A few months ago, Réal Desrochers called me to work on fixing CalPERS private equity benchmark. I can't consult CalPERS or any U.S. public pension fund because I'm not a registered investment advisor with the SEC and they got all these rules down there which make it impossible for a Canadian to work for them.

Anyways, I remember telling Réal their PE benchmark is too tough to beat, the opposite problem that many Canadian funds encounter. I told him I like a spread over the S&P 500 and even though it's not perfect, over the long-run this is the way to benchmark the PE portfolio.

Andy Moysiuk, the former head of HOOPP Capital Partners and now partner at Alignvest  has his own views on benchmarks in private equity. He basically thinks they're useless and they incentivize pension fund managers to take stupid risks. He raises many excellent points but at the end of the day, I like to keep things simple which is why I like a spread over the S&P 500 or MSCI World (if the portfolio is more global).

Should the spread be 300 or 500 basis points? In a deflationary world, I would argue that many public pension funds praying for an alternatives miracle that is unlikely to happen will be lucky to get 300 basis points over the S&P 500 in their private equity portfolio over the next ten years. To their credit, CalPERS has updated their statement of investment policy for benchmarks, something all public pension funds, especially the ones in Canada should be doing (don't hold your breath!).

Many Nova Scotians face the threat of not getting the pensions they have been promised, several experts warn.

Nova Scotia may not be Detroit, but between the retiree bubble and a stagnant working-age population, those defined-benefit public pension plans are starting to look less solid.

Public-service pension plans across Nova Scotia are underfunded and, in many cases, steps are not quickly being taken to fix them.

The provincial Teachers’ Pension Plan is only 75 per cent funded, with an unfunded liability of $1.5 billion. This is at a time when the number of new teachers is dropping, and soon half of the people in the plan will be retired.

From municipalities to universities such as Dalhousie and Acadia, low interest rates are putting a huge strain on pension plans.

“To say that we have problems, yeah, where do you want to start?” said one expert who did not want to be named because he is involved with some plans.

“They’re all a mess.”

The good news is there’s no shortage of people offering solutions with a track record of success. Too many small plans are being managed by people without the proper expertise, said the expert. He recommends all smaller plans with under $1 billion in assets should be merged.

Then there’s the contentious issue of reforming benefits. Nova Scotia’s largest pension plan, the Public Service Superannuation Plan, is healthy. But it took painful changes in 2010, such as removing benefit indexing when the plan is underfunded.

Those changes were politically painful and sparked protests from retirees. But the plan is now almost 100 per cent funded.

“You have to do something. But, politically, the thing is nobody has to do anything right now,” said Graham Steele, the finance minister at the time.

“You can always put it off. It’s just that things are going to get a little bit worse every year. That’s why it’s so hard for politicians to deal with this stuff.”

Bill Black, who previously led a provincial advisory committee on private-sector pensions, agreed smaller funds should be merged. Black also said government will have to make the unpopular move of forcing civil servants to contribute more and work a bit longer.

“They’re going to have to swallow that pill and gradually raise the future retirement age and increase the contributions.”

The increased costs of these plans tend to draw the ire of people without such savings. It’s a phenomenon nicknamed “pension envy.”

New Brunswick tried to strike a balance by adopting a European-style of pension reform where the benefits and risk are shared between the government and the pensioners. They’ve now been singled out as an international model for reform.

For those without government pension plans, the crisis could be coming sooner than many think. In a groundbreaking 2011 paper, economist Michael Wolfson found that by the time the baby boomers retire, half of middle-income retirees will see a 25 per cent drop in their net living standard.

Wolfson said in an interview that the most frustrating thing for him is that this problem had been predicted since he was working as a federal Finance Department analyst in the 1980s.

Even those with private pension plans are in trouble. About 60 per cent of private defined-benefit plans are underfunded, according to the Office of the Superintendent of Financial Institutions. And those plans are increasingly rare.

For Wolfson and other experts, one big solution is obvious: increase the Canada Pension Plan. Private savings plans come with bank fees typically five to eight times higher than the CPP program.

It’s also universal. Decades of history shows that while people know they should save for retirement, many can’t or won’t, said Murray Gold of Koskie Minsky LLP in Toronto.

“This is something that is best done collectively. It’s like building a road, building a school, building a health-care system,” said Gold.

“You need to take a social approach to this.”

Despite all the provinces backing the plan, former finance minister Jim Flaherty shot down the idea of beefing up the CPP last year. He said the economy could not handle the extra payroll reductions.

Ontario has since decided to go it alone. The Liberals have made the provincial plan, which would provide 15 per cent of a retirees pre-retirement income, a key part of their re-election platform.

It is not universally loved. The right-leaning Fraser Institute argues the plan will cause people to lower their private savings as they struggle to maintain the same quality of life. They argue instead for targeted programs to assist low-income retirees.

Black said provincial plans work in theory, but he worries unethical premiers would be tempted to dip into the funds to spend on political promises. (Federal legislation prevents the CPP being used for political investments.)

But Black, Gold and Wolfson all say that as long as the federal government won’t take action, the provinces should consider joining together and forging a joint provincial plan as a CPP alternative.

“It’s second-best, but it’s a heck of a lot better than nothing,” said Wolfson.

Retirement age for me would be: [Life expectancy at birth - 15 years]. No adjustment for men or women. This way, it would get adjusted every year before it gets out of control and becomes a political issue.

Very right about the compensation question. At the very top, it was necessary to bring compensation in line with banking and insurance industry pre-crisis when banks made blankets offers to anyone with at least 3 months of experience in a pseudo prop trading environment and no pension fund could compete with that but not true anymore. What's funny though is that the incentive compensation of non-investment executive is still very often tied to the rolling 4-yr performance of the plan but they take no part in investment decision making so that's kind of weird. Of course it is an undeniable metric but there must be a way around it.

Looking forward to read your plan on how to improve pension governance. It is not easy when half your board hasn't achieve financial markets literacy and that they need to have recourse to an 'external advisor' anyways.

Do you think a particular CEO makes too much money? Would you like to replace the directors who signed off on that salary? Or to vote on a company’s environmental policy?

If you own stock in a company, you get such opportunities. Every year, companies open the polls at their annual meetings, and shareholders elect directors to the board and vote on various policies. At Bank of America’s meeting on Wednesday, for example, shareholders weighed in on executive compensation and whether to force the bank to tally its impact on greenhouse-gas emissions.

But investors who prefer owning mutual funds to individual stocks don’t get to vote. Instead, the managers of their mutual funds do, carrying the weight of all the investors in the fund. Roughly half the companies in the Standard & Poor’s 500 index hold their annual meetings in May, so many of those votes are occurring now.

Investors can see how their mutual funds voted on issues over the prior year: Funds typically list their voting results on their Web sites, and they also file documents with the Securities and Exchange Commission detailing their choices.

Because fund managers would rather spend time buying and selling stocks than studying proposals for each corporate meeting, many funds hire an advisory firm to help them. Institutional Shareholder Services, better known as ISS, is such a company. It has about 1,700 clients and issues vote recommendations on nearly 39,000 companies around the world.

The votes cast by mutual funds carry big weight. Vanguard, which controls more than $2 trillion in assets, is often a company’s largest shareholder after totaling the investments across all of its funds. Vanguard and other large fund families say they vote based on what will drive the best long-term value for their investments. Vanguard prefers that the majority of directors on a company’s board be independent of management, for example.

Consider UPS, in which Vanguard funds collectively own about 5.1 percent of the outstanding shares, according to FactSet. Last year, Vanguard’s Total Stock Market Index fund – the largest mutual fund with $323.7 billion in assets – voted for a proposal to make all shares of stock have the same voting rights. The fund’s managers were hoping to replace the current system under which some UPS shares carry greater influence, with 10 votes per share. The fund voted against the recommendation of UPS management, though the proposal failed to pass. The fund also voted for all 12 nominees recommended for its board.

Vanguard, though, acknowledges “it would be exceedingly difficult, if not impossible” to reflect the social concerns of all shareholders while maximizing returns. It suggests investors who want to put emphasis in their portfolio look to specific mutual funds, ones that are typically called sustainable or socially responsible.

Over the years, corporate America has grown willing to talk with investors about such issues, says Stu Dalheim, the vice president of shareholder advocacy at Calvert. That’s made it easier for socially responsible investors, but it still isn’t easy.

At Leggett & Platt, which makes mattress innersprings and other products, Vanguard’s Total Stock Market Index fund last year voted for a proposal to explicitly prohibit discrimination based on sexual orientation and gender identity at the company. The vote was against the recommendation of the company’s management, which said that it is already an equal-opportunity employer. The company also said that it believes written policies should specifically list only the types of discrimination prohibited by federal law. The proposal failed to pass.

These funds make it part of their investment philosophy to emphasize issues such as executive compensation, climate change and human rights. For example, Calvert Investments focuses on sustainable investments and says it allocates its $13 billion in assets for both principle and performance.

Calvert identifies companies that it sees as strong in business ethics, environmental standards and other issues. It invests in them and tries to highlight those companies as leaders to others at conferences or in meetings with other CEOs.

It also makes proposals to try to advocate for corporate policies: It was among the investors who called on Bank of America to tally the greenhouse gases produced by companies and projects for which it’s a lender. The proposal failed to pass on Wednesday.

Sustainable-investing funds may also own stocks that may surprise some environmentalists, such as Exxon Mobil, Royal Dutch Shell and utility companies that burn a lot of coal. Calvert says it owns such companies in hopes of building long-term relationships and driving change.

“I think the trend is moving in our direction,” Dalheim says. “There’s more acknowledgment from companies and investors broadly that sustainability factors are important, but on some of these major challenges, there’s not enough progress.”

Propelled by a soaring stock market, the median pay package for a CEO rose above eight figures for the first time last year. The head of a typical large public company earned a record $10.5 million, an increase of 8.8 per cent from $9.6 million in 2012, according to an Associated Press/Equilar pay study.

Last year was the fourth straight that CEO compensation rose following a decline during the Great Recession. The median CEO pay package climbed more than 50 per cent over that stretch. A chief executive now makes about 257 times the average worker’s salary, up sharply from 181 times in 2009.

The best paid CEO last year led an oilfield-services company. The highest paid female CEO was Carol Meyrowitz of discount retail giant TJX, owner of TJ Maxx and Marshall’s. And the head of Monster Beverage got a monster of a raise.

Over the last several years, companies’ boards of directors have tweaked executive compensation to answer critics’ calls for CEO pay to be more attuned to performance. They’ve cut back on stock options and cash bonuses, which were criticized for rewarding executives even when a company did poorly. Boards of directors have placed more emphasis on paying CEOs in stock instead of cash and stock options.

The change became a boon for CEOs last year because of a surge in stocks that drove the Standard & Poor’s 500 index up 30 per cent. The stock component of pay packages rose 17 per cent to $4.5 million.

“Companies have been happy with their CEOs’ performance and the stock market has provided a big boost,” says Gary Hewitt, director of research at GMI Ratings, a corporate governance research firm. “But we are still dealing with a situation where CEO compensation has spun out of control and CEOs are being paid extraordinary levels for their work.”

The highest paid CEO was Anthony Petrello of oilfield-services company Nabors Industries, who made $68.3 million in 2013. Petrello’s pay ballooned as a result of a $60 million lump sum that the company paid him to buy out his old contract.

Nabors Industries did not respond to calls from The Associated Press seeking comment.

Petrello was one of a handful of chief executives who received a one-time boost in pay because boards of directors decided to re-negotiate CEO contracts under pressure from shareholders. Freeport-McMoRan Copper & Gold CEO Richard Adkerson also received a one-time payment of $36.7 million to renegotiate his contract. His total pay, $55.3 million, made him the third-highest paid CEO last year.

The second-highest paid CEO among companies in the S&P 500 was Leslie Moonves of CBS. Moonves’ total compensation rose 9 per cent to $65.6 million in 2013, a year when the company’s stock rose nearly 70 per cent.

“CBS’s share appreciation was not only the highest among major media companies, it was near the top of the entire S&P 500,” CBS said in a statement. “Mr. Moonves’ compensation is reflective of his continued strong leadership.”

Media industry CEOs were, once again, paid handsomely. Viacom’s Philippe Dauman made $37.2 million while Walt Disney’s Robert Iger made $34.3 million. Time Warner CEO Jeffrey Bewkes earned $32.5 million.

The industry with the biggest pay bump was banking. The median pay of a Wall Street CEO rose by 22 per cent last year, on top of a 22 per cent increase the year before. BlackRock chief Larry Fink made the most, $22.9 million. Kenneth Chenault of American Express ranked second with earnings of $21.7 million.

Like stock compensation, performance cash bonuses jumped last year as a result of the surging stock market and higher corporate profits. Earnings per share of the S&P 500 rose 5.3 per cent in 2013, according to FactSet. That resulted in an average cash bonus of $1.9 million, a jump of 12.9 per cent from the prior year.

More than two-thirds of CEOs at S&P 500 companies received a raise last year, according to the AP/Equilar study, because of the bigger profits and higher stock prices.

CEO pay remains a divisive issue in the U.S. Large investors and boards of directors argue that they need to offer big pay packages to attract talented men and women who can run multibillion-dollar businesses.

“If you have a good CEO at a company, the wealth he might generate for shareholders could be in the billions,” says Dan Mitchell, a senior fellow at the Cato Institute, a libertarian think tank. “It might be worth paying these guys millions for doing this type of work.”

CEOs are still getting much bigger raises than the average U.S. worker.

The 8.8 per cent increase in total pay that CEOs got last year dwarfed the average raise U.S. workers received. The Bureau of Labor Statistics said average weekly wages for U.S. workers rose 1.3 per cent in 2013. At that rate an employee would have to work 257 years to make what a typical S&P 500 CEO makes in a year.

“There’s this unbalanced approach, where there’s all this energy put into how to reward executives, but little energy being put into ensuring the rest of the workforce is engaged, productive and paid appropriately,” says Richard Clayton, research director at Change to Win Investment Group, which works with labour union-affiliated pension funds.

Petrello was the best-paid CEO largely because the board of directors of Nabors Industries’ wanted to end his previous contract. Under that contract, Petrello could have been owed huge cash bonuses, and the company could have paid out tens of millions of dollars if he were to die or become disabled. The board changed his contract following “say on pay” votes in 2012 and 2013 that showed shareholders were unhappy with how Nabors paid its executives.

To calculate a CEO’s pay package, the AP and Equilar looked at salary as well as perks, bonuses and stock and option awards, using the regulatory filings that companies file each year. Equilar looked at data from 337 companies that had filed their proxies by April 30. It includes CEOs who have been at the company for two years.

One prominent name not included in the data was Oracle CEO Larry Ellison, who is typically one of the best paid CEOs in the country.

Oracle files its salary paperwork later in the year, so Ellison was excluded in the 2013 survey data. He was awarded $76.9 million in stock options for Oracle’s fiscal year ending May 2013, according to proxy filings.

Among other findings:

— Female CEOs had a median pay package worth more than their male counterparts, $11.7 million versus $10.5 million for males. However, there were only 12 female CEOs in the AP/Equilar study compared with 325 male CEOs that were polled.

— The CEO who got the biggest bump in compensation from 2012 to 2013 was Rodney Sacks, the CEO of Monster Beverage. Sacks earned $6.22 million last year, an increase of 679 per cent. Monster’s board of directors awarded Sacks $5.3 million in stock options to supplement his $550,000 salary and $300,000 cash bonus.

Here are the 10 highest-paid CEOs of 2013, as calculated by The Associated Press and Equilar, an executive pay research firm:

1. Anthony Petrello, Nabors Industries, $68.2 million, up 246 per cent

2 .Leslie Moonves, CBS, $65.6 million, up 9 per cent

3. Richard Adkerson, Freeport-McMoRan Copper & Gold, $55.3 million, up 294 per cent

4. Stephen Kaufer, TripAdvisor, $39 million, up 510 per cent

5. Philippe Dauman, Viacom, $37.2 million, up 11 per cent

6. Leonard Schleifer, Regeneron Pharmaceuticals, $36.3 million, up 21 per cent

7. Robert Iger, Walt Disney, $34.3 million, up 46 per cent

8. David Zaslav, Discovery Communications, $33.3 million, down 33 per cent

9. Jeffrey Bewkes, Time Warner, $32.5 million, up 27 per cent

10. Brian Roberts, Comcast, $31.4 million, up 8 per cent

Companies in the Standard and Poor's 500 stock index bought back about $160 billion in stock in the first quarter - the number is an estimate because the first-quarter tallies aren't complete, says Howard Silverblatt, senior index analyst for S&P Dow Jones Indices. If that number's accurate, it would be the second-highest amount of stock repurchases in history, trailing only the $172 billion in the third quarter of 2007.

Students of history will recall that the largest bear market since the Great Depression began in October 2007, which is one reason to view stock buybacks skeptically. Companies rarely buy their own stocks because they think the stock is undervalued, as superstar Warren Buffett pointed out in a 1999 investment letter: "Repurchases are all the rage, but are all too often made for an unstated and, in our view, an ignoble reason: to pump or support the stock price."

Reducing the share count is one way that buybacks pump a stock price. But there's a somewhat more subtle way that repurchases kick up a stock's value. Analysts look at a company's earnings per share. If a company's earnings are the same and the number of its shares fall, the stock magically looks a bit less expensive than it really is.

It may not be a shock that the people who benefit most from higher stock prices are executives, because much of their compensation comes in the form of stock grants and options. And yes, those executives have a big say in when a company repurchases its stock. "The people who make those decisions have a big incentive to keep stock prices high," says William Lazonick, professor at the University of Massachusetts at Lowell.

Thus, big surges in share repurchases often happen when stock prices are high, not when they're a bargain. That may have happened in the first quarter of 2014, when earnings were widely expected to slow. "Companies may have decided to spend extra money getting a tailwind going into the first quarter," Silverblatt says.

That's not unusual, Lazonick argues. Looking over four decades of data, Lazonick found that buybacks peak at market peaks, and tail off in bear markets. But he makes other, powerful arguments against corporate stock buybacks:

• Even companies that buy back shares because they think the stock is a bargain don't sell it to lock in a profit. Doing so would be a signal that management thinks the stock is overvalued.
• Companies that depend on research and development for future earnings squander their money by buying back stocks. Pfizer, for example, depends on developing new drugs. Yet, from 2003-2012, the equivalent of 71% of Pfizer's profits went to buybacks, Lazonick says. Similarly, Hewlett-Packard spent $11 billion on buybacks in 2010, $10.1 billion in 2011, then took a $12.7 billion loss in 2012.
• Buybacks are probably the least productive use of a company's money. Companies have any number of things they can do with their cash, borrowings and profits. They can invest in people, plants and equipment. Or they can buy other companies. "It shows a lack of imagination," Lazonick says.

"We use it as an explanation of why earnings are holding up," says Sam Stovall, managing director of U.S. equity strategy at S&P Capital IQ. "Companies buy back stocks because management doesn't feel it has a better use for its funds."

The past five years, the PowerShares Buyback Achievers fund (ticker: PKW), has beaten the SPDR S&P 500 ETF trust by 3.91 percentage points a year, according to Morningstar, the Chicago investment trackers. So far this year, however, the fund has lagged behind the index by 2.28 percentage points - a sign that Wall Street may be getting less impressed by buybacks.

What should investors look for instead of repurchases? Stovall suggests investments in plant and equipment. Factory capacity utilization is at 80% now, about the point where companies start replacing old equipment, Stovall says. Investment in equipment grew 3.1% last year and is expected to grow 5.2% this year. Next year? a sizzling 10.4%.

Buying back stock is more of a sugar high than anything else. But wouldn't you prefer to own a company that has better ideas for using its cash?

As the City of Regina debated its largest tax hike in more than a decade, 76-year-old George Malish looked at his household balance sheet to see how he would pay for it all. Taxes were rising, along with utilities and phone bills. Yet Malish’s Old Age Security (OAS) cheque had gone up by just 55 cents a month. “I ask [city officials] to please put their heads together and decide how to divide 50 cents a month and forgo the other increases they are demanding,” he wrote in a letter to the local newspaper, suggesting that politicians and bureaucrats should also try limiting their own wage increase to 55 cents a month.

Despite what he sees as the growing demands on his meagre benefits, Malish considers himself one of the lucky ones when it comes to financing his retirement. Aside from income from CPP and OAS, he receives a company pension after retiring from what he calls “blue-collar work” in 1994. Two decades of inflation have steadily eroded his income, but at least Malish’s pension covers prescription benefits for himself and his wife. “Very few people have that,” he said in an interview. “That’s what’s giving us a very decent living.”

Like many of his generation, Malish is at the forefront of the coming pension wars, the growing divide between the haves, whose retirement is secured by guaranteed workplace pensions, and the have-nots, left to scrape by on their own meagre savings. It’s shaping up to be a battle between politicians and government bureaucrats armed with pensions that offer guaranteed payouts and the remaining 80 per cent of Canadians in the private sector who are preparing for retirement with a patchwork of different savings programs. With the first wave of  Baby Boomers heading into retirement, Canadians are only now starting to take stock of what kind of lifestyle they can afford with their savings and comparing that to their neighbours working government jobs. Many don’t like what they see.

“As people are becoming aware of the divide that exists, I think there is going to be resentment over the fact that some people are retiring much earlier and are going to have a much more financially secure retirement,” says Bill Tufts, a benefits consultant and founder of advocacy group Fair Pensions For All.

Already that resentment is starting to spill over into public policy. In Ontario, Liberal Premier Kathleen Wynne has staked her election hopes on voters’ angst over their retirement savings by promising a made-in-Ontario pension plan aimed at middle-class workers. Meanwhile her opponent, Progressive Conservative Tim Hudak, has attacked the plan as a job-killing payroll tax and is promising instead to cut spending by firing 100,000 government workers.

Public sector unions are pushing back against the growing threat of pension envy that is putting pressure on governments to cut back on their retirement benefits. The Public Service Alliance of Canada, the union that represents federal government workers, argues that at $25,000 the average pension payment for its members is hardly lavish.

Yet governments are struggling to afford even those benefits. This month, auditor-general Michael Ferguson warned the pension system for federal public servants was underfunded by more than $150 billion, representing Ottawa’s biggest liability next to the $668-billion federal debt. The federal government also paid $9.2 billion worth of interest payments on pension-related debt —nearly a third of the government’s total interest payments for 2012. Ottawa has also channelled another $1 billion into its pension fund from other tax revenues to help cover the roughly $15 billion in pension benefits it pays out every year, representing 5.5 per cent of all federal government spending.

Proponents of generous public sector pensions have traditionally argued that governments need better benefits in order to compete for workers who can find higher salaries in the private sector. Calgary Mayor Naheed Nenshi said as much this month when he warned that the Alberta government’s proposed public sector pension reform “could have a crippling effect on our labour force,” by encouraging an exodus of municipal workers to the private sector.

But it’s no longer the case that public sector workers are paid less than their private sector counterparts. A study by the Ontario Institute for Competitiveness and Prosperity (ICP), a government-funded think tank, found that for many jobs—particularly non-management positions—government workers now receive both higher salaries and better benefits than their private sector counterparts. Such generous guaranteed pensions make it difficult for politicians and bureaucrats to enact good policy because they can’t empathize with the struggles of average Canadians, says Gregory Thomas, federal director of the Canadian Taxpayers Federation. “You create a separate class of people who really identify with the government as opposed to the people they’re governing.”

Increasingly the anger over “gold-plated” public sector pensions isn’t focused on how much government workers are earning in retirement, but that they have access to a pension at all. Thanks to the decline of manufacturing jobs, the percentage of private sector workers enrolled in defined benefit pensions dropped from 35 per cent in 1970 to 12 per cent by 2010. Nearly all public sector workers in the largest provinces are covered by workplace pensions, regardless of whether they are junior secretaries or senior managers. By contrast, even the most skilled private sector workers have roughly a one-in-two shot of landing a job with a pension. Even then, most of the private sector pensions are defined contribution plans, where the benefit payouts depend on how a worker’s individual retirement account performs. The differences between the two types of pensions are huge. The ICP estimates the typical defined benefit plan for a manufacturing worker is worth $255,000 compared to $43,000 for a defined contribution plan.

That is the kind of discrepancy that riles taxpayers, who end up paying out more to fund public pensions than they get from their own employers. The ICP estimates that governments contribute an average of $4,530 a year for every worker, compared to an average contribution of $3,230 for private sector employers. Those are tax dollars not available to fund health care and infrastructure spending, says Tufts.

Yet others argue that growing pension envy is pushing policy-makers in the wrong direction, by encouraging governments to pare back their own pension benefits rather than expand benefits in the private sector. That will end up hitting taxpayers in other ways, such as through government programs like the Guaranteed Income Supplement for low-income seniors. A Boston Consulting Group study last year, funded by Canada’s largest public sector pensions, found that 15 per cent of pensioners with a defined benefit plan collect GIS compared to as many as 50 per cent of retirees without one. “If there’s not going to be the ability to bargain defined benefit plans then the pressure is going to come out somewhere else,” says Herb John, head of the National Pensioners and Senior Citizens Federation, who retired from Ford at age 49. “It’s like a bubble under a rug. You can’t get rid of it. You can push it around, but it’s always going to be there.”

Many worry that the grumblings of pension envy today will eventually explode in a full-blown crisis as young workers, saddled with student debt, mortgages and stagnant incomes, age into retirement. “The resentment becomes divisive,” says Alexandra Lopez-Pacheco. At 53, she’s a pensionless freelancer whose retirement wealth is tied up in the rising value of her Oakville, Ont., home. But she wonders what will happen to her three children. “When we start losing things that are really essential to society, we start resenting those who have [them],” she says. “We’re not helping ourselves or them. We’re bringing down the bar.” If anything, the pension wars are just getting started.

There is nothing that pisses me off more than a bunch of incompetent goofballs in Ottawa and idiots at right-wing think tanks spreading malicious lies on defined-benefit pensions and why we shouldn't enhance the CPP for all Canadians.

But I also got a bone to pick with all these public sector unions who think gold plated pensions are their god given right. Think again. There is nothing written in stone that guarantees you a nice pension for life. Just ask the civil servants in Greece and Detroit what happens when the money runs out.

I worked at various jobs in the public and private sector. There are lazy, incompetent fools in both the private and public sector. It used to drive me nuts when I had some senior civil servant bureaucrat telling me they are counting the days to retire so they can collect their pension.

Let me be clear on something. I am all for defined-benefit pensions across the public and private sector but I am also for major reform including raising the retirement age and risk sharing.

Importantly, if it were up to me, I'd raise the retirement age to 70 because people are living a lot longer and I would pass laws where pension plan benefits are indexed to markets. I would also ensure much more transparency and better governance at all our pension plans, including our much touted large Canadian public pension funds where compensation is running amok.

I had a chat with someone last week who asked me: "How can the board of directors at PSP Investments justify paying Gordon Fyfe $5.3 million? That's as much as P.K. Subban makes and he is a star athlete!" I explained to him that compensation at PSP and elsewhere is based on performance but there is no question that PSP's tricky balancing act is a lot of nonsense and the board needs to review compensation policy for senior executives (also spread that money to the lower ranks since they are the ones who really work their asses off!).

And it's not just PSP. All the major Canadian public pension funds pay their senior executives extremely well and they all justify it with the same flimsy excuses. I blame Claude Lamoureux, Ontario Teachers's former CEO, for all this compensation run amok at Canada's large public pension funds. You see Teachers got their governance right, paid people well to attract and retain talent so everyone else followed them and implemented the same compensation policy based on beating the same bogus benchmarks over a rolling four-year period.

But at the end of the day, these are public pension funds. They're not private funds which have to worry about performance in order to raise assets. They have captive clients giving them billions to manage so I find it hard to swallow all this nonsense that they deserve these hefty payouts because they manage billions and beat some bogus benchmarks based on a four-year rolling return period.

Another thing that really irks me is all the claims that Canada's senior public pension fund managers need to be paid extremely well because they can get get paid better in the private sector. This is utter fantasy and pure rubbish. Not one of the senior pension fund managers at Canada's large public pension funds can ever make anything close to what they are making at these public pension funds. Not one.

I roll my eyes whenever some pension fund manager tells me they could have easily started or worked at a hedge fund or private equity fund and made a lot more money. I tell them flat out: "You're dreaming, stay where you are, you got the best gig in the world, you're making great money taking little to no risk" (of course, some previous pension fund managers bought themselves cushy jobs at funds they invested billions with, which is scandalous!).

Despite healthy gains from the ongoing stock market rally, public pension funds are still badly underfunded and the shortfall continues to widen.

To try to close the gap, many states have shifted pension fund assets into stocks and alternative investments like hedge funds. But in doing so, they face a greater risk of  (not) being able to meet their long-term promises to pay retiree benefits, according to a new report from the Pew Charitable Trusts.

In the short run, the heavy investment in riskier assets has been paying off. After big losses during the financial collapse in 2008, large funds posted annual returns of more than 12 percent for the fiscal year ended last June, according to the report.

But the gains haven't come close to making up for years of underfunding by states that simply failed to set aside what their pension accountants told them they'd need to keep their retirement promises to state workers. As of 2012, the latest data available, states had set aside only $3 trillion to meet the more than $4 trillion in benefits earned by public workers.

"It is function of bad policies and bad budget practices," said Gregory Mennis, head of the Public Sector Retirement Systems Project at Pew. "There are states where the funding policies are reasonably sound—New Jersey is a perfect example—but the state simple simply chooses not to make the payments that their own policy recommends making."

In New Jersey, Republican Gov. Chris Christie, a potential 2016 GOP presidential candidate, recently announced a plan to divert $2.4 billion in pension payments to close a $2.7 billion budget gap. In 2012, the state came up with just 39 percent of the annual contribution required to meet its estimated $47 billion pension liability.

New Jersey isn't alone. About half the states kicked in at least 90 percent of their annual required contributions in 2012, the latest data available.

As a result, most states have set aside far less than they'll need to keep their promises to current and future public retirees. Only Wisconsin has fully funded its pension plans.

Some 14 states have saved at least 80 cents for every dollar they'll need to cover their pension liability. Illinois has set aside only 40 percent of what it owes; Kentucky (47 percent), Connecticut (49 percent), Alaska (55 percent), Kansas (56 percent), Louisiana (56 percent), and New Hampshire (56 percent) have the worst-funded public employee pension plans (click on image above).

That widespread underfunding helps explain why—despite recent pension reforms and benefit cuts in dozens of states—the gap between public funding and long-term liability continues to widen in many states.

"The problems that occur as a result of underfunding don't necessarily show their impact immediately - so result people can kick the can down the road and not feel the pain until the future," said Mennis. "That's what allows for bad budget decisions to be made today."

To help close the funding gap, states have shifted their pension assets away from relatively safe investments like bonds into higher-risk holdings like stocks and hedge funds, according to the Pew report. In 1982, nearly 80 percent of public pension assets were held in bonds and cash; by 2012, the share had fallen to 25 percent.

More recently, funds have shifted to riskier, so-called "alternative" funds that include private equity, hedge funds and real estate. Between 2006 and 2012, those assets, as a share of overall investments, more than doubled to 23 percent.

The shift to those higher-risk assets has helped states boost their projections on investment returns—but has also put those funds at greater risk of losses when the markets pull back. Those losses would further strain state budgets—leaving taxpayers on the hook to make up future pension fund investment losses.

The shift to heavier reliance on stocks and other riskier investment has also added a new layer of cost in the form of higher fees paid to hedge funds other investment managers. Those fees jumped by 30 percent between 2006 and 2012, according to the Pew report.

But it's not always clear that taxpayers are getting their money's worth for the added investment cost, said Mennis, because information about pension fund fees and investment performance is incomplete.

"This all points to the need for addition information on a more consistent basis so that stakeholders understand how well their funds are performing after all the expenses are taken in to account," he said.

America’s sprawling 401(k) pension system will turn cash flow negative in 2016, threatening disruption for asset managers and selling of equities, according to analysis by Cerulli Associates, a research house.

The $3.5tn system attracted fresh contributions of $300bn in 2012, with $276bn either withdrawn as cash by retirees or rolled over into individual retirement accounts (IRAs), Cerulli estimated.

However, by 2016 it forecasts that inflows will be $364bn and outflows $366bn, with the deficit only widening year on year after that as the core of the baby-boomer generation retires.

“This has significant implications for asset managers and other financial services providers,” said Bing Waldert, a director at Cerulli. “It is going to be a disappointment for a lot of fund managers that have put a lot of effort into the DC [defined contribution pension fund] market.

“For asset managers, the consistent contributions are particularly appealing and provide a source of positive flows even in poor markets when a firm may experience outflows from other segments of the industry.”

The largest managers in the 401(k) market are Fidelity Investments; Canada’s Power Financial, which owns Great-West Financial and Putnam Investments; TIAA-CREF; Vanguard; ING of the Netherlands and Prudential Financial of the US.
Funds run by such managers are typically among 10-20 options available to 401(k) savers, but when money is rolled over into an IRA, they face far stronger competition.

“In IRAs you are not just competing against asset managers, you are competing against the world. There are insurance-based products, ETFs [exchange traded funds] and individual securities. There is more freedom and flexibility,” said Mr Waldert.

Fidelity and Charles Schwab, which run direct-to-consumer platforms, are significant providers in the IRA market, alongside wealth managers such as Merrill Lynch and UBS. Vanguard also has a strong foothold.

Amin Rajan, chief executive of Create Research, a consultancy, said IRAs tend to have a 20-35 per cent exposure to equities, compared with 45-60 per cent in 401(k) plans. This suggests equity-focused houses could lose market share to bond-based rivals such as Pimco and Principal Global Investors as the demographic changes mean the 401(k) system shrinks relative to the IRA market, which is already larger at about $5.4tn.

Sue Walton, director at consultant Towers Watson Investment Services, agreed, saying: “People go to the extremes. They get to retirement heavily weighted to equities and they make this shift to go too conservative”, buying low-risk fixed income and money market funds.

Mr Rajan believed the wider US DC market, encompassing both 401(k)s and IRAs, would turn cash flow negative by 2020, following in the footsteps of the defined benefit pension market.

Mr Waldert said that regulators could intervene to slow the transition from 401(k)s to IRAs, given concerns that the costs of managing assets in an IRA tend to be far higher than the institutional pricing levels secured by 401(k)s.

Trading volume and volatility are dragging along low levels as stocks reach new highs. That’s made for a nervous complacency where a correction could really blindside investors, some stock pickers are warning. The CBOE Volatility Index (VIX) closed at its lowest point since Feb. 23, 2007 on Friday. It bounced back 4% to 11.18 on Monday even as stocks logged slight gains.

So what is the likelihood of a correction? Take these statistics from the WSJ’s data group:

The Dow Jones Industrial Average (DJIA) experiences a bull market correction on average roughly every 12 months, their analysts note. The Dow is now up approximately 59% from its last correction low on October 3, 2011 and is on its 32nd month without a 10% pullback.

Most investors are extremely and complacently bullish and are ignoring weaker seasonal historical trends that occur around this time, said Brian Belski, chief investment strategist at BMO Capital Markets.

Near-term, while many acknowledge that a pullback is coming, there’s too much complacency and that makes a surprise pullback very likely, according to Belski. Stocks have already spent half the year clawing their way back to low-to-mid single digit gains for the year after an initial drop that followed 2013’s 30% gain.

“I would be super careful as an investor being uber, uber-bullish right now after the huge move,” he said.

Still, at its healthiest, a bull can run for quite a long time without a pause. The longest period without at least a 10% pullback was during the 1990-1997 run, at 82 months, according to the WSJ’s data group.

Sam Stovall, managing director of U.S. equity strategy at S&P Capital IQ, said in a recent note that market bears have been eating a lot of crow lately but may soon see some vindication:

The S&P 500 (SPX) is certainly overbought, in our opinion, and has gone well beyond the time in which it typically endures a correction or worse (the 500 has advanced for 32 months without a decline of 10% or more, versus the average of 18 months since 1945). In addition, valuations on trailing and projected Operating and GAAP (also known as “As Reported”) earnings per share, are equal to their long-term averages.

But Stovall said June may not be the month for the pullback, or at least that’s how it’s happened in the past. Since 1945, the fewest pullbacks on the S&P 500 have started in June with 4%. October had the most with 11%, and May, July , and August had 10%.

Speaking of “overbought,” Jonathan Krinsky, chief market technician at MKM Partners, called the SPDR S&P 500 ETF (SPY).10% “extremely overbought”:

If today closes positive, SPY would be up 14 of the last 17 days. 2 of the 3 down days were -0.05%, and -0.07% (essentially flat). The SPX is now 8.3% above its 200 [daily moving average], which is within a few points of the largest spread in 2014. Of course this spread can get much wider (12% in May 2013), but we have to ask what is the risk/reward over the next few days?

Past experience shows that while current low levels of volatility have persisted at times for over a year. Investors are lulled into a "comfortably numb" attitude in which they act as if low volatility equates to limited investment risk. Unfortunately, periods of persistent low volatility have often ended with sharp spikes upward in volatility. In three recent episodes, in 2007-08, in the spring of 2010 and the spring and summer of 2011, the periods of low volatility have ended with sharp corrections in equity and credit markets and rallies in high-quality government bond markets. In one recent episode, in the spring of 2013, low volatility ended with a sharp selloff in government bond markets and a more moderate and temporary dip in equity markets.

Small-cap stocks are making a big comeback of sorts.

The small-cap benchmark, the Russell 2000 index, has retraced more than half of its recent pullback. This comes as the Dow Jones Industrial Average and the S&P 500 indices both make new record highs.

But the technicals may be signaling a huge drop ahead, according to Richard Ross, global technical strategist at Auerbach Grayson.

"I don't like the small caps," said Ross, a "Talking Numbers" contributor. "I'm a seller of the Russell 2000. In fact, full disclosure, I'm short the Russell in my personal account."

Ross owns shares in ProShares Short Russell2000 ETF (RWM), which takes a short position the small-cap index.

Looking at a chart of the iShares Russell 2000 ETF9 (IWM), which tracks the index, Ross sees the potential for a second shoulder in a head and shoulders top. That shoulder is coming close to its resistance level and could fall back again, he believes. The IWM closed at $116.90 on Monday (click on chart below).

"If history holds here, we should rollover and retest that neckline down around $107," Ross said. "That's your critical support."

The longer term chart "really scares me," said Ross and explains why he is short the Russell 2000. The last time it had a head and shoulders top, in 2011, it declined about 27 percent its 150-week moving average. He sees the likelihood of "technical symmetry."

"If this were a head and shoulders top as I put forth, it would be a 26 percent decline" from its recent peak, said Ross. "All we need is that second shoulder and then a rollover. We break below the neckline and we're looking at about a 20 percent drop from current levels. I would be a seller in anticipation of that big move."

Steve Cortes, founder of Veracruz TJM, is more upbeat on the Russell 2000.

"I like the small caps," Cortes said. "Over the last few months, small caps have massively underperformed the S&P 500. In fact, during the month of May, the IWM spent the entire month of May in negative territory for the year 2014 while the S&P spent the entire month of May in positive territory. That kind of a bifurcation between small caps and large is very unusual historically. I think it sets up for a flow of capital, a rotation back into the small guys."

The catalyst for a rotation away from large-cap stocks and into small caps is a stronger U.S. dollar, particularly against the euro.

"A weak dollar makes it easier for those giant multinationals to sell their products globally," Cortes said. "Small caps tend to be more domestic in nature. So, they're not necessarily as sensitive to the dollar trade."

After nearing $1.40 several weeks ago, the euro is now down below $1.36, a three-month low for the currency.

"That bodes ill for the large caps," Cortes said. "It's time for rotation back into the little guys."

I also think that once a trader moves from the confines of a prop desk, with its near infinite supply of low risk capital, to a place where they have to draw on capital that likely includes their entire net worth, that they assess risk/return in a different way. Also, when you have to start factoring in things you never really had to deal with when trading at the bank - commissions, margin limitations imposed on you by your prime desk, etc.

Also, it takes a lot of time to either replicate or match the trading systems that they had at the bank. I know at our firm, it took the one partner (who handles the trading platform) months to build everything and integrate with third-party systems. I know he wasn't really happy till a couple of years after they opened up and to this day he spends a considerable amount of time tweaking and refining it. So if these guys are true traders, rather than more cerebral research types (who trade once in blue moon), and they don't have a technical background, it can be very difficult to be the same trader you were at the bank.

Also, once the market closes you have start your second job as small business owner. That doesn't help thing at all.