Hedge funds have suffered a steady drumbeat of bad news this year: poor performance, withdrawals, prominent closures, bribery and insider trading charges, and accusations from a state regulator that the whole sector is a "rip-off."

Yet amid the gloom there are still a few managers posting the double-digit percentage gains that turned hedge funds into an elite asset class more than a decade ago, according to performance data provided by fund investors.

For instance, Eric Knight's activist-oriented Knight Vinke Institutional Partners is up nearly 50 percent before fees this year, while the Russian Prosperity Fund, which picks stocks in the former Soviet Union and is led by Alexander Branis, has climbed 43 percent (click on image below).

Then there are Jason Mudrick's Mudrick Distressed Opportunity Fund and Phoenix Investment Adviser's JLP Credit Opportunity Fund, which are both up 38 percent. Energy-oriented Zimmer Partners' ZP Energy Fund is up 27 percent, while Gates Capital Management's ECF Value Fund has risen 26 percent and Michael Hintze's CQS Directional Opportunities Fund has climbed 20 percent.

By contrast, the average hedge fund returned a little more than 4 percent over the first nine months of the year, according to data from Hedge Fund Research. That is about half of what the S&P 500 Index has returned over the same period, including dividends, and compares to a 7 percent increase for the Barclays Capital U.S. Government/Credit Bond Index, a common measure of the credit markets.

"In general there is no doubt this has been a tough year in terms of performance, but there are still winners out there," said Mark Doherty, a managing principal at PivotalPath, an investment consultant.

LITTLE-KNOWN VICTORS

The winners are harder to find. They tend not to be multi-billion-dollar household names whose managers appear on television and at industry conferences, attracting money to invest from the largest pension funds.

Although they pursue a variety of strategies, they are united in their relatively small size, investors said.

Gates Capital manages $1.8 billion, while Mudrick Capital oversees $1.5 billion and Phoenix's JLP Credit Opportunity and Zimmer Partner's ZP Energy Fund are smaller, with about $1 billion in assets, investors in the funds said. Representatives for the firms declined to comment.

There are a number of even smaller firms delivering blockbuster returns. Former Paulson & Co partner Dan Kamensky's $125 million Marble Ridge, which started trading in January, is up 23 percent. Svetlana Lee's Varna Capital, which invests less than $100 million, is up 20 percent. Halcyon Capital's $200 million Halcyon Solutions Fund, managed by Jason Dillow, is up 22 percent.

"These funds may be able to capitalize on smaller and more inefficient securities that are too small for the larger funds," said Michael Weinberg, chief investment strategist at New York-based Protégé Partners, which invests in smaller funds.

VARIED BETS

Knight Vinke's gains were largely driven by the merger of French electronics company Fnac with electrical retailer Darty, which the hedge fund pushed for, its most recent letter said.

Bets on steelmaker Evraz, Russian airline Aeroflot and Federal Grid Company, which manages Russia's unified electricity transmission grid system, helped the Russian Prosperity fund, its investment chief Branis said.

Some of the winners, including Dallas-based Brenham Capital, which manages $1.3 billion and is up 19 percent this year, also scored big by betting on the beaten-down energy sector as it recovers. Mudrick Capital won with bets on Alpha Natural Resources as the coal miner exits bankruptcy and closely held driller Fieldwood Energy, a fund investor said.

To be sure, this year's strong returns were preceded by big losses in 2015 and early in 2016 at some firms. Mudrick Capital, which made early bets on distressed energy and commodity companies, lost 26 percent last year, and Gates' ECF Value Fund lost 19 percent.

Some clients have not had the patience to stick around. Last month Rhode Island's pension fund voted to cut its hedge fund allocation in half following in the footsteps of New Jersey, which voted for a similar reduction in August. This week New York's financial regulator called hedge funds a "rip-off" in a report that said the state pension fund lost $3.8 billion on them in the last eight years.

Investors pulled an estimated $23.3 billion from hedge funds over the first half of the year, according to Hedge Fund Research, less than 1 percent of the industry's $2.9 trillion overall assets.

Is this the beginning of something far more widespread, a mass exodus out of external managers? I don't know but clearly there are some big pensions and sovereign wealth funds that are tired of paying hefty fees to external managers for lousy absolute and risk-adjusted returns.

The diversification argument can only take them so far, at one point funds need to deliver the goods or they will face the wrath of angry investors who will move assets internally and never look back.

Investment consultants are a force to the reckoned with in the pension world. They advise and drive many pension decisions around the globe. Consultants literally control trillions of dollars of allocations to managers through their recommendations, yet there have been no studies on the effectiveness of their choices. There may be limited argument that they provide useful information and education for pension managers, but they also give specific advice on managers, so an analysis of their picks is extremely valuable. The result may surprise you. Their investment manager picks do not outperform some simple benchmarks.

The recently published study in the Journal of Finance, "Picking Winners? Investment Consultants’ Recommendations of Fund Managers", makes a carefully researched assertion that consultant recommendations have little value. Worthless may be too strong, but that is close to what most would conclude when they read the paper. Given all of the work on trader skill and market efficiency, this should not be surprising. But, given that consultants supply their work to leading pensions, it is should be surprising that no one has called them on their recommendations.

The authors do a very careful job of researching this topic through analyzing what drives recommendations. Recommendations are driven by more than past performance but by soft factors such as philosophy, service, fees, and size. Consultants are not return chasers but are slaves to size which is a key driver for this results. The soft factors also seem to be key drivers for recommendations. The due diligence process identifies managers that have a well-defined process and can explain well. Given their client base and job, consultants have to be size sensitive. Perhaps in an imperfect world, the best they can do is conduct due diligence and make the best recommendations given size constraints.

Nevertheless, it may be too easy to let them off the hook based on the size argument. First, there is no evidence of outperformance and equal weighted portfolios of recommendations underperform. Second, these performance results hold for a number of different factor models. Third, the size or scale effect can explain the underperformance, but it cannot explain why the recommendations do not outperform alternatives.

Use your consultants carefully. If you want them to sift through managers and find those that meet size criteria and have well-defined processes, you are in safe ground. If you are asking them to pick future winners, beware.

They are among the world’s most famous landlords with stakes in major airports in Europe, luxury retailers in New York and transportation hubs in South America. They rank as five of the top 30 global real estate investors, seven of the world’s biggest international infrastructure investors, and were at the table during six of the top 100 leveraged buyouts in corporate history. And they are Canadian.

The country’s eight largest public pension funds, which collectively manage net assets worth more than $1 trillion, have acquired so much heft in the past decade that they are being lauded in international financial circles as the new “masters of the universe.” Their clout has caught the attention of major Wall Street investment firms angling for their business, as well as institutional investors around the world that are emulating their investing model (click on image).

“Canada’s public-sector pension plans are high profile, widely admired and they’re certainly bigger than they used to be,” said Malcolm Hamilton, a pension expert and senior fellow at the C.D. Howe Institute in Toronto.

A veteran Bay Street denizen, who asked not to be named because his firm has business dealings with many of the funds, added: “Asset by asset, around the world by virtue of their investments through ownership or partnership, they are as much economic ambassadors for Canada as anybody.”

But the vaunted positions these pension-plan behemoths have on the world stage is attracting closer scrutiny — and some skepticism — from industry experts at home, including the Bank of Canada, because of the increased levels of risk they are taking and the potential “future vulnerability” many of them have assumed in the pursuit of growth.

“You’re seeing more and more pension funds taking on greater risk in the past 15 years,” said Peter Forsyth, a professor of computational finance specializing in risk at the University of Waterloo in Ontario.

The eight funds, which account for two-thirds of the country’s pension fund assets or 15 per cent of all assets in the Canadian financial system, are acting more like merchant banks in going after — and financing — blockbuster deals in increasingly riskier locations and asset types.

A major reason behind the pension plans’ thirst for less liquid assets, namely real estate, private equity and infrastructure — much of it in foreign places — is the low-interest-environment that has made traditional assets less desirable. Between 2007 and 2015, the big eight public pension funds’ collective allocation to these types of investments grew to 29 per cent from 21 per cent. And foreign assets jumped to account for 81.5 per cent of assets in 2015 from 25 per cent in 2007 (click on images below).

That strategy collides with their traditional image as conservative, risk-averse guardians of retirement nest eggs. Should investments go wrong, benefits would likely be slashed, contributions could be sharply increased and it is anyone’s guess who would be on the hook if there were major losses.

“On the world stage, they are the cream of the crop, but I think they are taking significant risks and they aren’t acknowledging it,” Hamilton said.

Perhaps more importantly, the pension sector in Canada lacks the same stringent cohesive regulatory oversight as banks and insurers, meaning there are less checks and balances governing a big chunk of everyone’s retirement plans. As a result, some industry participants are questioning whether public pension funds should be more closely examined.

“The pension funds are largely unregulated — what’s regulated is the payments to the beneficiaries. The investments of the pensions are not regulated,” said a veteran Bay Street risk expert who asked not to be named. “And so this is the conundrum they’re in as they move further afield … And it’s a big debate going on right now.”

With net assets ranging from $64 billion to $265 billion, the top eight pension funds — Canadian Pension Plan Investment Board (CPPIB), Caisse de depot et placement du Quebec, Ontario Teachers’ Pension Plan, British Columbia Investment Management Corp., Public Sector Pension Investment Board, Alberta Investment Management Corp., OMERS (Ontario Municipal Employees Retirement System and Healthcare of Ontario Pension Plan (HOOPP) — all rank among the 100 largest such funds in the world, and three are among the top 20, according to a study by the Boston Consulting Group released last February. Only the United States has more public pension funds on the global list.

The country’s giant public pension plans, flush with billions in retirement savings, began flexing their investment muscle on the heels of tougher banking laws following the financial crisis of 2008-2009.

Although Canada emerged as the darling in international financial circles for its resilience during the crisis and resulting recession — and the major banks basked in the glory — their global counterparts did not fare so well, which prompted policymakers to layer on additional regulation for all banks.

These new rules, many of which are contained in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, are supposed to protect the financial sector in times of stress by limiting risk-taking strategies. Canadian pension funds, unencumbered from those onerous banking rules, have been all too eager to rush in.

During the past 10 years, they have accumulated an eclectic mix of prime assets in unprecedented fashion. Among them: a 27-per-cent stake in the Port of Brisbane in Australia; interests in Porterbrook Rail, the second-largest owner and lessor of trains in the United Kingdom; luxury retailer Neiman Marcus Group in New York; Transelec, Chile’s largest electricity transmission company; Heathrow Airport; and Camelot Group, the U.K.’s national lottery operator.

In all, they’ve done 20 deals worth more than US$10 billion during that time, according to the Boston Consulting report.

It’s a deal binge that has created a “new world order” in which “Canada’s pension funds have barged Wall Street to stake a claim to be the new masters of the universe,” a British financial columnist noted last year.

Notably, the Canadian public pensions have invested in less conventional businesses and asset classes, where risks are generally higher than more conservative investments such as stocks and bonds. At the same time, there is potentially even more risk looming because the funds are pushing into asset classes and geographies where they have less experience.

For example, CPPIB in June 2015 paid $12 billion for General Electric Capital Corp.’s GE Antares Capital, a middle-market private-equity sponsor. The pension giant has also made a pair of recent investments in the insurance business.

Earlier this month, the Caisse announced plans to invest US$600 million to US$700 million over four years in stressed assets and specialized corporate credit in India. The Quebec-based pension group forged a long-term partnership with Edelweiss Asset Reconstruction Company, India’s leading specialist in stressed assets, which included taking a 20-per-cent equity stake in Edelweiss.

At the same time, the pension funds are increasingly barging in on the conventional bank business. The CPPIB, which invests on behalf of 19 million Canadians as the investment arm of the Canada Pension Plan, has started tapping public markets by issuing bonds to fund their large-scale deals rather than seek debt financing through the banks.

In June 2015, Canada’s largest public pension fund, with $287.3 billion in assets under management — and the eighth largest in the world — raised $1 billion by issuing five-year bonds. A follow-up offering of three-year notes raised an additional $1.25 billion.

“Pension funds used to stick with a balanced portfolio of public-traded debt and equities and a little real estate,” said Richard Nesbitt, chief executive of the Toronto-based Global Risk Institute in Financial Services. “The Canadian model of pension investment management invests into many more asset classes including infrastructure assets around the globe. Banks are still there providing support in the form of advice and corporate loans. But the banks tend to be more regionally focused whereas the pensions are definitely global.”

Meanwhile, Canada’s large pension funds are also borrowing more money to fund their investments. Since they have long time horizons relative to other investors — decades in some cases — they argue that gives them a competitive advantage in both the deal arena and the ability to tolerate more short-term volatility.

“The pressure has just been getting worse and worse, especially as interest rates continue to decline for public funds to get the returns they used to get,” said Hamilton, a 40-year veteran of the industry and former partner at Mercer (Canada).

Low interest rates have a double-whammy effect: they tend to boost the prices of assets and lower expected returns while at the same time reducing borrowing costs, making it cheaper to borrow money and increasing the incentive to use leverage.

But rather than cutting back their risk exposure, Hamilton said the funds, especially those pension plans that are maturing, are behaving the same way they did during the gravy days of high interest rates years 20 years ago. The reason they are behaving this way is because they can’t afford to suffer lower returns, he said, because either benefits would have to be cut or contributions to the plan raised to keep payouts the same.

“They are levering up and hoping for the best instead of making the tough choices,” Hamilton said. “There are alternatives, but they are not so pleasant.”

Forsyth said a main reason Canadian pension funds have avoided making tough choices is partly because of this country’s stellar record. Unlike the Netherlands, where the central bank forces public pension funds to cut benefits when there’s too much risk on the books, Canada has never really faced a systemic financial meltdown that would induce the government to enact such tough measures.

“There isn’t the same amount of pressure in Canada, because we didn’t have the financial blow-ups they had in other countries,” he said.

The Netherlands is one of only two countries whose pension system achieved the top grade in the prestigious annual Melbourne Mercer pension index in 2015 (the other is Denmark). Canada tied for fourth with Sweden, Finland, Switzerland, the U.K. and Chile, all of which are considered to have a “sound system” with room for improvement.

Nevertheless, Canada’s public pension system has pioneered new approaches to institutional investing and governance, and rates among the best in the world in terms of funding its public-sector pension liabilities.

The key characteristic of the Canadian model is cost savings. Canadian fund managers, unlike other public pension managers, prefer to actively manage their portfolios with teams — employing about 5,500 people (and about 11,000 when including those in the financial and real estate sectors) — an organizational style that allows them to direct about 80 per cent of their total assets in-house.

Cutting out the middleman creates considerable economies of scale by lowering average costs, especially through fees to expensive third parties such as Blackrock Inc. and KKR & Co. LP.

In private equity, for example, managers can charge a fee equal to two per cent of assets and 20 per cent of profits. Hiring internal staff and building up internal capabilities is far less expensive. So much so that the total management cost for most Canadian public funds is 0.3 per cent versus 0.4 per cent for a typical fund that relies on external managers.

[Note: I think this is a mistake, the total management cost for a typical fund that relies on external managers is much higher than 0.4%.]

The management style was pioneered by Claude Lamoureux, former head of Ontario Teachers’ Pension Plan, who was the first to adopt many of the core principles espoused by the late Peter Drucker in the early 1990s on creating better “value for money outcomes.” Now all large Canadians funds operate with these key principles.

“That’s the innovation. It’s a simple story of scale allowing you to disintermediate a distributor,” said a senior Canadian pension executive who asked not to be named.

The strategy may be simple, but it has had a significant impact on the bottom line. The cost savings have added up to hundreds of millions of dollars that have been invested rather than outsourced.

Since 2013, total assets under management for the top 10 major public pension funds have tripled, with investment returns driving 80 per cent of the increase.

Even so, the Bank of Canada issued a cautionary note about the challenges in its 2016 Financial System Review. In a recent study of the country’s large public pension funds, the central bank stated that “trends toward more illiquid assets, combined with the greater use of short-term leverage through repo and derivatives markets may, if not properly managed, lead to a future vulnerability that could be tested during periods of financial market stress.”

In its June 2016 paper, “Large Canadian Public Pension Funds: A Financial System Perspective,” the central bank noted the big eight funds have increased their use of leverage, but the amounts on the balance sheet are not considered high.

However, the BoC cautioned that although balance-sheet leverage — defined as the ratio of a fund’s gross assets to net asset value — varies greatly across the funds and appears “modest as a group,” it is still “not possible to precisely assess aggregate leverage using public sources” because it can take on many forms in addition to what is shown on the balance sheet.

“If not properly managed, these trends my lead in the future to a vulnerability that could create challenges on a severely stressed financial market,” the central bank paper warned.

Oversight for most public pension funds, not including the CPPIB, which is federally chartered, falls to the provinces and their regulators are non-arms’ length organizations created by, and report to, the provinces, which also directly and indirectly sponsor many of the same plans being supervised. In other words, pension regulators are not truly independent the way the Office of the Superintendent of Financial Institutions is to the financial sector.

“Can a regulator staffed by members of public-sector pension plans effectively regulate public-sector pension plans?” said C.D. Howe’s Hamilton. “In particular, can such a regulator protect the public interest if the public interest conflicts with the interests of the government and/or the interests of plan members? I think not.”

Furthermore, he said, most pension fund managers would characterize their behaviour as “prudent and creatively adapting to an unforgiving and challenging environment.”

Over at Ontario Teachers’, chief investment officer Bjarne Graven Larsen, welcomed the central bank’s scrutiny and acknowledged that risk is an integral part of any investment strategy. The trick as the pension plan evolves, he said, is to make sure there is adequate compensation for the amount of uncertainty.

“You have to have risk, that’s the way you can earn a return,” Graven Larsen said. Not every transaction will work out according to plan, of course, but he said the strategy is to ensure that losses will not be too great when assets or market conditions fail to meet expectations, even if that means taking a lower return at the outset.

Ontario Teachers’, the largest single-profession plan in Canada, recently moved its risk functions into an independent department and is also tweaking its portfolio construction in an attempt to account for the largest risks it takes and calibrate other positions to balance the potential downside.

“But you will, over time, be able to harness a risk premium and get the kind of return you need with diversified risk — that’s the approach, what we’ve been working on,” Graven Larsen said.

CPPIB, meanwhile, doesn’t have a designated chief risk officer, a key executive who plays a critical role balancing operations and risk. That absence sets it apart from other major government pension plans and other major Canadian financial institutions such as banks and insurers, according to Jason Mercer, a Moody’s analyst.

“A chief risk officer plays devil’s advocate to other members of management who take risks to achieve business objectives,” Mercer said. “The role provides comfort to the board of directors and other stakeholders that risks facing the organization are being overseen independently.”

For its part, CPPIB officials said they have created a framework that doesn’t rely on a single executive to monitor risk. Michel Leduc, head of global public affairs at CPPIB, said the pension organization has an enterprise risk management system that runs from the board of directors, through senior management, to professionals in each of the pension’s investment departments.

“This decentralized model ensures that individuals closest to the risks and best equipped to exercise judgment have local ownership over management of those risks,” Leduc said.

The risks some critics find worrisome, CPPIB officials see as a strength, courtesy of the funds’ unique characteristics, namely a steady and predictable flow of contributions — about $4 billion to $5 billion a year.

CPPIB in 2014 began shifting the investment portfolio to recognize that the fund could tolerate more risk while still carrying out the pension management’s mandate of maximizing returns without undue risk of loss.

The plan is to gradually move from a mix reflecting the “risk equivalent” of 70-per-cent equity and 30-per-cent fixed income to a risk equivalent of 85-per-cent equity and 15-per-cent fixed income by 2018.

With unprecedented amounts of money pouring into public pensions — fuelled by heightened assumptions from governments about what Canadians should expect to receive — the chorus for closer examination of the sector will likely reverberate.

After all, for all the bouquets tossed at them on the world stage, Canada’s public pension funds still have to prove whether their high-profile investments are worth the risk to those at home.

No pension fund can achieve a 4 per cent average real return in the long run without assuming a certain amount of properly calibrated and well-diversified risk. This group of large Canadian pension managers seem generally well equipped to understand and manage that risk. The ability of the Big Eight to withstand acute stress is important for the financial system, as well as for their beneficiaries. They can rely on both the structural advantages of a long-term investment horizon and stable contributions. Moreover, they have reinforced their risk-management functions since the height of the 2007–09 global financial crisis.

Variable benefit plans are a type of defined benefit (DB) plan that have been around for decades, according to Matt Klein, a principal and leader of the actuarial services practice at employee benefits consulting firm Findley Davies in Cleveland.

However, few sponsors and retirement plan advisers know about them, he says, estimating that there are fewer than 100 of these types of plans in the United States. Nonetheless, he believes that sponsors and retirement plan advisers might be interested in them since they shift the investment risk off of the sponsor’s shoulders onto the participant’s—while moving the longevity risk over to the sponsor.

Employers continue to shut down their pension plans, redeploying their employees into defined contribution (DC) plans, Klein notes. But unless participants are automatically enrolled into their DC plan at meaningful deferral rates into an appropriate qualified default investment alternative (QDIA), most DC participants fail to make appropriate investment and deferral decisions, he says. The DC system fails to properly prepare most people for retirement, he maintains.

A variable benefit plan is a type of pension plan that, unlike a traditional DB plan that promises a set return every year, fluctuates with the market, he explains. Hence the name variable benefit.

“Sponsors interested in a comprehensive benefits package that will be able to provide employees with a comfortable retirement might want to consider a variable benefits plan, which eliminates the traditional risks associated with defined benefit plans and provides a stable cost and contribution policy that fits better with companies’ goals and objective in the 21st century,” Klein says.

NEXT: Comparison to traditional DB plans

In a traditional DB plan, the employer takes on the investment risk, he explains. But when a pension plan faces a market correction, such as the 2008 financial crises, assets decrease significantly while participants’ promised benefits remain intact, requiring the sponsor to make additional contributions to fund the plan at the precise time when they are typically facing a recession, Klein notes.

Like a traditional DB plans, a variable benefit plan uses an accrual rate whereby the sponsor contributes a percentage of each participant’s salary to the plan each year and ensures that the assets are professionally managed. Unlike a traditional DB plan, however, a variable benefit plan establishes a hurdle rate, which is the percentage return goal for each year, Klein says. If the returns are actually higher than the hurdle rate, the sponsor can increase the participants’ benefits—but if it is lower, they can reduce the benefits, Klein says.

“You would invest the assets in a variable benefit plan very differently than a traditional DB plan,” he adds. “A lot of traditional DB plans are doing some sort of asset/liability matching or glide path strategy, matching bonds to expected cash flows coming out of the plan. With a variable benefit plan, you don’t have the downside risk keeping employers up at night. One way to approach investing in a variable benefit plan is to treat it like an endowment while still being cognizant of the downside risk.”

NEXT: Advantages for participants and sponsors

From the participants’ perspective, the key advantage of a variable benefit plan is that, like a traditional DB plan, when they retire, they receive an annuity that pays them a set monthly income, as opposed to a lump sum they would receive from a DC plan or even a cash balance plan, Klein notes.

He believes that because DC plans are so prevalent today, sponsors and participants are now accustomed to variable returns—and the fact that their balances could decrease—and that they might be more receptive to variable benefit plans.

“Part of my passion here is to try and educate employers and advisers that these plans do exist,” he says. “They meet all of the legal hurdles and requirements of the IRS, DOL and ERISA. They are a win/win for both plan sponsors and plan participants while splitting the investment and longevity risks between the employer and the participant.”

An additional reason an employer might consider a variable benefit plan is that, unlike traditional pension plans that are typically underfunded and that require DB plan sponsors to pay 3% of their underfunding each year to the Pension Benefit Guaranty Corporation (PBGC), variable benefit plans remain 100% or very close to 100% funded. The reason for this is that the benefits rise or decrease as the plan’s returns exceed, meet or fall below the hurdle rate, Klein says. Therefore, variable benefit plan sponsors do not have to pay the annual 3% to the PBGC, only the minimal per-head cost.

Findley Davies has created a white paper comparing the benefits of variable benefit, DB, DC and cash balance plans, titled, “The Future of Retirement Plans: Variable Benefit Plans.” The paper makes the case that variable benefit plans strike the right balance between investment, interest or inflation, and mortality risk. It is available here.

The brutal truth on defined-contribution plans is they are leaving millions at risk of pension poverty which is why unlike the Andrew Coynes of this world, I kept harping on enhancing the CPP knowing full well Canadians are getting a great bang for their CPP buck.

And when I read about what is happening to Nortel's pensioners, it infuriates me and reminds me that there is still a lot of work left to do in terms of pension policy in this country, like creating a new large, well-governed public pension here in Montreal in charge of managing the assets of all Canadian DB and DC corporate pensions (Montreal is home to the country's best corporate DB pensions like CN's Investment Division and Air Canada Pensions).

The Liberal government is following the Conservatives’ lead by introducing legislation that will allow employers to reduce pension benefits.

Bill C-27, An Act to amend the Pension Benefits Standards Act, had its first reading in the House of Commons last week.

A target benefit pension plan is a big gamble

This bill will allow employers to shift from good, defined benefit plans that provide secure and predictable pension benefits, into the much less secure form of target benefits.

Unlike a defined benefit plan, where the employer and employees contribute and retirees know how much they can expect when they retire, the amount you receive under a target benefit pension plan is just that, a target. Meaning, the plan aims to give you a certain pension benefit, but there’s no guarantee.

The other big difference is that target pension benefit plans shift the financial risk from the employer to employees and pensioners.

PSAC will oppose this bill

Bill C-27 opens the door to eliminating or reducing defined benefit pension plans. PSAC has opposed target benefit pension plans since the previous Conservative government introduced consultations.

We will continue to resist any move in this direction, and continue to push for retirement security for all Canadians.

Bill C-27 was introduced in the Parliament of Canada on October 19th, 2016 and will allow for the conversion of defined benefit pension plans to less secure "target benefit" pension plans. Quite remarkably this legislation has thus far been flying under the mainstream media radar.

In the opinion of the PSAC, Bill C-27 will eventually lead to the demise of "defined benefit" pension plans in the federal jurisdiction and is a component of the Morneau agenda to dismantle the Public Service Superannuation Act.

Much is riding on target-dated funds. As this week’s FT series on pensions should make clear, defined benefit pensions face serious deficits — but the same mathematics of disappointing returns and ever greater expense for buying an income also applies to defined contribution plans.

DC plans have been poorly designed. For years, 401(k) sponsors were lulled by the equity bull market into allowing members to choose their own asset allocations, and switch between funds and asset classes at will. This was a recipe for disaster, as members tended to sell at the bottom and buy at the top. The strong returns of the 1990s convinced many that they could get away with saving far less than they needed.

The industry and regulators have been alive to the problem, and their response is sensible. Now they offer a default option of a fund that aims to ensure a decent payout by a “target date” — the intended retirement date. These funds automatically adjust their asset allocation between stocks and bonds as the retirement date approaches, which in general means starting with mostly stocks and shifting to bonds as retirement approaches. This (good) idea mimics the best features of a DB plan.

Such funds are undeniably an improvement on the “supermarket” model of the 1990s. Savers avoid the pitfalls of taking too much or too little risk, and regular rebalancing helps them sell at the top and buy at the bottom.

But TDFs have problems, which are growing increasingly apparent. First, are their costs under control? Second, do they have their asset allocation right? And third, can we benchmark their performance?

On costs, the news is good. US regulations require 401(k) sponsors to look at costs, and the response has been to drive down fees. According to Morningstar’s Jeff Holt, TDFs’ average asset-weighted expense ratio stood at 1.03 per cent in 2009, and by last year had dropped to 0.73 per cent — a 30 basis point fall, which in a low return environment could make a very big difference when compounded.

But if TDFs are coming under pressure to limit costs, the pressure over asset allocation is taking them in every direction. They are designed as mutual funds, so they still do not hold the kind of illiquid assets that the best DB funds can fund, such as infrastructure. That is a problem.

So is the entire balance between stocks and bonds. The notion from the DB world was to reach 100 per cent bonds by the retirement date, when the fund could be used to buy an annuity. With low bond yields making annuities expensive, and life expectancy far longer than it used to be, this no longer makes much sense. A 65-year-old, with a decent chance of making it to 90, should not be 100 per cent invested in bonds.

But high equity allocations tend to emphasise that the TDFs expose savers to greater risk than a DB plan. According to Morningstar the average drawdown for 2010 TDFs during the crisis year of 2008 was 36 per cent — a potentially disastrous loss of capital for people about to retire. As stocks rapidly recovered, and as those retiring in 2010 would have been unwise to sell all their stocks, this should not be a problem — but it plainly hit confidence.

The early stages are also a problem. Our 20s and 30s are a time of great expense. Should young investors really be defaulted into heavy equity holdings when the risks that they lose their job are still high, and when they face possible big drains on their income, such as a baby, or downpayments on a first house?

So the “glide path” of shifting from equity to bonds is controversial. And there is no standard practice on it. According to Mr Holt, TDFs’ holdings of bonds at the target date for retirement vary from 10 to 70 per cent.

What about benchmarking? Such differences make it impossible. Asset allocation differences swamp other factors, and are driven by different assumptions about risk.

Establish bands for asset allocation at each age, but allow them to vary according to valuation. Funds designed for retirement should never take the risk of being out of the market altogether. But if, as now, bonds and US equities look overpriced while emerging market equities look cheap, an approach that took US equities’ weighting to the bottom of its band, while putting the maximum permissible into emerging markets, would probably work out well.

There is not, as yet, an incentive to do that, and there needs to be. TDFs, or something like them, should be at the heart of future pension provision. It is good that their costs are under control, but there are ways to make them far more effective: by allowing more asset classes, accepting that people at retirement should still have substantial holdings in equities, and encouraging TDFs to allocate more to asset classes that are cheap.

I think everyone is missing the point of this bill.

Until now, federal pension legislation has only recognized plans as either DC or DB - there was no provision for a hybrid/risk shared plan.

That is one reason contributing to the switch all the way from DB to DC at many companies - if the DB plan was not sustainable, the only alternative was to move all the way to DC - a middle ground was not available even if the parties wanted a middle ground.

As I understand it, this bill simply allows transition to a risk shared model as an alternative to closing the DB and going all the way to DC.

Greater legislative flexibility is a positive step.

There are two big fairness-related points with this legislation, namely:

• not only does it allow the reduction of future accruing pension benefits of both active and retired (deferred and pensioned) members, a vital right so far covered under federal and provincial (except NB since 2014) pension legislation;
• but it also allows the concerned sponsoring employers to shift to active and retired members the liability pertaining to any current (as at effective date of the tabled C-27 legislation) deficit under any concerned existing DB plan.

As shown in the two attachments hereto, I have been promoting over the past few years that the shortcomings of DB plans can be easily overcome in a manner that would make DB plans much more simple, effective and fair than TB plans. Points not to be missed.

Harvard University’s money managers collected tens of millions in bonuses by exceeding “easy-to-beat” investment goals even as the college’s endowment languished, employees complained in an internal review.

The consulting firm McKinsey & Co., in a wide-ranging examination, zeroed in on the endowment’s benchmarks, or investment targets. Some of those surveyed said Harvard allowed a kind of grade inflation when it came to evaluating its money managers.

“This is the only place I’ve seen where people can negotiate the benchmark they get compensated on,” read a “representative quote" in the McKinsey report.

The McKinsey assessment offered an explanation of what it called the “performance paradox” at Harvard’s $35.7 billion endowment, the largest in higher education. Year after year, Harvard would report benchmark-beating performance while falling further behind rivals such as Yale, Princeton, Columbia and the Massachusetts Institute of Technology.

The April 2015 report, which has never been made public, spells out why the fund paid more than peers for lagging performance, as well as its management’s strategy for shifting course. Harvard said it has since revamped its compensation.

Soaring Pay

McKinsey’s review took a rare, unvarnished look into the culture of a secretive organization, where employees and others complained to McKinsey of an inattentive board and complacent culture -- in their words, “stable, rather than smart, capital” or, less charitably, “lazy, fat and stupid.”

As Harvard’s Cambridge, Massachusetts campus braces for possible budget cuts after a recent decline in the endowment, McKinsey’s conclusions are likely to raise concern. For years, faculty and alumni have complained about money manager pay, which they have called inappropriate for a nonprofit.

The consultant’s report focused on the five years ended June 2014, a period when manager compensation soared. During that half-decade, Harvard paid 11 money managers a total of $242 million, 90 percent of which was made up of bonuses, tax filings show. In the final year, total compensation amounted to $65 million, more than twice the amount five years earlier.

Harvard’s endowment has “redesigned its compensation to further align the interest of investment professionals with those of the university,” spokeswoman Emily Guadagnoli said in an e-mail. Because of under-performance in the most recent year, “current and former employees will forfeit compensation that was held back in prior years.”

The new plan ties pay to “appropriate industry benchmarks” and a “significant portion” is held back and won’t be awarded for performance that isn’t sustained, she said.

In the report, the consultants cited a “representative” quote from within the endowment stating that benchmarks are “easy to beat, inconsistent and often manipulated.” McKinsey summed up this sentiment in a PowerPoint slide: “The benchmarks are considered ‘slow rabbits.”’

People familiar with the report said some at Harvard considered McKinsey’s comparisons unfair because each school had such a different mix of investments and risks. They also took issue with the idea that benchmarks were manipulated.

Then Chief Executive Officer Jane Mendillo, who oversaw the endowment during the period McKinsey studied, had a goal of making the endowment less volatile after steep losses during the 2008 financial crisis. Even adjusted for risk, however, Harvard’s performance lagged, McKinsey said. Mendillo declined to comment.

Key Targets

Universities and other organizations with money managers must strike a balance when setting performance targets, according to Ashby Monk, who directs a Stanford University research center and is a senior adviser to the University of California endowment. Setting goals too high encourages excessive risk, while setting them too low results in overpaying money managers, he said.

“You’ve got to get the benchmarks right,” Monk said.

Harvard commissioned the study after it promoted Stephen Blyth, a former Deutsche Bank AG bond trader from head of public markets to chief executive officer in 2014. McKinsey delivered a 78-page PowerPoint presentation, which was reviewed by Bloomberg, to executives and money managers.

Afterward, Blyth overhauled Harvard’s compensation and benchmarks, making targets harder to beat. Blyth stepped down in July after taking a medical leave. In December Nirmal P. Narvekar, the top-performing endowment manager from Columbia, will take over at Harvard. He will become the eighth permanent or interim chief executive since 2005.

Foregone Billions

In the five years scrutinized by McKinsey, the fund reported an average annual return of 11.2 percent, compared with Princeton’s 14 percent, Yale’s 13.5 percent and MIT’s 13.2 percent. Harvard’s relative under-performance cost the school $3.5 billion. Because of such results, McKinsey warned that Harvard could lose its perch as the world’s largest endowment to Yale within 20 years. On a 10-year basis, Harvard’s performance was “slightly better,” McKinsey said.

The review focused on what endowments call a “policy portfolio.” It reflects the mix of each kind of asset a school owns -- from stocks and bonds to South American timberland. The university picks benchmarks, such as an equity index, to evaluate the performance of the different investments.

Over the five-year period, Harvard reported that its 11.2 percent average annual return beat its benchmarks -- its so-called policy portfolio -- by 1 percentage point, a significant margin for a money manager.

Then, McKinsey compared the college’s performance to Stanford’s policy portfolio, which it viewed as more ambitious. Had it been measured by the more rigorous standard, Harvard would have underperformed by half a percentage point.

Side Deals

In fact, merely running a portfolio of index-tracking funds -– 65 percent in the S&P 500 Index and 35 percent in a government bond index -– would have generated a 14.2 percent annual return.

During the financial crisis, managers took steps to move out poorly performing investments and adjust benchmarks, muddying performance judgments, according to one of the quotations from the survey: “There were so many side deals cut during the crisis – bad stuff moved out of portfolios and benchmarks adjusted – individual performance bears little resemblance to fund performance and we somehow seem OK with that.”

The McKinsey report singled out alternative investments such as real estate and natural resources. They make up more than half of Harvard’s portfolio, and McKinsey noted they performed strongly. At the same time, they were judged on benchmarks -- particularly for natural resources -- that were “less aggressive” compared with those at Yale, Princeton and Stanford, according to the report.

Highest Pay

In the five-year period, the university paid Andrew Wiltshire, who oversaw alternative investments, a total of $38 million, more than anyone else. Alvaro Aguirre, who oversaw holdings in natural resources like farmland and timber, made $25 million during the four years for which his compensation was disclosed. Wiltshire, who declined to comment, and Aguirre, who didn’t return messages, both left Harvard last year.

During the entire five years, Harvard paid then CEO Mendillo $37 million, twice as much as top-performing David Swensen at Yale University.

The report recommended expanding Harvard’s internal trading operations, which it said had an annual cost of almost $75 million, including performance bonuses for employees. Harvard did so, but later backtracked, eliminating at least a dozen positions.

Thanking Klarman

Blyth, who headed public markets, including the trading operation, was paid a total of $34 million over the five years. McKinsey found that Blyth’s unit contribute strongly to the fund’s performance, and its benchmarks fell in line with the school’s peers. Blyth didn’t return messages.

The report also noted that some of the best-performing investments in the portfolio were picked years ago. They included Baupost Group LLC, the hedge fund run by Seth Klarman, stock-picking hedge fund Adage Capital Management, and venture firm Sequoia Capital, an early backer of Google and PayPal Holdings Inc. “Thank God for Seth Klarman,” one employee told the consultants.

McKinsey cited interviews describing recent commitments to strongly performing investments, such as Baker Brothers Advisors, a biotechnology stock-focused fund, as “incremental, scattershot and lacking in conviction.”

Consultants heard complaints about the board overseeing Harvard Management Co., the school’s investment arm: “The board doesn’t ask the hard, searching questions around benchmarks and compensation.”

Falling Behind

James Rothenberg, chairman of Capital Research & Management Co., the Los Angeles mutual-fund manager, chaired the board during this period. Rothenberg, who was also Harvard’s treasurer, died in July 2015.

Paul Finnegan, founder of a private equity fund, joined the board in 2014 and succeeded Rothenberg as chairman last year. Most of the current members of the board joined in the last two years. Harvard President Drew Faust was also on the board during the period and remains a member.

McKinsey said staffers were proud to work for such a prestigious college, which they said could use its name to attract talent and gain access to investments. As one of those interviewed told the consultant: “Harvard shouldn’t stand for mediocrity, but that’s where we’re heading if this continues.”

• First, whenever you hear the board or senior management is hiring McKinsey, Boston Consulting Group, or some other big name consultant, brace yourselves, bad news is coming. I'd love to see the 78-page PowerPoint presentation to Harvard endowment's board and I am sure Canada's large pension funds would love to see it too.
• Second, I actually welcome this McKinsey study and think it or another consulting group should provide a similar study to the Auditor General of Canada and provincial auditors generals reviewing all the benchmarks used across public and private markets at Canada's large pensions, the leverage they take to achieve their results, and whether they're all adding the value they claim when adjusting for illiquidity, leverage, and other factors. I recently praised Canada's new masters of the universe but I also noted that oversight and governance needs to be improved by commissioning independent, comprehensive assessments of operational, investment and risk management risks (and these reports should be made public).
• Third, related to second point, not all boards are created equal. Some are doing a much better job than others overseeing the operations of the endowments and pensions they are responsible for. I'm not claiming the board members at Harvard or any of Canada's large pensions are incompetent as they clearly aren't, but they need to fulfill their fiduciary duty and make sure there is nothing remotely shady going on, especially when it comes to benchmarking performance which is used to gauge performance and determine compensation. 
• Fourth, the compensation at Harvard's endowment is mind-blowing, not only by Canadian pension standards, but also relative to other large US endowments. When I read that during the entire five years, Harvard paid then CEO Mendillo $37 million, twice as much as top-performing David Swensen at Yale University, I was floored. I believe in paying for real performance (adjusted for risk) and this was clearly not the case at Harvard. Moreover, when you read the absurd compensation at Harvard's endowment, you wonder what are they smoking? If these "investment superstars' are that great, why aren't they opening up their own hedge fund or private equity fund to make some serious money? Also, I openly question whether on a risk-adjusted basis Canada's top large pensions are not outperforming some of the large US endowments. If that's the case, we can argue that Canada's senior pension investment officers are a real bargain (I'm serious!). 
• Fifth, I wrote a comment on Harvard betting on farmland back in 2012,  stating that "Harvard's push into timberland was not revolutionary" and it was fraught with risks. I'm extremely surprised that Alvaro Aguirre, who oversaw holdings in natural resources like farmland and timber, made $25 million during the four years for which his compensation was disclosed. That is outrageous and absurd and I wonder how well these investments are doing nowadays after the bubble in agriculture burst (I've seen mixed performance figures and some bombs from big pensions like CalPERS).
• Sixth, I don't know what happened to Stephen Blyth, I hope his medical leave of absence isn't serious, but he seemed to me to be the most qualified CEO and his internal trading group was delivering stellar results. Last September, Harvard's endowment was warning of market froth and Blyth was actively looking for investment managers with expertise as short-sellers. His timing might have been off by a year and even now, I am not sure we should be bracing for a violent shift in markets.
• Seventh, take all this stuff about "Thank God for Seth Klarman" with a shaker of salt! I admire Klarman, his protege, David Abrams, the one-man wealth machine, and many other top funds Harvard's endowment has invested in, including Adage Capital and the Baker Brothers. I track their holdings as well as those of other top funds every quarter on my blog. But these are tough markets for everyone, especially for biotech investors like the Baker Bros (I know, I trade biotechs and they swing like crazy both ways). It is also interesting to note that Klarman and Abrams hold some big positions in biotechs that got massacred recently so I am not sure how they are performing lately (remember, don't fall in love with your managers, grill them, that is your job!).  

This past weekend, I attended a gala reception for over 500 European Harvard alumni gathered in the impressively refurbished main hall of the Deutsches Historisches Museum (German Historical Museum) in Berlin.

Harvard's President Drew Faust regaled alumni with self-congratulatory statistics on how Harvard is spending the fruits of its current $6.5 billion fund raising campaign, refurbishing undergraduate housing and getting Harvard' science and engineering departments up to snuff.

There was other news from Cambridge, Massachusetts that President Faust ignored in her polished plea to well-heeled alumni in Berlin.

And that has been the embarrassing performance of the Harvard endowment over the past decade.

For all of Harvard's fund raising prowess — second only to Stanford — six years of Harvard's current capital campaign has been barely enough to offset the decline in the value of the Harvard endowment since 2011.

Almost a decade after reaching its peak, the Harvard endowment is smaller today in nominal terms than it was in 2007.

Boasting a value $35.7 billion, Harvard's endowment tumbled about 5% or $1.9 billion over the past 12 months. A big chunk of the most recent drop stemmed from Harvard endowment forking over $1.7 billion to the university itself– a roughly 30% subsidy to its annual operating budget.

What is of growing concern to Harvard alumni and staff is that Harvard endowment's investment returns over the past 12 months were a negative 2%. That (yet again) trailed traditional rival Yale, which eked out a 3.4% gain.

Harvard's Endowment: A State of Crisis

So what is the culprit behind Harvard's poor investment performance?

Some of last year's poor performance may be due to bad luck. After a volatile start to the year, Harvard's portfolio of publicly traded stocks lost 10.2% through June 2016. Throw in a couple of unfortunate blow ups in Latin America, and voila — the Harvard endowment recorded its first annual loss since 2008.

Still, concern about Harvard's poor investment performance is about more than just a single unlucky year.

Over the past decade, the Harvard endowment has generated an average gain of just 5.7%. Harvard's five-year track record of 5.9% puts it at the back of the class among its Ivy League rivals, just ahead of Cornell.

Not that the school hasn’t noticed.

The Harvard endowment plowed through several CEOs in recent years. The recently hired former head of Columbia's endowment will be the eighth CEO to lead the Harvard endowment — including interim heads — in the past 12 years. His predecessor left after just 18 months on the job.

The largest university endowment in the world has not lacked for investment talent. The Harvard Management Company's staff is chock full of former Goldman Sachs partners and other high-compensated Wall Street investment talent

Nor has Harvard's staff of around 200 former Masters of the Universe been shy about writing themselves checks for huge salary and bonuses. Former CEO Jane Mendillo earned $13.8 million in 2014. Other top traders at Harvard have made as much as $30 million in a single year.

How Nevada is embarrassing Harvard

Carson City, Nevada, is a long way from Cambridge, Massachusetts.

That's where Steve Edmundson manages the Nevada State Pension fund — which, at $35 billion, is just about the same size as the Harvard endowment. Nevada's State Pension fund, however, differs from Harvard in other crucial ways.

First, Steven Edmundson is the only investment professional managing the Nevada State Pension Fund. The University of Nevada, Reno, alumnus has no other internal professional staff.

His investment strategy?

Do as little as possible — usually nothing. That is because Edmundson invests Nevada's pension fund's assets in low-cost passive investment vehicles.
Second, Edmundson earns an annual salary of $127,121.75. That's a long way from the multimillion dollar pay packages collected by top portfolio managers at Harvard. Ironically, his salary also matches just about exactly the $126,379 salary of an Assistant Professor at Harvard — typically a 27-year-old academic who has just completed her Ph.D.

Third, and perhaps most astonishingly, the Nevada State Pension Fund's investment track record soundly beats the Harvard endowment over the past decade.

While Harvard returned 5.7% annually over the last 10 years, the Nevada State Pension fund has generated annual returns of 6.2%. Over five years, Nevada has extended its lead, returning 7.7% per annum, while has Harvard stagnated at 5.9%. That outperformance of 1.8% per year is a country mile in the investment world.

As it turns out, Nevada is also beating the returns of the nation's largest public pension fund, the California Public Employees' Retirement System, or Calpers. Nevada's investment returns beat Calpers over one-, three-, five- and 10-year periods.

Sure, Calpers is a different beast, managing about $300 billion. However, it also has a staff of 2,636 employees to generate its returns

Edmundson is essentially a one-man band.

What is to be done?

So does Nevada's outperformance of the Harvard endowment mean it should abandon the famous "Yale model" of endowment investing with its eye-popping allocations to alternative asset classes like private equity, venture capital, and hedge funds?

Should Harvard mimic the Nevada State Pension fund success, fire the bulk of its investment staff, and only invest in low-cost index funds ?

Although that strategy would likely improve Harvard's investment performance, the answer remains "probably not."

Over the past 10 years, Yale has generated an annualized return of 8.1% on its endowment with a staff of about 25 investment professionals, by definition staying true Davis Swensen's original "Yale model."

And after all, Yale did outperform Nevada's 6.2% return over the past decade. An outperformance of 1.9% per year is substantial.

So it seems less that the "Yale model" itself is broken than it is Harvard's investment team that has tripped over itself during the past decade. But it does mean that the Harvard endowment and its overpaid staff of 200 investment professionals has to get its act together.

And it had better do so ... and fast.

The largest educational endowment in the world is under new management, and it’s easy to see why.

Harvard Management Co., which oversees Harvard’s mammoth $36 billion endowment, has named Columbia University’s investment chief N.P. Narvekar as its new CEO. At Columbia, Narvekar produced annual total returns of 10.1% over the past decade, which trounced the 7.6% annual gains for Harvard.

The hiring comes days after Harvard’s investment fund reported a loss of 2% in the 12 months ended June 30. Making matters worse, rival Yale announced that its $25 billion endowment grew 3.4% during that same stretch, leading the student editors of the Harvard Crimson to declare: “This is unacceptable.”

The prior year wasn’t much better. While Harvard’s endowment gained 5.8% in the prior fiscal year ending June 30, 2015, that performance ranked second-to-last among all Ivy League endowments, earning half the returns of Yale.

Normally, differences of this magnitude can be chalked up to basic strategy. But the fact is, Harvard and Yale invest rather similarly. Instead of simply owning stocks and bonds, both endowments spread their wealth among a broader collection of assets that include U.S. and foreign stocks, U.S. and foreign bonds, real estate, natural resources, “absolute return” funds (which are hedge-fund-like strategies), and private equity.

Still, there are subtle differences between the two approaches. And while most investors don’t have access to—or interest in—exotic alternatives like private equity and venture capital funds, the differences between the performance of the Harvard and Yale endowments offer a few lessons for all investors.

#1) Focus your attention on what really matters.

Academic research shows that deciding on which assets to invest in—and how much money to put in each type of investment—plays a far bigger role in determining your overall performance than the individual securities you select.

But while Harvard and Yale’s investment management teams both spend time concentrating on their “asset allocation” strategies, only one gives it its full attention.

Yale runs a fairly streamlined office with a staff of just 30. That’s because the actual function of picking and choosing which stocks or bonds or real estate holdings to invest in—and how best to execute the actual trades—is farmed out to external managers at professional investment firms.

This allows the Yale Investments Office to spend all its time figuring out the optimal mix of investments based on their needs and the market climate.

Harvard, on the other hand, runs what’s called a “hybrid” system. In addition to setting asset allocation policies and hiring external managers like Yale does, the investment staff at Harvard Management Co. also directly invests a sizeable portion of the endowment itself, selecting securities and being responsible for executing the trades.

This is why HMC employs more than 200 staffers by comparison.

Yet as Harvard’s recent performance shows, it’s hard to be good at all aspects of investing.

Indeed, Robert Ettl—who has been serving as HMC’s interim chief executive and will become chief operating officer under Narvekar—noted in a recent report that the endowment’s disappointing showing “was driven primarily by losses in our public equity and natural resources portfolios.”

Ettl went on to note that “we have repositioned our public equity strategy to rely more heavily on external managers”—a tacit admission that Harvard’s internal equity managers were probably responsible for a decent portion of that poor performance.

And as for the natural resources segment of HMC’s portfolio—which involves owning physical commodities such as timber on plantations owned and managed by Harvard—that lagged its benchmark performance by a massive 11 percentage points in fiscal year 2016. As a result, Ettl said HMC recently replaced the internal head of its natural resources portfolio.

#2) Turnover is never good, especially when it comes to management.

At Yale, David Swensen has managed the school’s endowment for 30 straight years, generating annual returns of about 14% throughout his tenure, far in excess of his peers and the broad market. That long, stable tenure has allowed Yale to maintain such a consistent strategy—of being willing to delve into somewhat risky and illiquid assets including venture capital, private equity, hedge funds, and physical assets—that this approach is now called “the Yale Model.”

Harvard is another story altogether.

When Narvekar assumes his duties at HMC on December 5, he will be the eighth manager to lead Harvard’s investment portfolio—including interim heads—in the past 12 years.

And each manager has put his or her own spin on the underlying investment style, forcing the endowment to switch gears every few years.

For example, Mohamed El-Erian, who briefly ran the endowment before leaving to become CEO and co-chief investment officer at PIMCO, increased the endowment’s use of derivatives and hedge funds and exposure to the emerging markets. El-Erian’s successor Jane Mendillo then took the fund in a more traditional direction. But she had the unenviable job of unwinding HMC’s exposure to El-Erian’s illiquid bets during the global financial crisis.

Every time the endowment deploys new strategies and unwinds old ones, turnover rises. And high portfolio turnover usually leads to poor performance, higher costs, and more taxes.

#3) Don’t try to copy other investors. Success is hard to replicate.

Under both Stephen Blythe, who served for less than a year and a half before taking medical leave, and interim CEO Ettl, Harvard Management has shifted a greater portion of its equity strategy to external managers—in apparent emulation of Yale.Narvekar himself is said to be closer to Yale’s Swensen, operating a relatively small staff that relies exclusively on external managers.

But it’s hard enough for successful managers to replicate their own success. It’s doubly hard trying to emulate other successful investors.

In fact, David Swensen at Yale is on record as saying that individual investors should not even try to copy what Yale is doing with its endowment.

Instead, Swensen tells investors to keep things simple by establishing a broadly diversified portfolio and then using low-cost, low-turnover index funds as vehicles of choice.

Ironically, some investment managers argue that this is a strategy that Harvard’s endowment should focus on as well.

While Harvard’s endowment has beaten the broad stock and bond markets over the past 15 years, on a risk-adjusted basis, it has actually done no better than a basic 60% stock/40% bond approach.

This may explain why financial adviser Barry Ritholtz has argued that rather than trying to emulate the Yale Model, Harvard should be taking a page from Calpers, the giant pension fund manager that invests on behalf of California’s public employees.

A couple of years ago, Calpers made a big splash by saying that it would be cutting back on its use of expensive actively managed strategies, including hedge funds, while focusing more on low-cost index funds, which simply buy and hold all the securities in a given market.

Now those are lessons—low costs, index funds, and buy and hold—that apply to your 401(k) as much as they do to Harvard’s endowment.

1. Growth Is Likely To Slow ... From Already Low Levels
2. The Risks Of Zero Growth Are Higher Today Than In The Past
3. The U.S. Consumer No Longer The Buffer Of U.S. Slowdowns
4. The World Is Battling Lingering Structural Problems
5. A U.S. Slowdown Has Implications For The World's Weakest Links
6. The Excesses Of China’s Investment Bubble Have Yet To Unwind
7. Demographic Trends In Japan ... An Insurmountable Problem?
8. Central Banks Have Reached The Limits Of Monetary Policy
9. Slower Growth Is The Enemy Of Portfolio Managers
10. P/Es Are Hypersensitive To The Economy At This Time

It doesn’t seem like much to ask for—a 5 percent return. But the odds of making even that on traditional investments in the next 10 years are slim, according to a new report from investment advisory firm Research Affiliates.

The company looked at the default settings of 11 retirement calculators, robo-advisers, and surveys of institutional investors. Their average annualized long-term expected return? 6.2 percent. After 1.6 percent was shaved off to allow for a decade of inflation1, the number dropped to 4.6 percent, which was rounded up. Voilà.

So on average we all expect a 5 percent; the report tells us we should start getting used to disappointment. To show how a mainstream stock and bond portfolio would do under Research Affiliates’ 10-year model, the report looks at the typical balanced portfolio of 60 percent stocks and 40 percent bonds. An example would be the $29.6 billion Vanguard Balanced Index Fund (VBINX). For the decade ended Sept. 30, VBINX had an average annual performance of 6.6 percent, and that’s before inflation. Over the next decade, according to the report, “the ubiquitous 60/40 U.S. portfolio has a 0% probability of achieving a 5% or greater annualized real return.”

One message that John West, head of client strategies at Research Affiliates and a co-author of the report, hopes people will take away is that the high returns of the past came with a price: lower returns in the future.

“If the retirement calculators say we’ll make 6 percent or 7 percent, and people saved based on that but only make 3 percent, they’re going to have a massive shortfall,” he said. “They’ll have to work longer or retire with a substantially different standard of living than they thought they would have.”

Research Affiliates’ forecasts for the stock market rely on the cyclically adjusted price-earnings ratio, known as the CAPE or Shiller P/E. It looks at P/Es over 10 years, rather than one, to account for volatility and short-term considerations, among other things.

The firm’s website lets people enter their portfolio’s asset allocation into an interactive calculator and see what their own odds are, as well as how their portfolio might fare if invested in less-mainstream assets (which the company tends to specialize in). The point isn’t to steer people to higher risk, according to West. To get higher returns, you have to take on what the firm calls “maverick” risk, and that means holding a portfolio that can look very different from those of peers. “It’s hard to stick with being wrong and alone in the short term,” West said.

At least as hard though is seeing the level of return the calculator spits out for traditional asset classes. Splitting a portfolio evenly among U.S. large-cap equities, U.S. small-cap equities, emerging-market equities, short-term U.S. Treasuries, and a global core bond portfolio produced an expected return of 2.3 percent. Taking 20 percent out of short-term U.S. Treasuries and putting 10 percent of that into emerging-market currencies, and 10 percent into U.S. Treasury Inflation Protected Securities, lifted the return to 2.7 percent. Shifting the 20 percent U.S. large-cap chunk into 10 percent commodities and 10 percent high-yield pushed the expected return up to 2.9 percent. Not a pretty picture.

Moral of the story: Since most people’s risk tolerance isn’t likely to change dramatically, the amount you save may have to.

This issue is even more critical especially for pensions and endowments which invest more directly into real assets which are typically held for the long-term (not divested yet) as their bonuses tend to be annually paid out based on these real assets' valuations (which are marked-to-model), hence, can be subject to massage or manipulation if their fiduciary awareness and governance are not deep, etc...

[...] keep this in mind, pensions have a much longer investment horizon than endowments and they have structural advantages over them and other investment funds to invest in private equity, real estate and increasingly in infrastructure. If they have the skill set to invest directly, all the better as it saves on costs of farming out these assets. Now, in terms of benchmarks governing these private market assets, there is no perfect solution but clearly some form of opportunity cost and spread (to adjust for illiquidity and leverage) is required to evaluate them over a long period but even that is not perfect. Pensions and endowments recognize the need to find better benchmarks for private markets and clearly some are doing a much better job than others on benchmarking these assets. The performance of these investments should be judged over a longer period and in my opinion, clawbacks should be implemented if some investment officer took huge risks to beat their benchmark and got away with millions in bonuses right before these investments plummeted.

Canada’s Public Sector Pension Investment Board (PSP Investments) has committed €500 million ($735 million) in seed capital to a new European credit platform. The platform, created by David Allen‘s AlbaCore Capital, will focus on private and public credit markets where there are inefficiencies in pricing, including high yield, leveraged loans and direct lending. PSP said it may deploy more capital in partnership with AlbaCore for specific deal opportunities. PSP launched a private debt strategy in November 2015. Earlier this year, the pension fund hired Oliver Duff to lead its strategy in Europe.

PRESS RELEASE

PSP Investments commits €500 million in newly-created European credit platform AlbaCore

Seed Investment in AlbaCore to Add to PSP Investments’ Existing Private Debt Activities in Europe

MONTRÉAL and LONDON, Nov. 1, 2016 /CNW Telbec/ – The Public Sector Pension Investment Board (“PSP Investments”), one of Canada’s largest pension investment managers, announced today a €500 million seed investment commitment made by an affiliate of PSP Investments in a new specialist European credit platform promoted by AlbaCore Capital Limited (“AlbaCore”), recently formed by David Allen. This is one of the largest commitments PSP Investments has made to an external strategy. AlbaCore intends to focus on private and public credit markets where there are significant inefficiencies in pricing, including European high yield, leveraged loans and direct lending. PSP Investments may deploy further capital in partnership with AlbaCore in certain substantial investment opportunities in Europe.

“PSP Investments sees great opportunity in the European credit market and, as such, entered the market earlier this year with the hiring of Oliver Duff to lead our European private debt activities, which focus on sponsor-financed acquisitions, first liens, second liens and other debt instruments across the capital structure,” said David Scudellari, Senior Vice President and Head of Principal Debt and Credit Investments at PSP Investments. “With its expertise and extensive network of relationships, the portfolio team working for AlbaCore is well positioned to source bespoke, attractive transactions that will add to our existing activities,” Mr. Scudellari added.

Private Debt is PSP Investments’ newest asset class. It was created in November 2015 with the objective to deploy over C$5 billion (over €3.4 billion) in debt financings globally. Since inception, the team has committed to over 20 transactions in North America and deployed C$2.4 billion (€1.6 billion). Oliver Duff joined PSP Investments’ London office in September 2016 with the mandate to develop the organization’s presence in the European leverage finance market, build relationships with local partners and contribute to achieving PSP Investments’ deployment goal.

About PSP Investments

The Public Sector Pension Investment Board (PSP Investments) is one of Canada’s largest pension investment managers with C$116.8 billion of net assets under management as at March 31, 2016. It manages a diversified global portfolio composed of investments in public financial markets, private equity, real estate, infrastructure, natural resources and private debt. Established in 1999, PSP Investments manages net contributions to the pension funds of the federal Public Service, the Canadian Armed Forces, the Royal Canadian Mounted Police and the Reserve Force. Headquartered in Ottawa, PSP Investments has its principal business office in Montréal and offices in New York and London. For more information, visit investpsp.com or follow Twitter @InvestPSP.

About AlbaCore

AlbaCore’s specialist European credit platform is focused on opportunities across European corporate credit markets. The platform’s selection process is based on fundamental research focusing on capital preservation and total return.

David Allen, a money manager in London at the $212 billion Canada Pension Plan Investment Board, is leaving to start his own hedge fund, according to a person with knowledge of the matter.

Allen, who is a managing director responsible for credit investments, will leave Canada’s largest pension fund on Friday and start his own investment firm later this year, said the person who asked not to be identified because the information is private.

The money manager established and managed a credit opportunities fund that has invested more than 9 billion Canadian dollars ($6.9 billion) since he joined the firm in 2010, the person said. The fund returned an annualized 15.3 percent over the last six years, they said.

Allen declined to comment, while Mei Mavin, a spokeswoman for the pension firm, confirmed his departure. “We thank David for his many contributions to CPPIB and wish him all the very best on his new endeavors, ” she said in an e-mailed statement.

Allen was a partner and head of European investments at GoldenTree Asset Management in London before joining the pension fund.

Former Canada Pension Plan Investment Board fund manager Bill Ammons has joined David Allen’s new credit startup AlbaCore Capital as a founding partner and portfolio manager.

The new fund is planning to commence operations by the end of the year, according to Reuters. Ammons worked for Allen when they were both portfolio managers at CPPIB.

Allen was a managing director responsible for credit investments at CPPIB, which manages some $217 billion and is Canada’s largest pension fund, before leaving in May of this year to start his own shop in London.

Ammons joined CPPIB in 2010 and worked on its European credit investment team, Reuters noted. He managed a European sub-investment grade credit portfolio investing in leveraged loans, high yield, mezzanine, PIK, converts and distressed positions across the primary, secondary and private credit markets, according to his LinkedIn profile.

Beforehand, he was part of BofAML’s restructuring and leveraged finance team in London, and was previously on the leveraged finance team at Wachovia.

He comes aboard AlbaCore alongside Matthew Courey, who was head of high-yield bond trading at Credit Suisse, and Joseph Novarro, who was managing partner at money manager Renshaw Bay and joins the firm as COO. Both are also founding partners, and the four will reportedly form the nucleus of AlbaCore’s investment and management committees.

David O’Neill, former head of European institutional equity trading for KCG Holdings, also recently joined AlbaCore recently as head of operations and risk management.

Based in London and founded in early June 2016, AlbaCore’s initial size is unknown and details about the strategy or strategies it will pursue remain sparse beyond a concentration in European private and public credit opportunities.

• I like this deal for a lot of reasons. No question that David Allen and Bill Ammons are excellent at what they do which is why they posted solid numbers while working at CPPIB. Will they keep delivering 15% annualized at AlbaCore? I strongly doubt it but even if they deliver 10% + with low volatility and correlation to stocks and bonds, that will be great for PSP and its members. That all remains to be seen as markets will be far more challenging in the next five to ten years.
• Was this deal cooking for a while? I believe so and think PSP's President and CEO, André Bourbonnais who was David Allen's boss at CPPIB, was in talks about this deal ever since Allen departed CPPIB. In fact, I wouldn't be surprised if Bourbonnais prodded Allen to leave CPPIB, promising him he would seed his new fund or Allen confidentially told him he wanted to start this new fund and would love to have PSP as a seed investor (it helps to have friends in high places). Either way, seed deals of this size don't happen on a whim.
• I'm not sure if it's technically a hedge fund (the release calls it a credit "platform") but seeding this new fund with such a sizable commitment comes with risks and benefits. The risks are the fund will flop spectacularly and PSP will deeply regret its decision to back it up with such a hefty commitment. But if it succeeds, PSP will enjoy the benefits of being an anchor investor, which means it won't be paying 2 & 20 in fees (not even close) and if it has an equity stake (not sure it does), it will make money off that too (or do some sort of revenue sharing). The specific terms of the deal were not disclosed but I'm sure they were mutually beneficial to both parties.
• Other specifics were not disclosed as well like the specific breakdown of investment activities and geographic exposure within Europe. That likely remains to be determined as AlbaCore will invest opportunistically as opportunities arise in high yield, leveraged loans and direct lending. For PSP, it gains meaningful, scalable access immediately to very qualified portfolio managers who are very much in tune with what is happening in European credit markets.
• This deal represents a significant push for PSP in private debt, a new asset class that makes perfect sense, especially when the economy is slowing and banks aren't lending. Oliver Duff who leads PSP's European private debt activities and reports to David Scudellari, Senior Vice President and Head of Principal Debt and Credit Investments at PSP, is very qualified and will use this investment to deploy more capital in partnership with AlbaCore for specific sizable deal opportunities.
• European debt markets are challenging to say the least but that is why it helps to have partners who understand these challenges and can seize opportunities as well as advise PSP as bigger opportunities arise.

Carlyle’s first big investment in a hedge fund firm was Claren Road Asset Management, which was founded by four star Citigroup traders in December 2010. Carlyle took a majority stake. A few months later, it bought a stake in the Emerging Sovereign Group (E.S.G.), which started with a seed investment from Julian H. Robertson, the billionaire investor.

It was part of a bigger push by Carlyle to branch out before its initial public offering in 2012. Soon after, it bought a stake in Vermillion Asset Management, a commodities investment manager. Other private equity firms like Blackstone have followed similar strategies, buying hedge fund stakes, as have the family investment offices of extremely wealthy people, like that of the Alphabet chairman, Eric E. Schmidt.

But over the last two years, nearly $8 billion has flowed out of Claren Road. It is bracing for another $1 billion to be withdrawn in the next few quarters. This year, it announced plans to cut ties with E.S.G., selling its majority stake in the $3.5 billion hedge fund. Last year, Carlyle split with the Vermillion founders Chris Nygaard and Andrew Gilbert after deciding to redirect the business toward commodity financing and away from managing money. By the end of the year, its assets in hedge funds are expected to total just $1 billion.

Now, Carlyle will focus on another part of its global markets strategies business: lending. It will focus on private lending to companies, buying distressed debt from companies in sectors like energy, and investing in complex pooled investments like collateralized loan obligations, stepping into the business as banks retrench after the financial crisis. Last month, it hired Mark Jenkins from the Canada Pension Plan Investment Board. Mr. Jenkins helped expand the pension fund’s direct lending.

Carlyle may still face challenges in its global markets strategies unit, and its pivot to lending from hedge funds has been met with some skepticism. During a phone call with analysts after its third-quarter earnings announcement this week, an analyst from JPMorgan Chase questioned whether Carlyle’s experiment in hedge funds might be repeated in its new venture into lending.

“I think in hindsight, you were late to hedge funds, made significant investments and it didn’t end well,” the analyst said, adding, “Why is this different?”

In response, Mr. Conway emphasized that Carlyle had better expertise in private markets, its traditional business, than in the public markets in which its hedge fund investments were mainly invested.

Christopher W. Ullman, a spokesman for the firm said: “We’re building on well-established firmwide strengths. This is a long-term strategic commitment. Credit is an attractive asset class and always will be.”

As a number of prominent pension funds stop using external managers they say charge too much in exchange for paltry returns, the biggest pension fund in Denmark is bucking the trend and sticking with the hedge funds it uses.

“In our case, funds have played a small but a good part in our portfolio,” Carsten Stendevad, the chief executive officer of ATP, which oversees about $118 billion in assets, said in an interview in Copenhagen.

The comments stand out at a time when a number of other pension funds have questioned the sense of continuing to rely on hedge funds to generate extra returns. There are plenty of examples of prominent skeptics. Rhode Island’s $7.7 billion pension fund terminated investments in seven hedge funds, including Brevan Howard Asset Management and Och-Ziff Capital Management Group LLC, it said earlier this month.

The largest U.S. pension plan, the California Public Employees’ Retirement System, voted to stop using hedge funds two years ago. Others who have stuck with the hedge funds they outsource investments to have faced criticism as the decision has led to losses, such as the New York state comptroller. Its loyalty to the industry has cost the Common Retirement Fund $3.8 billion in fees and underperformance, the Department of Financial Services in the U.S. said on Oct. 17.

Hedge fund investors pulled $28.2 billion from the industry last quarter, which is more than at any time since the aftermath of the global financial crisis, according to Hedge Fund Research Inc.

ATP declined to say which funds it uses or how much of its portfolio is managed by the industry. Investors can’t lump all external managers into one bucket and there’s plenty of variety left out there for it to still make sense to outsource to hedge funds, Stendevad said.

“There are so many types of hedge funds and we would look at all of them on a multi-year risk-adjusted return basis,” he said. “Looking at the ones we have, they’re quite different.”

ATP divides its investments into two categories: a so-called hedging portfolio, which is by far the larger of the two and designed to guarantee pensions. Its investment portfolio tries to boost the fund’s returns to top up Danes’ pensions. The fund returned 5.8 percent on its investments in the third quarter. For the first nine months, ATP’s investment portfolio returned 12.3 percent. It made money on private equity, bonds, real estate, infrastructure and credit instruments, but lost money on inflation hedges.

Stendevad said the double-digit returns ATP has generated probably aren’t sustainable, citing extreme monetary policies and the uncertainty created by Britain’s decision to turn its back on the European Union.

ATP will only continue using hedge funds as long as the returns justify doing so, Stendevad said.

“Of course the burden of proof is on them to demonstrate that they can deliver strong risk-adjusted returns,” he said. “And of course those who can do that have a good future. There are many that don’t, but that’s true for all active management to demonstrate added value.”

Stendevad, who joined ATP from Citigroup in the U.S. in 2013, is leaving the fund at the end of this year to spend more time with his family. He will be replaced by Christian Hyldahl, who comes from a position as head of asset management at Nordea.

For years they have been the elite of the fund management industry, enjoying colossal fees, gigantic homes and champagne lifestyles.

Now the good times may be over for hedge funds. Investors are taking their money elsewhere.

Last week the $US7.7 billion Rhode Island state pension scheme announced that it would take back half of the $US1.1 billion it had invested with seven hedge funds, including Och-Ziff and Brevan Howard.

Its decision comes after similar moves this year by the New York, New Jersey and Illinois state pension funds, which collectively have redeemed about $US6.5 billion. Kentucky and Massachusetts have also withdrawn money.

According to eVestment, an analytics and data provider, almost $US60 billion has left hedge funds this year, including $US10.3 billion in September.

It is an accelerating trend that began two years ago when the California Public Employees Retirement System (CalPERS), the benchmark for many public sector pension schemes, said that it was redeeming some of its hedge fund investments.

In the context of a $3 trillion industry, $60 billion of withdrawals may not seem like a crisis. But they are causing disquiet.

The main reason is that investors are becoming more cost-conscious. Few are prepared to stump up the gigantic fees charged in the glory years. Chris Ailman, chief investment officer of the $US187 billion California State Teachers Retirement System, spoke for many when in May he said that the industry’s traditional “two-and-twenty” model, where fund managers charge 2 per cent of assets under management and an additional 20 per cent of any profits earned, was broken.

Frankly, investors have decided that many hedge funds do not justify their high fees. According to eVestment, hedge funds delivered a positive return in September for the eighth consecutive month, taking the industry’s average return during the first nine months of 2016 to 4.4 per cent. But that’s poor set against the 9.7 per cent that investment-grade bonds have returned this year, let alone the S&P 500, which was up 6.1 per cent in the same period.

Among the worst performers have been some of the industry’s best-known names. The master fund at Brevan Howard fell by 0.8 per cent in 2014 and by almost 2 per cent last year. To date, it is said to be down by 3.4 per cent this year. Alan Howard, the firm’s billionaire co-founder, has responded by removing management fees on new investments from existing clients. Blaming poor performance on the fund having become too big, after assets under management swelled to $US27 billion in 2014, he has also capped it at $US15 billion.

Another industry legend to have cut fees is Paul Tudor Jones, a hedge fund pioneer, who let go nearly one in six of his staff this year after $US2 billion in redemptions. Other big names to have suffered poor returns this year include John Paulson, the hedgie famed for making billions in 2007 betting on a US housing crash, and Bill Ackman, a regular on America’s business channels.

Several factors have made it harder for the industry to make money. One is ultra-low rates and the rise of passive investing. These mean that many assets now move in tandem, making it harder for investors to add value by stock-picking or by alighting on specific situations or opportunities. Another is that markets are not as inefficient as before. Trading in some assets, notably interest rate products, is now dominated by algorithmic or “black box” traders that make fewer mistakes than human beings. With fewer mortals participating in such markets, there are fewer market anomalies for hedge funds to exploit, making it harder for them to claim an edge.

Poor performance is only one factor, however. Another is growing irritation at the billionaire lifestyles of some of the characters within the industry. This cannot be ignored by those running the retirement funds of public sector workers. Letitia James, the public advocate for New York and the city’s second-highest-ranking public official, told board members of the New York City Employees System this year to dump their hedge fund investments. She told them: “Hedges have underperformed, costing us millions. Let them sell their summer homes and jets and return those fees to their investors.”

Also helping to spark the redemptions have been other reputational hits prompted by tougher action on the part of regulators. Last month Och-Ziff agreed to pay $US412 million in penalties after entering a deferred prosecution agreement to settle claims of alleged bribery in five African countries. Most of the settlement was paid for by Daniel Och, the company’s founder and a former Goldman Sachs trader. Jacob Gottlieb, another big name, is in the process of closing his firm, Visium Asset Management, after one of its fund managers, who subsequently killed himself, was charged with insider trading. Leon Cooperman, another of the industry’s billionaire pioneers, is preparing to fight charges that his firm, Omega Advisors, profited from insider trading.

All these factors have created an unpleasant cocktail for the sector. One of the very best television series this year has been Billions, the story of hedge fund manager Bobby “Axe” Axelrod and Chuck Rhoades, the US attorney who tries to bring him down. The second series airs early next year, but to judge by the way things are going, soon it may look as much of a period piece as the film Wall Street does now.

The head of Canada Pension Plan Investment Board is taking a cautious approach to infrastructure investments in Canada as it retools its portfolio to manage the challenging investment environment.

Executives from the country’s largest pension fund spoke to the House of Commons finance committee on Tuesday to explain the fund’s investment strategy, its need for independence and evolving approach to risk. The discussion comes ahead of the planned increase to the Canada Pension Plan contributions that workers and employers will make to fund their retirement years, in order to boost the benefits they will receive. That is set to begin in 2019.

On the topic of infrastructure – a major, multibillion-dollar federal government spending priority – the pension fund said it would need to see investment opportunities that meet its specific criteria in order to participate in the spending boom.

CPPIB, which is set to announce next week that its assets now exceed $300-billion, currently makes equity-driven investments in infrastructure. It buys portions of toll roads, shipping ports and pipelines in may parts of the world and receives a relatively steady flow of fees in return. The fund also needs to write cheques for more than $500-million to make these investments manageable and worthwhile. These are conditions rarely satisfied by the infrastructure assets available in Canada, although the largest infrastructure investment the pension fund owns is in Canada – the Ontario Highway 407 toll road.

“That’s been one of the biggest challenges in Canada, and around the world, is there’s just not been enough of those scale opportunities in size, but also that are prepared for our type of investments,” Mark Machin, CEO of CPPIB, told the committee. He noted that the pension fund likes to by operational assets, rather than investing in constructing new projects from scratch.

When it comes to creating an infrastructure bank, as was proposed in a report to the Minister of Finance by the Advisory Council on Economic Growth two weeks ago, Mr. Machin said that “the devil would be in the details of how everything’s implemented.” The report was penned in part by committee members Mark Wiseman, former CPPIB CEO, and current Caisse de dépôt et placement du Québec CEO Michael Sabia.

When pressed on the stress that changes in government and policies would put on an infrastructure investment years in the future, Mr. Machin said this would be one of the major risks.

“Infrastructure investments are, by nature, very long-term investments. And therefore the stability of regulatory regimes [and tax regimes] around those investments is very important,” Mr. Machin said.

Mr. Machin was also asked extensively about the pension fund’s risk exposure in the rest of its investments, and the expectation that returns will be “lower for longer”–a theme outlined by the Bank of Canada in recent months.

“It’s a challenging investment environment globally, given central banks’ activity, whether in Japan or in the U.S., Canada and other countries,” Mr. Machin said. CPPIB is trying to further diversify the investments of the fund around the world, to different sectors and strategies to combat this pressure. The fund still has 20 per cent of its investment portfolio in Canada, even as the country represents less than 3 per cent of the global market index.

CPPIB is planning to increase its investment risk tolerance over the next three years, equivalent to a portfolio containing 85-per-cent global equities. But the fund would take a more conservative approach with the money set to come from the expanded CPP contributions. That portfolio will have a lower risk tolerance because it relies more on investment income to pay pensions years into the future than contributions from employees.

Canada’s large pensions, which have infrastructure investments around the world from shipping and airports in Britain and Europe to toll roads in Mexico, are expressing interest in joining forces with the federal government’s new infrastructure investment bank.

But they stopped short Wednesday of committing their dollars.

“We look forward to seeing the pipeline of infrastructure investments,” Michel Leduc, senior managing director and head of global affairs at the Canada Pension Plan Investment Board, said a day after the Liberal government pledged $81 billion over the next 10 years to fund public infrastructure including public transit and renewable power projects.

The first $15 billion will become available in the spring budget through the newly established Canadian Infrastructure Bank, designed to attract private sector capital to large national and regional projects with revenue-generating potential.

“An infrastructure bank, executed well, has the potential to be a catalyst of the type of infrastructure investment we have witnessed in Australia, United Kingdom, Chile and United States,” Leduc said.

However, while he said infrastructure investments can provide the pension plan’s beneficiaries with value, particular in a “stubbornly” low-interest environment, not all investments are the same and each must fit with CPPIB’s overall strategy.

“Infrastructure is a very broad concept, perhaps just as broad as any reference to investing in stocks. Some stocks are a good fit with our investment portfolio, some less so,” he said.

Leduc said infrastructure investment has worked in markets in which there is a concerted policy aim to attract productive, long-term capital.

“It doesn’t just happen,” he said.

If it is determined that CPPIB, which invests funds not needed to pay current benefits of the Canada Pension Plan, is interested in partnering with the government, the pension giant would be able to exploit a “home market advantage,” he said.

“We know Canada well… the home market advantage is one we would apply fiercely.”

Federal Finance Minister Bill Morneau told the House of Commons finance committee Wednesday the infrastructure bank is needed to spearhead projects because private institutional investors view the dedicated agency as a means to lower political risk.

PPP Canada, a federal Crown corporation that oversees public-private partnerships on infrastructure projects, doesn’t meet all the needs of the private investors, he said.

Ron Mock, chief executive of the Ontario Teachers’ Pension Plan, said a national infrastructure investment strategy in Canada could be “transformative” in terms of productivity, employments, and return on investment — provided it is guided by a long-term vision of commercial viability and independent governance.

The governance structure will be essential to its success to attracting private capital, he said, suggesting the government appoint a strong, professional, and independent board “to ensure it is run like a business.”

Canadian pension plans “have validated the soundness of this model on the global investment stage,” Mock said.

Since entering the infrastructure arena in 2001, Teachers’ has partnered with governments around the world, and used the plan’s governance and management expertise to add value and improve the productivity of these assets, he said.

“In our experience, countries that develop and implement a long-term vision for infrastructure are some of the most economically progressive and productive countries in the world.”

Mock said an infrastructure institution that combines government and institutional investment capital and risk sharing “will significantly improve the Canadian infrastructure landscape.”

Teachers’ was among the first pension plans to invest in infrastructure assets directly and is one of the world’s largest infrastructure investors, with a portfolio of nearly $16 billion as of the end of last year. The portfolio spans market segments including transportation and logistics, water and waste water, gas distribution, and renewable and conventional energy.

Senior advisors at Toronto law firm Bennett Jones LLP said the government has signaled it would be receptive to unsolicited bids for infrastructure projects, which represents a new opportunity for players experienced in project development.

“We think the energy transmission, water, wastewater, and transportation fields are well-suited to this initiative,” David Dodge, former Governor of the Bank of Canada, wrote in a note to clients with senior business advisor Jane Bird.

Following the federal government’s announcement yesterday of its plans to invest in infrastructure, one of Canada’s largest pension funds is advising the government that the implementation of a governance structure will be essential to its success in attracting private capital.

“We recommend the government appoint a strong, professional and independent board to ensure it is run like a business, as is the case for Canadian pension plans, which have validated the soundness of this model on the global investment stage,” said Ron Mock, president and chief executive officer of the Ontario Teachers’ Pension Plan, in a press release.

In his Fall Economic Statement yesterday, Finance Minister Bill Morneau said the federal government will invest an additional $81 billion in public transit, green and social infrastructure and transportation infrastructure, along with a number of other measures.

Canada’s largest pension funds, including the Ontario Teachers’, were among the first pension plans to invest directly in infrastructure assets, noted Mock.

“We believe that a government-backed Canadian infrastructure institution that partners government and institutional investor capital and risk sharing will significantly improve the Canadian infrastructure landscape,” said Mock. “It will benefit the Canadian government and, ultimately, Canadians.”

Since it began investing in infrastructure in 2001, Ontario Teachers’ has partnered with governments around the world, leveraging the fund’s governance and management expertise. “In our experience, countries that develop and implement a long-term vision for infrastructure are some of the most economically progressive and productive countries in the world,” said Mock.

The Ontario Teachers’ infrastructure portfolio is diversified across the transport/logistics, water and waste water, gas distribution, renewable and conventional energy industry sectors.

The Canada Pension Plan Investment Board also addressed infrastructure investment yesterday before the House of Commons finance committee. Mark Machin, chief executive officer of CPPIB, said the pension fund would need to see investment opportunities that meet its specific criteria in order to participate in the spending boom, according to the Globe and Mail.

CPPIB infrastructure investments include toll roads, shipping ports and pipelines around the world but the conditions are rarely satisfied by the infrastructure assets available in Canada, said Machin, although the pension fund is invested in the Ontario Highway 407 toll road.

“That’s been one of the biggest challenges in Canada, and around the world, is there’s just not been enough of those scale opportunities in size, but also that are prepared for our type of investments,” said Machin before the committee. He noted that the pension fund likes to buy operational assets, rather than investing in constructing new projects from scratch.

It’s important to make the distinction between operational infrastructure investments and green field ones (specifically ones utilizing the DBFM model, which is being contemplated here).

Quite rightly, Teachers and CPPIB steer clear of the latter because they are far riskier, require specialized legal expertise, and more recently, the application of Lean construction methods to manage successfully to time and dollar budgets. CPPIB and Teachers lack the necessary expertise to assess such infrastructure investment types, which is certainly not a knock against them.

So at the end of the day, Mock’s and Machin’s commentary as it relates to governance of federal government infrastructure projects is irrelevant. Most of the projects will be non-revenue plays and DBFM (i.e. full life cycle) projects and therefore outside of their permitted investment mandates.

These being P3 projects as well, private equity will be the (P)rivate driver, and I would imagine that their risk/reward profile, for those who know how to size them up, will be attractive.

DBFM is a type of Public Private Partnership (P3). The acronym describes the risks transferred to the private sector partner. In this case, Design, Build, Finance, and Maintain.

I think that the concept of establishing an infrastructure bank is to expand horizons and getting more projects done. It is not necessarily just about P3s.

In Europe, the European Investment Bank (EIB) has all sorts of tools that help projects to get financed. These tools do not exist in Canada. In the US, tax exempt muni bonds really go a long way to getting things done.

Anyway, just take a drive around Montreal and Ottawa, fairly obvious that the infrastructure is falling apart.

Former Alberta Investment Management (AIMCo) chief executive Leo de Bever is skeptical the federal government can attract foreign investment in critical Canadian infrastructure projects.

In an interview on BNN, de Bever, who’s now the chairman of energy service company Oak Point Energy, said foreign capital may prove disinterested in investing in many of the projects coveted by the Trudeau government.

“I don’t think that’s the first place that they’d be looking for,” he said. “The kind of people I talk to about foreign investment want to invest in our resources because they want security of supply [for] their own economies. I don’t think you’re going to get too many people excited about building roads in Canada.”

De Bever said Canadian attitudes toward paying for public infrastructure are at times diametrically opposed to the cash-flow needs of private equity.

“The prevailing wisdom in Canada is still that roads and sewage and so on should be free, and unfortunately infrastructure costs, so it has to earn a return,” he said. “The question is how do you allocate the cost of that infrastructure and if you’re not willing to charge for it, or not charge enough, then you’re not going to attract very much private capital: It’s that simple.”

• Andrew told me that OTPP, CPPIB, OMERS and the rest of Canada's large pensions are not interested in small DMBF/ PPP projects which are typically social infrastructure like building schools, hospitals or prisons. Why? Because they're small projects and the returns are too low for them. However, he said these are great projects for construction companies and lenders because you have the government as your counterparty so no risk of a default.
• Instead, he told me they are interested in investing in "larger, more ambitious" infrastructure projects which are economical and make sense for pensions from a risk/ return perspective. In this way he told me that they are not competing with PPPs who typically focus on smaller projects and are complimenting them because they are focusing on much larger projects.
• Here is where our conversation got interesting because we started talking about Australia being the model for privatizing infrastructure to help fund new infrastructure projects. He told me that while Australia took the lead in infrastructure, the Canadian model being proposed here takes it one step further. "In Australia, the government builds infrastructure projects and once they are operational (ie. brownfield), they sell equity stakes to investors and use those proceeds to finance new greenfield projects. In Canada, the government is setting up this infrastructure bank which will provide the bulk of the capital on major infrastructure greenfield projects and ask investors to invest alongside them" (ie. take an equity stake in a big greenfield project).
• Andrew told me this is a truly novel idea and if they get the implementation and governance right, setting up a qualified and independent board to oversee this new infrastructure bank, it will be mutually beneficial for all  parties involved. 
• In terms of subsidizing pensions, he aid unlike pensions which have a fiduciary duty to maximize returns without taking undue risks, the government has a "financial P&L" and a "social P & L". The social P & L is investing in infrastructure projects that benefit society and the economy over the long run. He went on to share this with me. "No doubt, the government is putting up the bulk of the money in the form of bridge capital for large infrastructure projects and pensions will invest alongside them as long as the risk/ return makes sense. The government is reducing the risk for pensions to invest alongside them and we are providing the expertise to help them run these projects more efficiently. If these projects don't turn out to be economical, the government will borne most of the risk, however, if they turn out to be economical, the government will participate in all the upside" (allowing it to collect more revenues to invest in new projects).
• He made it a point to underscore this new model is much better than the government providing grants to subsidize large infrastructure projects because it gets to participate in the upside if these projects turn out to be very profitable. 

October's jobs report showed a gain of 161,000 jobs in October, and while it won't have an immediate bearing on the Fed's next interest rate decision, it's one last economic pinata for the final days of the presidential election.

Economists expected to see 175,000 nonfarm payrolls. There were 156,000 jobs reported in September, and that number was revised higher to 191,000. The unemployment rate fell to 4.9 percent from 5 percent.

Market strategists are quick to point out that the jobs report comes just days after this month's Fed meeting, and the Federal Open Market Committee will have the November employment report and other fresh data to consider at its Dec. 14 meeting. The Fed is widely expected to hike ratesfor the second time in 10 years in December, if financial conditions and the economy are strong enough.

The jobs data, therefore, would've probably been more use to Donald Trump and Hillary Clinton in the campaign arena if it had been either very weak or very strong.

"If it's anything like the GDP report, it helps her. … If it's a good number, he'll say it's fake. If it's a bad number, he'll have a field day with it," said Greg Valliere, chief global strategist at Horizon Investments. Valliere on Thursday said the number would be more important for Clinton than Trump. "First of all, she needs something to deflect attention away from the slump she's in."

Economists viewed the data as about in line with expectations. The unemployment rate held steady, and the report revealed a tightening labor market with the highest wage increases - 2.8 percent - in the current economic cycle.

Stock futures rose slightly after the report Friday morning, and Treasury yields held mostly steady though the 2-year yield initially inched higher. Stocks on Thursday were lower for an eighth day, the longest losing streak in the S&P 500 since October of 2008. The S&P fell 9 points to 2,088, breaking key support at 2,097 and now just 6 points above its 200-day moving average. The Dow was down 28 at 17,930, a four-month low.

"I think as a notion, there's less emphasis on the employment report over the election results," said Ian Lyngen, head U.S. rate strategist at BMO. "You do have a presidential election that could in and of itself tighten financial conditions. I'm not quite surprised by the lack of interest in the employment series."

The move up in polls by Trump, amid new revelations about the FBI's investigation into Clinton emails, has helped flatten the yield curve, said Lyngen. Markets have been wary of a Trump presidency since he is less of a known factor, and some of his positions, such as on trade, are seen as potentially harmful to the U.S. and global economy. But while the markets have been somewhat comfortable with the idea of a Clinton victory, there is also concern that she would be weakened by ongoing investigations by the FBI and potentially by Congress.

"The markets are scared you could see a material tightening of financial conditions without the Fed doing anything," said Lyngen. Fed watchers have said the likelihood of a Fed rate hike in December would diminish dramatically if markets react violently to the election.

The jobs number, however, does have a chance of being a bright spot.

"Retailers are hiring a little earlier than they were. They have pulled ahead hiring to try to compete. It's a sign of a tighter labor market," said Diane Swonk, CEO of DS Economics. She was looking for about 190,000 jobs, aided by online retailers that have already been adding staff to distribution centers ahead of the holidays.

"Consumer confidence surveys show the current situation is fine. Employment is fine. It's the expectations that have deteriorated, which you could expect to see, given how ugly this election has gotten," said Swonk.

Bank of America Merrill Lynch was looking for 170,000 nonfarm payrolls.

"That's kind of like a Goldilocks number right now. It looks like the labor force participation rate has finally turned higher. If we can mark time with an unemployment rate of 5 percent and decent job growth for a while, it's the best thing that could happen to this economy. It's one of the better stories in the economy right now," said Ethan Harris, chief global economist at Bank of America Merrill Lynch, before the jobs report. "People are coming back to work. Wages are starting to pick up. I think the labor market is going to confirm it's one of the bright spots right now."

Goldman Sachs economists said they were looking for 185,000 jobs. The economists noted that much of the slowing in September was focused on state and local government employment, education and health care employment. Those areas added just 14,000 jobs in September, down from their 12 month average of 61,000. "A partial rebound in these sectors — with other sectors steady — would be enough to lift payroll growth into the high-100K range," they wrote in a note.

Besides the employment report, there are also earnings from Duke Energy, Humana, NRG Energy, PG&E, Madison Square Garden, FirstEnergy, NGL Energy Partners, Shutterstock and Virtu Financial before the bell. Berkshire Hathaway reports after the market close.

There are three Fed speakers to watch Friday, and the most important will be Fed Vice Chairman Stanley Fischer, who speaks on a panel at the IMF at 4 p.m. Atlanta Fed President Dennis Lockhart speaks at 9:30 a.m. at a realtors conference, and Dallas Fed President Rob Kaplan speaks at a bank forum in Mexico City.

Employment growth has slowed in recent months, but the labor market continues to tighten, this month led by the broader measure of unemployment.  Wage growth is now finally quickening in a way that matters for income and for the Fed. Because of the former, the labor income proxy continues to look decent.  It is now being driven more by wages than by jobs growth, which is a later-cycle type thing.  It is not yet to the point where it is “dangerous.” Rather, taken in isolation it favors the Fed tapping the brakes in December, not that they have been pressing on the accelerator that hard! But mostly, it means that the blah expansion is still moving along.

Taleb said Trump is not as "scary" as people make him out to be.

"In the end, Trump is a real estate salesman," Taleb said. "When you elect real estate salespeople to the presidency, they're going to try deliver something."

Because of that, Trump probably won't do anything apocalyptic, Taleb said.

The author further said he is against the two-party system and is voting for neither Trump nor Hillary Clinton. He said, however, that whoever wins won't make nearly as much of a difference as people think.

1. Growth Is Likely To Slow ... From Already Low Levels
2. The Risks Of Zero Growth Are Higher Today Than In The Past
3. The U.S. Consumer No Longer The Buffer Of U.S. Slowdowns
4. The World Is Battling Lingering Structural Problems
5. A U.S. Slowdown Has Implications For The World's Weakest Links
6. The Excesses Of China’s Investment Bubble Have Yet To Unwind
7. Demographic Trends In Japan ... An Insurmountable Problem?
8. Central Banks Have Reached The Limits Of Monetary Policy
9. Slower Growth Is The Enemy Of Portfolio Managers
10. P/Es Are Hypersensitive To The Economy At This Time

My thinking has not changed much, I still think we're headed for a long period of debt deflation but there are always going to be tradeable opportunities in these markets if you know where to plunge (and which sectors to steer clear of).

This brings me to the BAML report at the top of this comment. I remain highly skeptical of a global economic recovery and would take profits or even short emerging market (EEM), Chinese (FXI),  Metal & Mining (XME) and Energy (XLE) shares on any strength. And despite huge volatility, I remain long biotech shares (IBB and equally weighted XBI) and keep finding gems in this sector by examining closely the holdings of top biotech funds.

And in a deflationary, ZIRP & NIRP world, I still maintain nominal bonds (TLT), not gold, will remain the ultimate diversifier and Financials (XLF) will struggle for a long time if a debt deflation cycle hits the world (ultra low or negative rates for years aren't good for financials).

As far as Ultilities (XLU), REITs (IYR), Consumer Staples (XLP), and other dividend plays (DVY), they have gotten hit lately partly because of a backup in yields but mostly because they ran up too much as everyone chased yield (be careful, high dividend doesn't mean less risk!). Interestingly, however, high yield credit (HYG) continues to make new highs which bodes well for risk assets.

Death awaits all of us, but how patiently? To unlock the mystery of when we’re going to die, start with an actuary.

Specializing in the study of risk and uncertainty, members of this 200-year-old profession pore over the data of death to estimate the length of life. Putting aside the spiritual, that’s crucial information for insurance companies and pension plans, and it’s also helpful for planning retirement, since we need our money to last as long we do.

The latest, best guesses for U.S. lifespans come from a study (PDF) released this month by the Society of Actuaries: The average 65-year-old American man should die a few months short of his 86th birthday, while the average 65-year-old woman gets an additional two years, barely missing age 88.

This new data turns out to be a disappointment. Over the past several years, the health of Americans has deteriorated—particularly that of middle-aged non-Hispanic whites. Among the culprits are drug overdoses, suicide, alcohol poisoning, and liver disease, according to a Princeton University study issued in December.

Partly as a result, the life expectancy for 65-year-olds is now six months shorter than in last year’s actuarial study. Longevity for younger Americans was also affected: A 25-year-old woman last year had a 50/50 chance of reaching age 90. This year, she is projected to fall about six months short. (The average 25-year-old man is expected to live to 86 years and 11 months, down from 87 years and 8 months in last year's estimates.) Baby boomers, Generation X, and yes, millennials, are all doing worse.

Americans increasingly need an accurate sense of how long they’ll be alive. Employer shifts from traditional pensions—which sent a regular check for life—to individual 401(k) accounts mean workers must figure out retirement on their own. When you die becomes a crucial variable, helping to determine how much you need to save and how much you can afford to spend: Die at 95 and your retirement could be twice as expensive than if you die at 80. Information on mortality also helps set the price of annuities, insurance contracts that can pay buyers a set amount of money for the rest of their lives.

Some of the most commonly cited estimates of longevity are misleading for anyone putting together a retirement plan. For example, the life expectancy for Americans at birth is 76 for men and 81 for women, according to the Centers for Disease Control and Prevention. But if you’ve already survived to middle age, you have a good chance of living much longer. The Society of Actuaries’ website offers a longevity calculator that takes both your age and health into account.

Estimating longevity is as much an art as a science. The simplest way to calculate life expectancy is to look simply at how many people are dying at every age. If you want to know a 25-year-old’s chances of hitting age 100, you just calculate her statistical chances of getting through the next 75 birthdays unscathed. Looking at current data, what are her chances of dying at 25, 26, 27, 28, and so on?

The problem with this simple calculation is that it assumes life expectancy won’t improve over the next 75 years. Today’s 25-year-olds could be kept alive by safety technologies and medical treatments that don’t exist yet. At least, we hope.

So, baked in to the Society of Actuaries’ calculations is an assumption that longevity will keep improving. It looks at recent data to estimate near-term improvements.

The latest numbers, however, aren’t pretty: From 2000 to 2009, American death rates improved1 at 1.93 percent for men and 1.46 percent for women annually. From 2010 to 2014, that plunged to 0.6 percent for men and 0.42 percent.

This is bad news for almost everyone but pension fund managers. Still, it’s not time to panic yet.

“Year-over-year changes in mortality are very volatile,” said Dale Hall, managing director of research at the Society of Actuaries. Over time, death rates jump up and down a lot: All it takes is a bad flu season or the onset of a novel disease to make for a bad year, while new drug treatments for heart disease can produce several excellent years.

Actuaries assume that eventually, longevity improvements will get back on their long-term track. Still, the bottom line is that longevity’s rise has slowed way down. When they reach the traditional retirement age of 65, the average millennial should get just a few more years than the average baby boomer.

If Americans’ health continues to decline, these estimates could prove optimistic. Then again, the actuaries might be not be able to see huge improvements around the bend. The long-term historical record is encouraging: For two centuries, researchers have found (PDF) life expectancy in the world’s healthiest countries to have risen at a more-or-less steady rate of an additional three months for every year that passes, or 2.5 years a decade. In the 1840s, Swedish women were living to an average age of 45. Today, Japanese women have a life expectancy of 87. If the U.S. somehow got back on this track, today’s 25-year-olds should have an extra decade of life by the time they're at retirement age.

That future may have already arrived for some Americans—the very wealthy. According to research earlier this year in the Journal of the American Medical Association, a 40-year-old man in the top 1 percent can expect to live 14 years longer than his counterpart in the bottom 1 percent. Education may also make a difference: A college-educated 25-year-old can expect to live a decade longer than a high school dropout of the same age, according to the Population Reference Bureau.

If you’re trying to figure out how long you’re likely to live, estimates of “average” life expectancy may not be that helpful. That’s getting worse in an age of rising inequality. Great medical care and good fortune may add decades to the lives of the wealthy and educated, while much of the rest of America is left behind.

Middle-aged white Americans are dying at increasing rates and half a million people are dead who should not be, according to a new report published in the Proceedings of the National Academy of Sciences.

The study, co-authored by Anne Case and Angus Deaton, analyzed death rates for men and women aged 45 to 54 in the United States, a range often categorized as “middle-age.” The duo, both economics professors at Princeton, then compared the data to those death rates found within other domestic racial categories and those seen in similarly wealthy nations.

Black, Hispanic and older Americans (65 and up) have continued to see longer lives, as have those in Sweden, Australia, Germany and other rich nations, but middle-aged white Americans have not. The results represented a “marked increase” in mortality between 1999 and 2013, and the trends seem to “reverse decades of progress in mortality and was unique to the United States.”

Those with less education were also more likely to die in middle age due to suicide or alcohol and drug poisoning, the authors note.

The study links the increase in mortality to a slew of problematic issues seen throughout American society, including an increase in drug and alcohol abuse and an increase in suicide rates. White men had the highest suicide rate of any demographic in 2013, according to the Centers for Disease Control and Prevention.

The authors also draw a stark link between a rise in opioid availability, including the growing problem of cheap heroin. They theorize that an uptick in “the epidemic of pain, suicide and drug overdoses” may be tied to 2008’s financial crisis, and say many baby-boomers are among the first to live a harsher life than their parents.

The Washington Post notes such a large increase in mortality seen in a particular group within a developed nation is exceedingly rare. Although there were higher death rates of Russian men after the collapse of the Soviet Union, by and large, people have been leading longer lives since the 1970s.

The authors say that if America had seen a constant rate of increased longevity like other nations, some 500,000 people would still be alive. Others, facing an increase in illnesses like cirrhosis of the liver, will “age into Medicare in worse health than the current elderly,” which could put a hefty strain on an already overburdened system.

No doubt about it, the Oracle of Ontario, HOOPP and other Canadian pensions use much more realistic return assumptions to discount their future liabilities. In fact, Neil Petroff, CIO at Ontario Teachers once told me bluntly: "If U.S. public pensions were using our discount rate, they'd be insolvent."

Mauldin raises issues I've discussed extensively on my blog, including what if 8% is really 0%, the pension rate-of-return fantasy, how useless investment consultants have hijacked U.S. pension funds, how longevity risk is adding to the pressures of corporate and public defined-benefit (DB) pensions.

Mauldin isn't the first to sound the alarm and he won't be the last. Warren Buffett's dire warning on pensions fell largely on deaf ears as did Bridgewater's. I knew a long time ago that the pension crisis and jobs crisis were going to be the two main issues plaguing policymakers around the world.

And I've got some very bad news for you, when global deflation hits us, it will decimate pensions. That's where I part ways with Mauldin because longevity risk, while important, is nothing compared to a substantial decline in real interest rates.

Importantly, a decline in real rates, especially now when rates are at historic lows, is far more detrimental to pension deficits than people living longer.

What else did Mauldin conveniently miss? He ignores the brutal truth on DC pensions and misses how the 'inexorable' shift to DC pensions will exacerbate inequality and pretty much condemn millions of Americans to more pension poverty.

He also fails to look at the success of DB pensions in Canada, the Netherlands and other Nordic countries where they have implemented risk sharing and use proper pension governance to make sure these pensions operate at arms-length from the government and are supervised by a qualified, independent board of directors (see my recent comment on the list of highest paid pension fund CEOs).

But John Mauldin is right, at the heart of all pensions is a promise that future obligations will be paid out in full. The United States has long ignored this issue, much to the detriment of millions of workers that will retire in poverty. I've long argued we need universal pensions backstopped by the federal government, which is why I'm all for enhancing the Canada Pension Plan (CPP) for all Canadians and think U.S. policymakers should consider doing the same thing for their Social Security.

Another area where I agree with Mauldin is healthspans are more important than lifespans and there's a revolution going on in healthcare and biotechnology.

• First, longevity risk isn't as important as the direction of real rates in terms of impacting pension deficits.
• Second, defined-benefit pensions are much better than defined-contribution pensions because they lower costs, pool investment and longevity risk which means people with a DB plan never run the risk of outliving their savings during their golden years.
• Third, defined-benefit plans might are not just good for the economy, they're also good for people's health.

The head of Infrastructure Ontario (IO) has quietly left the government agency to run a massive new $50-billion public pension corporation.

Bert Clark, who had been president and CEO of the province’s infrastructure arm for more than four years, departed last month for the fledgling Investment Management Corporation of Ontario (IMCO), which will pool and manage public-sector pension funds.

Its founding members are the Ontario Pension Board (OPB) — which administers pensions for provincial government employees and those at agencies, boards and commissions — and the Workplace Safety and Insurance Board (WSIB).

An executive search has begun for Clark’s permanent replacement.

Toni Rossi, divisional president for real estate and lending, is serving as acting president and CEO of the infrastructure agency that is responsible for overseeing the financing and construction of schools, bridges, hospitals, court houses, and public transit projects.

“Bert has been a driving force at IO and made significant contributions to our success. He has demonstrated the potential for the public and private sectors to work together on infrastructure and real estate, and the benefits of doing so. We wish him all the best in his new role at IMCO,” Linda Robinson, IO’s board chair, said in an email Monday.

A former Scotiabank managing director and one-time aide to former premier Dalton McGuinty, Clark is the son of Ed Clark, Premier Kathleen Wynne’s business guru.

In a statement, the WSIB welcomed his appointment as the first CEO of the new corporation effective Oct. 17.

“The WSIB is confident that Mr. Clark’s experience in both the public and private sectors will prove valuable in his leadership of IMCO,” the board said.

“We anticipate a successful partnership which will allow the WSIB to strengthen its investment performance and asset management capabilities to provide secure benefits for workers and maintain stable premium rates for employers.”

The new investment management corporation, which is not bankrolled by the government or taxpayers, will operate as an arm’s length, member-funded, non-profit corporation.

It is expected that other public-service pension funds may eventually join the corporation which was set up in July and will begin its investment operations next year.

Finance Minister Charles Sousa said last summer that it would “enable public-sector organizations to pool assets and create economies of scale.”

“This will increase efficiency when providing pension support and income for injured workers. OPB and WSIB — and public-sector pension plans that may join in the future — will benefit from IMCO’s ability to deliver enhanced services,” he said.

Ontario is working to improve the management of broader public sector investment funds, including public sector pensions, through the creation of the Investment Management Corporation of Ontario (IMCO), which will provide investment management and advisory services to participating organizations in Ontario's Broader Public Sector (BPS).

Established July 1, 2016 by proclamation of the Investment Management Corporation of Ontario Act, 2015, IMCO will enable BPS organizations to lessen costs by pooling their assets. The larger fund is expected to lower administrative costs, which will help improve return on investments.

The creation of this entity is another step forward in fulfilling Ontario's commitment to strengthen the retirement income system for Ontario's workers. Since 2013, the province has advocated for an enhancement to the Canada Pension Plan. Ontario's sustained leadership on this critical issue, as well as the collaboration with the federal government, provinces and territories, resulted in the recent agreement-in-principle on a national solution, signed on June 20th in Vancouver. With this consolidated approach and creation of IMCO, Ontario is modernizing workplace pensions by providing a new tool for the investment of retirement savings.

The founding members of the IMCO are the Ontario Pension Board (OPB) and the Workplace Safety and Insurance Board (WSIB). With combined investment assets of approximately $50 billion, these two institutions provide the scale to ensure IMCO's success. IMCO is designed to accept, through a managed process, the membership application of any BPS organization with an investment fund that is interested in accessing its services.

IMCO will not require financial support from the Ontario government or Ontario taxpayers and will operate at arm's length from government as a member-based non-profit corporation. The creation of IMCO fulfills a commitment made in the 2015 Ontario Budget. It is expected to be operational by Spring 2017.

Three of the IMCO's initial Board of Directors were appointed July 1 by the Minister of Finance, including David Leith as Chair. The WSIB and OPB have each appointed two Directors to the initial Board. The new board's main priority will be to prepare the corporation to manage members' funds in the spring of 2017.

Strengthening workplace pension plans is part of the government's economic plan to build Ontario up and deliver on its number-one priority to grow the economy and create jobs. The four-part plan includes helping more people get and create the jobs of the future by expanding access to high-quality college and university education. The plan is making the largest infrastructure investment in hospitals, schools, roads, bridges and transit in Ontario's history and is investing in a low-carbon economy driven by innovative, high-growth, export-oriented businesses. The plan is also helping working Ontarians achieve a more secure retirement.

Quick Facts

• Participation of public sector and broader public sector (BPS) organizations in IMCO will be voluntary.
• Members of IMCO will retain ownership of their assets and responsibility to determine how their assets are invested by IMCO.
• The Ontario Pension Board (OPB) is the administrator of the Public Service Pension Plan (PSPP), a major defined benefit pension plan sponsored by the Government of Ontario. PSPP membership is made up of employees of the provincial government and its agencies, boards and commissions. At the end of 2015, OPB had $23 billion worth of assets under management.
• The Workplace Safety and Insurance Board (WSIB) is an independent agency that administers compensation and no-fault insurance for Ontario workplaces. At the end of 2015, WSIB had $26.3 billion worth of assets under management.
• IMCO will be headquartered in Toronto, the second-largest North American financial services centre by employment after New York.

Background Information

• Investment Management Corporation of Ontario Board Members

Additional Resources

• Read the Investment Management Corporation of Ontario Act (2015)
• Read Facilitating Pooled Asset Management for Ontario’s Public-Sector Institutions.

• Andrew told me that OTPP, CPPIB, OMERS and the rest of Canada's large pensions are not interested in small DMBF/ PPP projects which are typically social infrastructure like building schools, hospitals or prisons. Why? Because they're small projects and the returns are too low for them. However, he said these are great projects for construction companies and lenders because you have the government as your counterparty so no risk of a default.
• Instead, he told me they are interested in investing in "larger, more ambitious" infrastructure projects which are economical and make sense for pensions from a risk/ return perspective. In this way he told me that they are not competing with PPPs who typically focus on smaller projects and are complimenting them because they are focusing on much larger projects.
• Here is where our conversation got interesting because we started talking about Australia being the model for privatizing infrastructure to help fund new infrastructure projects. He told me that while Australia took the lead in infrastructure, the Canadian model being proposed here takes it one step further. "In Australia, the government builds infrastructure projects and once they are operational (ie. brownfield), they sell equity stakes to investors and use those proceeds to finance new greenfield projects. In Canada, the government is setting up this infrastructure bank which will provide the bulk of the capital on major infrastructure greenfield projects and asks investors to invest alongside it" (ie. take an equity stake in a big greenfield project).
• Andrew told me this is a truly novel idea and if they get the implementation and governance right, setting up a qualified and independent board to oversee this new infrastructure bank, it will be mutually beneficial for all  parties involved. 
• In terms of subsidizing pensions, he said unlike pensions which have a fiduciary duty to maximize returns without taking undue risk, the government has a "financial P&L" and a "social P & L" (profit and loss). The social P & L is investing in infrastructure projects that "benefit society" and the economy over the long run. He went on to share this with me. "No doubt, the government is putting up the bulk of the money in the form of bridge capital for large infrastructure projects and pensions will invest alongside them as long as the risk/ return makes sense. The government is reducing the risk for pensions to invest alongside them and we are providing the expertise to help them run these projects more efficiently. If these projects don't turn out to be economical, the government will borne most of the risk, however, if they turn out to be good projects, the government will participate in all the upside" (allowing it to collect more revenues to invest in new projects).
• He made it a point to underscore this new model is much better than the government providing grants to subsidize large infrastructure projects because it gets to participate in the upside if these projects turn out to be very good, providing all parties steady long-term revenue streams.

The head of Infrastructure Ontario (IO) has quietly left the government agency to run a massive new $50-billion public pension corporation.

Bert Clark, who had been president and CEO of the province’s infrastructure arm for more than four years, departed last month for the fledgling Investment Management Corporation of Ontario (IMCO), which will pool and manage public-sector pension funds.

Its founding members are the Ontario Pension Board (OPB) — which administers pensions for provincial government employees and those at agencies, boards and commissions — and the Workplace Safety and Insurance Board (WSIB).

An executive search has begun for Clark’s permanent replacement.

Toni Rossi, divisional president for real estate and lending, is serving as acting president and CEO of the infrastructure agency that is responsible for overseeing the financing and construction of schools, bridges, hospitals, court houses, and public transit projects.

“Bert has been a driving force at IO and made significant contributions to our success. He has demonstrated the potential for the public and private sectors to work together on infrastructure and real estate, and the benefits of doing so. We wish him all the best in his new role at IMCO,” Linda Robinson, IO’s board chair, said in an email Monday.

A former Scotiabank managing director and one-time aide to former premier Dalton McGuinty, Clark is the son of Ed Clark, Premier Kathleen Wynne’s business guru.

In a statement, the WSIB welcomed his appointment as the first CEO of the new corporation effective Oct. 17.

“The WSIB is confident that Mr. Clark’s experience in both the public and private sectors will prove valuable in his leadership of IMCO,” the board said.

“We anticipate a successful partnership which will allow the WSIB to strengthen its investment performance and asset management capabilities to provide secure benefits for workers and maintain stable premium rates for employers.”

The new investment management corporation, which is not bankrolled by the government or taxpayers, will operate as an arm’s length, member-funded, non-profit corporation.

It is expected that other public-service pension funds may eventually join the corporation which was set up in July and will begin its investment operations next year.

Finance Minister Charles Sousa said last summer that it would “enable public-sector organizations to pool assets and create economies of scale.”

“This will increase efficiency when providing pension support and income for injured workers. OPB and WSIB — and public-sector pension plans that may join in the future — will benefit from IMCO’s ability to deliver enhanced services,” he said.

Ontario is working to improve the management of broader public sector investment funds, including public sector pensions, through the creation of the Investment Management Corporation of Ontario (IMCO), which will provide investment management and advisory services to participating organizations in Ontario's Broader Public Sector (BPS).

Established July 1, 2016 by proclamation of the Investment Management Corporation of Ontario Act, 2015, IMCO will enable BPS organizations to lessen costs by pooling their assets. The larger fund is expected to lower administrative costs, which will help improve return on investments.

The creation of this entity is another step forward in fulfilling Ontario's commitment to strengthen the retirement income system for Ontario's workers. Since 2013, the province has advocated for an enhancement to the Canada Pension Plan. Ontario's sustained leadership on this critical issue, as well as the collaboration with the federal government, provinces and territories, resulted in the recent agreement-in-principle on a national solution, signed on June 20th in Vancouver. With this consolidated approach and creation of IMCO, Ontario is modernizing workplace pensions by providing a new tool for the investment of retirement savings.

The founding members of the IMCO are the Ontario Pension Board (OPB) and the Workplace Safety and Insurance Board (WSIB). With combined investment assets of approximately $50 billion, these two institutions provide the scale to ensure IMCO's success. IMCO is designed to accept, through a managed process, the membership application of any BPS organization with an investment fund that is interested in accessing its services.

IMCO will not require financial support from the Ontario government or Ontario taxpayers and will operate at arm's length from government as a member-based non-profit corporation. The creation of IMCO fulfills a commitment made in the 2015 Ontario Budget. It is expected to be operational by Spring 2017.

Three of the IMCO's initial Board of Directors were appointed July 1 by the Minister of Finance, including David Leith as Chair. The WSIB and OPB have each appointed two Directors to the initial Board. The new board's main priority will be to prepare the corporation to manage members' funds in the spring of 2017.

Strengthening workplace pension plans is part of the government's economic plan to build Ontario up and deliver on its number-one priority to grow the economy and create jobs. The four-part plan includes helping more people get and create the jobs of the future by expanding access to high-quality college and university education. The plan is making the largest infrastructure investment in hospitals, schools, roads, bridges and transit in Ontario's history and is investing in a low-carbon economy driven by innovative, high-growth, export-oriented businesses. The plan is also helping working Ontarians achieve a more secure retirement.

Quick Facts

• Participation of public sector and broader public sector (BPS) organizations in IMCO will be voluntary.
• Members of IMCO will retain ownership of their assets and responsibility to determine how their assets are invested by IMCO.
• The Ontario Pension Board (OPB) is the administrator of the Public Service Pension Plan (PSPP), a major defined benefit pension plan sponsored by the Government of Ontario. PSPP membership is made up of employees of the provincial government and its agencies, boards and commissions. At the end of 2015, OPB had $23 billion worth of assets under management.
• The Workplace Safety and Insurance Board (WSIB) is an independent agency that administers compensation and no-fault insurance for Ontario workplaces. At the end of 2015, WSIB had $26.3 billion worth of assets under management.
• IMCO will be headquartered in Toronto, the second-largest North American financial services centre by employment after New York.

Background Information

• Investment Management Corporation of Ontario Board Members

Additional Resources

• Read the Investment Management Corporation of Ontario Act (2015)
• Read Facilitating Pooled Asset Management for Ontario’s Public-Sector Institutions.

Donald John Trump will be the 45th president of the United States, capping a historic and boisterous run by an outsider who captured a loyal following across a swath of America fed up with establishment politics, the news media and elected officials.

His success was only part of a larger, crushing victory for the Republican Party, which retained the House and maintained control of the Senate.

The brash New York businessman will win at least 270 electoral votes, according to NBC News projections, and will take his Republican ticket to the White House in January. Trump had trailed Democrat Hillary Clinton in polling averages for nearly the entire election cycle, but he bucked prognostications by picking up states many pundits deemed out of his reach.

On Twitter, the president-elect called his win "beautiful and important," while the White House issued a statement that President Obama plans to publicly address the election results, and invite Trump to the White House on Thursday to discuss handing over power.

"Ensuring a smooth transition of power is one of the top priorities the President identified at the beginning of the year and a meeting with the President-elect is the next step," the White House statement read.

The 70-year-old real estate mogul — who is now the oldest person ever elected to a first presidential term — declared victory early Wednesday, saying Clinton had conceded the election and that it's time for the nation "to come together as one united people."


The Republican congratulated his Democratic rival, saying that she waged "a very very hard-fought campaign." He also commended her for having "worked very long and very hard" over her political career.

"Now it's time for America to bind the wounds of division — have to get together," he said. "To all Republicans and Democrats and independents across this nation, I say it is time for us to come together as one united people."

Trump, who had been criticized by opponents for rhetoric characterized as divisive and racist, pledged, "I will be president for all Americans, and this is so important to me."

Trump has never before held public office, but he will be joined in the executive branch by Vice President-elect Mike Pence and a host of politicians and business executives who rallied around the GOP nominee.

Although the vast majority of pre-election surveys had indicated a slight advantage for Clinton, Trump's campaign had frequently predicted that a vein of electoral strength existed beyond the polls, pointing to his massive crowds at his events and online support.

Clinton — who was secretary of state under President Barack Obama, a U.S. senator for New York from 2001 to 2009, and first lady during her husband's presidency in the 1990s — had been painted as the "establishment" politician, while Trump campaigned as a political neophyte who could "drain the swamp" of government corruption in Washington.

Trump will likely face significant Democratic attempts at opposition after he enters the White House in January. In fact, Trump has elicited strong outcries from liberal and minority groups since he first characterized many Mexican immigrants "rapists" in his June 2015 campaign kickoff.

Trump rose to prominence in a crowded GOP primary field by connecting with voters who felt they had been betrayed by Washington interests. The businessman focused his early pitch on forceful answers to economic issues like trade and immigration, which resonated with those Americans who had stopped believing mainstream Republicans cared about their communities.

Many experts in economics and policy studies have decried Trump's prescriptions as nearly impossible to implement and unlikely to achieve their desired aims. But supporters, and Trump himself, have contended that his calls for extreme tariffs and mass deportations were opening salvos in forthcoming negotiations.

And Trump, who has been famous for decades as a symbol of wealth and business acumen, channeled the image of a negotiator throughout his campaign. The real estate developer — who co-authored "Trump: The Art of the Deal"— has repeatedly claimed that other countries are taking advantage of the United States, and the White House should work to renegotiate its existing agreements.

Clinton, meanwhile, had campaigned on a set of policy proposals made more liberal for her primary contest against Sen. Bernie Sanders. While Republicans painted Clinton as too liberal — an extension of Obama's tenure — many on the left expressed discomfort with the former secretary of state, jeering that she was more aligned with right-of-center candidates.

Yet for all of those criticisms, Clinton had appeared ahead in the race, especially after her well-received debate performances. But that lead became more tenuous when the FBI announced just 11 days before the election that it was probing new evidence regarding her use of a private email server while secretary of state. The FBI subsequently said the new probe did not turn up any reason to charge Clinton with a crime, but Democrats, and even some Trump supporters, called foul on the timing of the original announcement: Clinton's campaign was damaged as voters were reminded of a scandal that had faded from the forefront.

Trump also faced several challenges on his road to the White House, including allegations that he sexually assaulted or harassed multiple women, and several women making such claims came forward after the release of a 2005 video in which he bragged about groping women.

Still, Tuesday's election results are a strong repudiation of the entire system of Washington politics, not just the Democrats or Clinton. A long list of Republican leaders and luminaries had come out against Trump, or at least refused to endorse their party's new, de-facto head.

The Trump victory also marks a rejection of the mainstream news media, which extensively covered Trump's scandals and self-contradictions. Polls showed many of the Republican's supporters dismissed those reports.

As recently as last week, in fact, pundits on both sides suggested that Trump was not angling to win the election — he was instead interested, they said, in establishing a base of support for profitable post-race enterprises. But after an acrimonious election, Trump will now turn to building a team that can work together to implement his ideas for the country.

Donald Trump's presidential campaign, like the business career that preceded it, was unpredictable, undisciplined and unreliable. Despite those qualities — or perhaps, in part, because of them — it was also successful.

So what should we expect from President-elect Trump, mindful that his path to the White House has defied expectations at every turn?

Some of Trump's ambitions have been clearly telegraphed: He plans to build a wall along the U.S. border with Mexico, deport millions of criminal immigrants, unwind trade deals dating back more than two decades and repeal Obamacare. He has also promised to cut taxes and eliminate numerous government regulations — including power plant rules designed to combat global warming.

With the presidential pen and a friendly Republican Congress, Trump should have little trouble delivering on those promises.

But Trump's campaign never really revolved around specific policy prescriptions. His agenda is not anchored to ideology but rather shaped by instinct and expedience.

"Trump operates very much from his gut," said David Cay Johnston, author of The Making of Donald Trump. "The guiding philosophy of Trump is whatever is in it for his interests at the moment."

When his initial tax plan prompted sticker shock among fiscal watchdogs, Trump readily shaved trillions of dollars off the bottom line. (His new plan is still a budget buster, though.) His impulsive call to ban Muslim immigrants gradually morphed into a vague prescription for "extreme vetting." And he hastily concocted a plan to help working parents only after his daughter trumpeted a vaporware version at the GOP convention.

That flexibility seems to be just fine with tens of millions of supporters who trust Trump's instincts and assume his success will boost the country as a whole. The campaign slogan "Make America Great Again," which Trump trademarked just days after the 2012 election, is both vague and malleable enough to accommodate whatever nostalgic and aspirational vision his followers want to attach to it.

Supporters point to the way Trump rescued a New York skating rink that languished for years in the 1980s under city government supervision.

"What had taken the city over half a decade to botch, my father completed in less than six months, two months ahead of schedule and over a million dollars under budget," Eric Trump told delegates at the Republican National Convention.

Backers hope the incoming president will bring similar accountability to the federal government.

One of Trump's first tasks will be staffing up for a new administration. The celebrity businessman who turned "You're fired!" into a catchphrase will soon be doing a lot of hiring.

"I will harness the creative talents of our people," Trump told supporters at a victory party early Wednesday. "And we will call upon the best and brightest to leverage their tremendous talent for the benefit of all."

Friends say assembling high-performing teams is one of the president-elect's strengths.

"He pushes everybody around him, including you, through comfort barriers that they never thought they could ever shatter," said Colony Capital CEO Tom Barrack, who delivered a testimonial for Trump at the party convention in July.

Trump's daughter Ivanka told delegates her father has always promoted on the basis of merit.

"Competence in the building trades is easy to spot," she said at the convention in July. "And incompetence is impossible to hide."

In politics and in business, Trump has kept his organizations lean. He had only about one-tenth of the staff Hillary Clinton had, heading into the final months of the campaign.

Trump's aides are often long on loyalty and short on formal credentials. Politico noted that the chief operating officer of the Trump Organization was initially hired to be a bodyguard, after Trump spotted him working security at the U.S. Open tennis tournament.

Trump may delegate, but there's no doubt who's in charge. Even if he fills his Cabinet with big personalities — Newt Gingrich has been floated for secretary of state and Rudy Giuliani for attorney general — Trump is not likely to share the spotlight.

"The only quote that matters is a quote from me!" Trump tweeted this summer, urging journalists to pay no attention to his subordinates. As late as Friday, he boasted that he didn't need other celebrities to attract large crowds to his rallies.

"I didn't have to bring JLo or Jay Z," Trump said, mocking Hillary Clinton's reliance on big-name warmup acts. "I am here all by myself."

Trump, who prides himself on being a counter-puncher, can also be expected to use the levers of government to target his political rivals. He has already threatened on live television to appoint a special prosecutor to investigate Clinton.

"Trump's philosophy, which he's written and spoken about for many years, is to get revenge," Johnston said.

Once Trump is in the White House, the news media will remain firmly focused on the new commander in chief.

"Donald is the most masterful manipulator of the conventions of journalism I've ever seen," said Johnston, a Pulitzer Prize-winning former reporter for The New York Times.

Trump has long believed that even bad publicity is better than no publicity. Surprising and provocative statements are both a tool to keep the audience paying attention and a negotiating tactic.

"I always say we have to be unpredictable," Trump told the Washington Post editorial board.

Everything for Trump is a negotiation. And much of his campaign was based on the idea that the U.S. has been getting a bad bargain.

"You look at what the world is doing to us at every level, whether it's militarily or in trade or so many other levels, the world is taking advantage of the United States," Trump told CNN. "And it's driving us into literally being a third-world nation."

As a businessman, Trump has a long history of using pressure tactics to drive hard bargains. USA Today found hundreds of examples in which employees and contractors accused Trump of not paying them for their work. They sometimes settled for less than they were owed, rather than face a lengthy legal battle against Trump and his deep pockets.

Similarly, Trump argues that if the U.S. puts pressure on other countries — by imposing import tariffs or demanding payment for military protection — they'll quickly back down.

Some foreign policy scholars are not convinced this zero-sum mindset is appropriate.

"By threatening to drive harder bargains, he might manage to eke out a slightly larger share of the pie," said Daniel Drezner of the Fletcher School of Law and Diplomacy at Tufts University. "But he also threatens to blow up that pie in the process."

The stock market has sent clear signals that investors are worried about the economic fallout from a Trump administration. According to one estimate, the S&P 500 index will be worth 12 percent less under Trump than it would have been had Clinton been elected.

Count on the president-elect to loudly hype any success while downplaying any setback. And if that requires bending the truth a bit, so be it.

"People want to believe that something is the biggest and the greatest and the most spectacular," Trump wrote in his best-selling 1987 book The Art of the Deal. "It's an innocent form of exaggeration — and a very effective form of promotion."

If history is any guide, the new Trump administration will not be overly constrained by facts.

Trump has shamelessly exaggerated the height of his buildings, the size of his profits, and even the number of people who showed up to cheer his presidential bid.

"When you have a huge crowd, and Trump draws huge crowds, there's no need to exaggerate," Johnston said. "Except in Donald's mind where big is never big enough."

Don't expect that to stop now that he has achieved the biggest and most powerful office in the land.

If there is one thing that 2016 has taught us it is to not rule out the unlikely scenario. Indeed, the events surrounding the Brexit vote and now Donald Trump winning the U.S. presidency were unexpected to happen, at least according to the polls and their proponents. So what does all of this mean for the stock market anyway? It's hard to know exactly what powers congress will convey on the new President but the biggest potential problem as we see things has to do with trade.

At this time, there is already a dynamic for an economic slowdown in place, one that the new president will inherit. Money supply has slowed across the developed world and rates have backed up. All of which will eventually add to a weaker U.S. economy. The real troubles with this story lie overseas where a number of countries have come to rely on the U.S. for trade. If the new President holds true on his promise to tear up trade agreements, then the outlook just got a lot more complicated. Our call for a bear market in 2017 was never about potential U.S. election results. Rather, it is about the consequences that tighter policy will bring to an already fragile world economy. As always, we shall see.

1. Growth Is Likely To Slow ... From Already Low Levels
2. The Risks Of Zero Growth Are Higher Today Than In The Past
3. The U.S. Consumer No Longer The Buffer Of U.S. Slowdowns
4. The World Is Battling Lingering Structural Problems
5. A U.S. Slowdown Has Implications For The World's Weakest Links
6. The Excesses Of China’s Investment Bubble Have Yet To Unwind
7. Demographic Trends In Japan ... An Insurmountable Problem?
8. Central Banks Have Reached The Limits Of Monetary Policy
9. Slower Growth Is The Enemy Of Portfolio Managers
10. P/Es Are Hypersensitive To The Economy At This Time

Stock prices crashed as it became clear that Donald Trump would be elected the next President of the United States. And then they did a complete reversal to actually rally during the first trading day after the votes were counted.

Just when you thought the stock market was starting to make sense, it goes ahead and does the exact opposite.

The markets were supposed to get crushed

Ahead of Election Day, Wall Street’s stock market experts were in broad agreement that a surprise victory by Republican candidate Donald Trump would be met by a sharp sell-off, ranging somewhere between -3% to -15%. Yahoo Finance reported on this multiple times.

What were behind these bearish calls?

For months, candidate Trump employed a divisive tone as he promised aggressive actions, including renegotiating or withdrawing from NAFTA, tightening the screws on immigration, and pressuring the Federal Reserve and its monetary policy. Most of his promises were considered bearish and recessionary. At the very least, they introduced more uncertainty, which by definition increases the premium investors demand for taking on risk.

On the night of the election, stock prices plummeted as the odds of a Trump win improved. When it became clear that Trump would win, the futures market hit “limit down,” which is just another way of saying that prices would’ve gone lower if the exchanges didn’t step in. S&P 500 futures (ES=F) were down by an eye-popping 5%.

And then the exact opposite happened

As the world awaited the US stock markets to open on Wednesday morning, traders slowly bid prices back up. And in a total shocker, stocks erased all losses and opened in the green.

When it was all said and done, the S&P 500 (^GSPC) closed at 2,163, up 23 points or 1.1% for the day. It would’ve been considered an impressive rally under any circumstance.

(Before we get to the big picture, it’s important to note that there were plenty of losers in the market. IT stocks and utilities tumbled, as financials and health care stocks surged. Our discussion today about the net effects.)

What happened? Were the stock market forecasters dead wrong? Was Donald Trump the better candidate all along?

The most common explanation for the turnaround is tied Trump’s victory speech.

“To all Republicans and Democrats and Independents across this nation, I say it is time for us to come together as one united people,” Trump said in the wee hours of Wednesday morning. “For those who have chosen not to support me in the past, of which there were a few people, I’m reaching out to you for your guidance and your help so we can work together and unify our great country.”

“The President-elect’s more conciliatory tone and pledge to work together with his opponents came as a positive surprise to market participants, many of whom had expected more of the aggressive rhetoric that marked his campaign,” UBS’s Mark Haefele said.

Indeed, while he could’ve taken a victory lap and kicked his opponents while they were down, he didn’t.

“Trump’s gracious acceptance speech has encouraged hopes that he will moderate his more extreme positions when actually in office,” Capital Economics Julian Jessop said. “Indeed, it is fair to ask ‘does Trump mean Trump?'”

This is not to say that Trump won’t eventually push for policies deemed unfriendly to the markets. All these arguments suggest is that Trump is being seen as less bad than previously thought.

Let’s not get too carried away

There are plenty of other theories for the rally, including the suggestion that this is very similar to June’s surprise “Brexit” vote, when the UK unexpectedly voted to leave the European Union. Initially, markets cratered, and then they came back.

But rather than belaboring the rationale for one or two days’ worth of rallies, it’s best to just stop now. Because who knows what the market will do tomorrow or the day after that?

If there’s one lesson to be learned here, it’s that markets are unpredictable and often times they flat out won’t make sense.

As Gluskin Sheff’s David Rosenberg once said: “Nobody ever said it had to make sense.”

I don't know if Trump will etch out a victory on Tuesday but I agree with 'Black Swan' author Nassim Taleb, there is much ado about a Trump presidency:

Taleb said Trump is not as "scary" as people make him out to be.

"In the end, Trump is a real estate salesman," Taleb said. "When you elect real estate salespeople to the presidency, they're going to try deliver something."

Because of that, Trump probably won't do anything apocalyptic, Taleb said.

The author further said he is against the two-party system and is voting for neither Trump nor Hillary Clinton. He said, however, that whoever wins won't make nearly as much of a difference as people think.

I tend to agree with Taleb on this, a vote for Hillary Clinton will essentially be a vote for the status quo and a vote for Donald Trump sounds a lot scarier than it actually will be (President Trump will be very different from candidate Trump but his ego stays so if he manages to pull off a victory, he definitely doesn't want to be remembered as the worst president to ever hold office).

If there is one thing that 2016 has taught us it is to not rule out the unlikely scenario. Indeed, the events surrounding the Brexit vote and now Donald Trump winning the U.S. presidency were unexpected to happen, at least according to the polls and their proponents. So what does all of this mean for the stock market anyway? It's hard to know exactly what powers congress will convey on the new President but the biggest potential problem as we see things has to do with trade.

At this time, there is already a dynamic for an economic slowdown in place, one that the new president will inherit. Money supply has slowed across the developed world and rates have backed up. All of which will eventually add to a weaker U.S. economy. The real troubles with this story lie overseas where a number of countries have come to rely on the U.S. for trade. If the new President holds true on his promise to tear up trade agreements, then the outlook just got a lot more complicated. Our call for a bear market in 2017 was never about potential U.S. election results. Rather, it is about the consequences that tighter policy will bring to an already fragile world economy. As always, we shall see.

1. Growth Is Likely To Slow ... From Already Low Levels
2. The Risks Of Zero Growth Are Higher Today Than In The Past
3. The U.S. Consumer No Longer The Buffer Of U.S. Slowdowns
4. The World Is Battling Lingering Structural Problems
5. A U.S. Slowdown Has Implications For The World's Weakest Links
6. The Excesses Of China’s Investment Bubble Have Yet To Unwind
7. Demographic Trends In Japan ... An Insurmountable Problem?
8. Central Banks Have Reached The Limits Of Monetary Policy
9. Slower Growth Is The Enemy Of Portfolio Managers
10. P/Es Are Hypersensitive To The Economy At This Time

President-elect Trump may plan his first foreign visit to China, 45 years after the famous Nixon meeting with Mao Zedong in February 1972. Mr. Trump may not plan many foreign visits but a strong relationship with China will be critical to realize the new American infrastructure dream. Mr. Trump may learn a great deal from the Chinese infrastructure miracle, its modern cities, its fast-speed train network, and its leveraged financing strategies.

What are his policy priorities? How could the Chinese inspire him? And what are the implications for emerging markets? First, President Trump wants to become the American infrastructure president rather than a global policeman. His most important priority is to modernize the US transportation network with innovative technologies and smart financing. Trade wars or foreign expeditions or mass migration would be costly distractions. Infrastructure is a domestic focus but requires global capital, just like global FDI poured into China and helped finance its impressive building and infrastructure boom. China has attracted foreign capital with its growth vision, low interest rates, a stable exchange rate, and mostly passive foreign policies: a smart WTO accession (rather than trade wars), a position of military strength (rather than sending troops overseas), and addition of allies (rather than undermining of alliances). Mr. Trump may wish to relegate his campaign bluster behind his real priorities.

Second, China might inspire him in three ways: China today is the queen of leverage (see chart), just as Mr. Trump describes himself as the king of debt. China has financed its growth mostly off-balance-sheet through state banks and non-bank financial institutions, rather than direct central government spending or ineffective monetary policies. China has directed its massive spending alongside state and local administrations while developing its domestic industries: high-speed trains are made in China, new electric cars are built in China, and smart city grids are developed in China. And technological innovation was a major driver of Chinese growth while labor remained stable with low birth rates and low immigration, although urban migration has been supporting productivity.

Mr. Trump might translate these Chinese lessons to make America great again: the Rustbelt could produce innovative self-driving electric cars, the heartland could benefit from US-built bullet trains (taking bullets off the streets), and urban renewal could be enhanced by smart grids and smart new buildings. His chief economist may counsel him to refrain from picking fights abroad and instead focus on keeping positive real interest rates and a stable exchange rate as well as rebuilding leverage off-balance-sheet with new guarantees through the SBA as well as retooled Fannie & Freddie and new local vehicles. An initial boost could come from repatriated foreign earnings and tax reforms.

Third, emerging markets stand to benefit from a more inward looking US administration focused on rebuilding its domestic infrastructure. US investment would likely propel growth while inflation and interest rates would rise and the dollar would remain range-bound whereas leverage would increase significantly. The credit cycle might be further extended as financial regulations are relaxed, and risk-on trades could return quickly. A massive construction boom would benefit commodity prices as well as EM currencies, which may bode well for Russia and for Latin America. However, geopolitical tensions may increase, with a new vacuum in the Middle East and a resurgent Chinese position in East Asia. While this is not an ideal long-term foundation, it would provide additional near-term upside for emerging markets.

The global bond market rout continued on Friday, driving up Italian yields and hammering emerging markets as investors feared higher U.S. interest rates under incoming President Donald Trump will spark capital outflows from these assets.

With the U.S. Treasury market closed for Veterans' Day, the bond selling centered on Europe, with Italy's benchmark 10-year yield rising to its highest in a year before a key ratings review from Standard & Poor's later in the day.

This followed a wave of heavy selling across emerging Asian stocks, bonds and currencies as investors bet that Trump's fiscal policies will be inflationary, push U.S. rates up and drive investors into dollar-based assets.

This prompted the central banks of Malaysia and Indonesia to intervene in the foreign exchange market to try to stem the outflow of money, while Mexico's peso slumped to a fresh record low in its biggest weekly slide since 2008.

Developed market equities held up better, although Europe's index of 300 leading shares was down slightly and U.S. futures pointed to a slightly lower open on Wall Street.

Rising expectations that Trump's economic policies will include a heavy dose of infrastructure spending sent copper soaring more than 5 percent, on track for its biggest weekly rise since the late 1970s.

"We are turning more cautious on emerging market credit. Potential Trump policies may translate into higher U.S. rates due to inflationary pressures," Citi analysts said in a note on Friday. "Emerging market FX is now joining the Trump slump."

MSCI's emerging market index fell 2.3 percent to its lowest level since July, chalking up its third consecutive weekly decline, while MSCI's broadest index of Asia-Pacific shares outside Japan fell 1.6 percent.

Japan's Nikkei .N225 bucked the trend, closing 0.2 percent higher despite a stronger yen, after earlier hitting a 6-1/2-month high.

Europe's FTSEurofirst 300 was down 0.1 percent and Germany's DAX  was up 0.5 percent, while Britain's FTSE 100 bore the brunt of a rise in sterling above $1.26 and fell 1.1 percent.

U.S. futures pointed to a fall of around 0.3 percent at the open on Wall Street as investors prepared to take some chips off the table after the Dow Jones hit a record high on Thursday. The Dow remains well on track for its best week in five years.

DOLLAR BUOYANT

Among the biggest fallers in Asia were Indonesian shares, which slumped 3 percent while the rupiah currency fell more than 2.5 percent to 4-1/2-month lows before it stabilized on the Indonesian central bank's intervention.

The Malaysian ringgit also dropped 1 percent to 9 1/2-month lows, and Mexico's peso fell nearly 3 percent to a new record low of 21.39 per dollar.

It's been a bruising week for the peso. It has fallen 10 percent - its worst week since 2008 and second worst since the 1995 "Tequila" crisis - as investors have taken fright at what a Trump presidency will mean for the Mexican economy.

Elsewhere in currencies, the dollar edged down from near 3-1/2-month highs against the yen to 106.50 yen, and the euro was a touch weaker at $1.0870.

But more broadly, the dollar is having its best week in a year, rising 1.7 percent against a basket of currencies, lifted by the rise in U.S. yields and expectations of tighter policy from the Federal Reserve next year and beyond.

The 10-year Treasury yield has this week hit its highest level in 10 months at 2.15 percent, and the 30-year yield a 10-month high of 2.96 percent .

The 30-year yield rose 38 basis points this week, its biggest weekly jump since 2009. Markets are betting that Trump's policy stance - from protectionism and fiscal expansion - will boost inflation.

Inflation expectations measured by U.S. inflation-linked bonds rose to 1.87 percent, its highest since July last year, up from low below 1.2 percent touched in February.

"Sharply higher bond yields are often associated with higher implied inflation expectations, and the Fed might feel the need to respond to this with rate hikes, not delay," said Steve Barrow, head of G10 strategy at Standard Bank in London.

In a remarkable shift of sentiment, the market is also now starting to price in a chance of a rate hike by the European Central Bank for the first time since 2011.

Italian bond yields rose ahead of a key ratings review and a planned sale of Italian government bonds via auctions. The country's benchmark 10-year bond yield rose as high as 1.95 percent. Investors are also concerned that Prime Minister Matteo Renzi may resign if he loses the Dec 4 referendum on constitutional reform he pushed for.

Elsewhere, copper topped $6,000 per tonne for the first time since June last year. It is up 18 percent this week, its biggest weekly rise in over 30 years.

U.S. crude oil futures fell 1.3 percent to $44.07 per barrel and Brent fell 1.1 percent to $45.32.

All I can tell you right now is what I've been telling you for a while, I see no summer crash but given my bullish US dollar views, I remain highly skeptical of a global economic recovery and would take profits or even short emerging market (EEM), Chinese (FXI),  Metal & Mining (XME) and Energy (XLE) shares on any strength. And despite huge volatility, I remain long biotech shares (IBB and equally weighted XBI) as I see great deals in this sector and momentum is gaining there.

Central bankers lowered interest rates to near zero or below to try to revive their gasping economies. In the process, though, they have put in jeopardy the pensions of more than 100 million government workers and retirees around the globe.

In Costa Mesa, Calif., Mayor Stephen Mensinger is worried retirement payments will soon eat up all the city’s cash. In Amsterdam, language teacher Frans van Leeuwen is angry his pension now will be less than what his father received, despite 30 years of contributions. In Tokyo, ex-government worker Tadakazu Kobayashi no longer has enough income from pension checks to buy new clothes.

Managers handling trillions of dollars in government-run pension funds never expected rates to stay this low for so long. Now, the world is starved for the safe, profitable bonds that pension funds have long needed to survive. That has pulled down investment returns and made it difficult for funds to meet mounting obligations to workers and retirees who are drawing government pensions.

As low interest rates suppress investment gains in the pension plans, it generally means one thing: Standards of living for workers and retirees are decreasing, not increasing.

“Unless ordinary people have money in their pockets, they don’t spend,” the 70-year-old Mr. Kobayashi said during a recent protest of benefit cuts in downtown Tokyo. “Higher interest rates would mean there’d be more money at our disposal, even if slightly.”

The low rates exacerbate cash problems already bedeviling the world’s pension funds. Decades of underfunding, benefit overpromises, government austerity measures and two recessions have left many retirement systems with deep funding holes. A wave of retirees world-wide is leaving fewer active workers left to contribute. The 60-and-older demographic is expected to roughly double between now and 2050, according to the United Nations.

Government-bond yields have risen since Donald Trump was elected U.S. president, though few investors expect a prolonged climb. Regardless, the ultralow bond yields of recent years have already hindered the most straightforward way for retirement funds to recover—through investment gains (click on image).

Pension officials and government leaders are left with vexing choices. As investors, they have to stash away more than they did before or pile into riskier bets in hedge funds, private equity or commodities. Countries, states and cities must decide whether to reduce benefits for existing workers, cut back public services or raise taxes to pay for the bulging obligations.

“Interest rates have never been so low,” said Corien Wortmann-Kool, chairwoman of the Netherlands-based Stichting Pensioenfonds ABP, Europe’s largest pension fund. It manages assets worth €381 billion, or $414 billion. “That has put the whole system under pressure.” Only about 40% of ABP’s 2.8 million members are active employees paying into the fund.

Pension funds around the world pay benefits through a combination of investment gains and contributions from employers and workers. To ensure enough is saved, plans adopt long-term annual return assumptions to project how much of their costs will be paid from earnings. They range from as low as a government bond yield in much of Europe and Asia to 8% or more in the U.S.

The problem is that investment-grade bonds that once churned out 7.5% a year are now barely yielding anything. Global pensions on average have roughly 30% of their money in bonds.

Low rates helped pull down assets of the world’s 300 largest pension funds by $530 billion in 2015, the first decline since the financial crisis, according to a recent Pensions & Investments and Willis Towers Watson report. Funding gaps for the two biggest funds in Europe and the U.S. have ballooned by $300 billion since 2008, according to a Wall Street Journal analysis.

Low rates helped pull down assets of the world’s 300 largest pension funds by $530 billion in 2015, the first decline since the financial crisis, according to a recent Pensions & Investments and Willis Towers Watson report. Funding gaps for the two biggest funds in Europe and the U.S. have ballooned by $300 billion since 2008, according to a Wall Street Journal analysis (click on image).

Few parts of Europe are feeling the pension pain more acutely than the Netherlands, home to 17 million people and part of the eurozone, which introduced negative rates in 2014. Unlike countries such as France and Italy, where pensions are an annual budget item, the Netherlands has several large plans that stockpile assets and invest them. The goal is for profits to grow faster than retiree obligations, allowing the pension to become financially self-sufficient and shrink as an expense to lawmakers.

ABP currently holds 90.7 cents for every euro of obligations, a ratio that would be welcome in other corners of the world. But Dutch regulators demand pension assets exceed liabilities, meaning more cash is required than actually needed.

This spring, ABP officials had to provide government regulators a rescue plan after years of worsening finances. ABP’s members, representing one in six people in the Netherlands, haven’t seen their pension checks increase in a decade. ABP officials have warned payments may be cut 1% next year.

“People are angry, not because pensions are low, but because we failed to deliver what we promised them,” said Gerard Riemen, managing director of the Pensioenfederatie, a federation of 260 Dutch pension funds managing a total of one trillion euros.

Benefit cuts have become such a divisive issue that one party, 50PLUS, plans for parliamentary-election campaigns early next year that demand the end of “pension robbery.”

“Giving certainty has become expensive,” said Ms. Wortmann-Kool, ABP’s chairwoman.

That is tough to swallow for Mr. van Leeuwen, the Amsterdam language teacher. Sitting on a bench near one of the city’s historic canals, he fumed over how he had paid the ABP every month for decades for a pension he now believes will be less than he expected.

Japan is wrestling with the same question of generational inequality. Roughly one-quarter of its 127 million residents are now old enough to collect a pension. More than one-third will be by 2035.

The demographic shift means contributions from active workers aren’t sufficient to cover obligations to retirees. The government has tried to alleviate that pressure. It decided to gradually increase the minimum age to collect a pension to 65, to require greater contributions from workers and employers and to reduce payouts to retirees.

A typical Japanese couple who are both 65 would collect today a monthly pension of ¥218,000 ($2,048). If they live to their early 90s, those payouts, adjusted for inflation, would drop 12% to ¥192,000.

The Japanese government has turned to its $1.3 trillion Government Pension Investment Fund for cash injections six of the past seven years. That fund, the largest of its kind in the world, manages reserves for Japan’s public-pension system and seeks to earn returns that outpace inflation. The more it earns, the more it can shore up the government’s pension system.

In February, Japanese central bankers adopted negative interest rates for the first time on some excess reserves held at the central bank so commercial banks would boost lending. The pension-investment fund raised a political ruckus in August when it said it lost about ¥5.2 trillion ($49 billion) in the space of three months, the result of a foray into volatile global assets as it tried to escape low rates at home.

The fund’s target holdings of low-yielding Japanese bonds were cut to 35% of assets, from 60% two years ago, and it has added heaps of foreign and domestic stocks. It is now considering investing more in private equity.

The government-mandated target is a 1.7% return above wage growth. “We’d like to strive to accomplish that goal,” said Shinichiro Mori, a deputy director-general of the fund’s investment-strategy department.

The fund posted a loss of 3.8% for the year ended in March because of the yen’s surge and global economic uncertainty. It was its worst performance since the 2008 global financial crisis. Mr. Mori said performance “should be evaluated from a long-term perspective,” citing returns of ¥40 trillion ($376 billion) since 2001.

Mr. Kobayashi, the former Tokyo government worker, said the government’s effort to boost returns by making riskier investments was supposed to “increase benefits for everyone, even if only slightly. It didn’t turn out that way…And they are inflicting the loss on us.”

Mr. Kobayashi joined roughly 2,300 people who marched in downtown Tokyo in October to protest government plans to cut pension benefits further.

In the U.S., the country’s largest public-pension plan is struggling with the same bleak outlook. The California Public Employees’ Retirement System, which handles benefits for 1.8 million members, recently posted a 0.6% return for its 2016 fiscal year, its worst annual result since the financial crisis. Its investment consultant recently estimated that annual returns will be closer to 6% over the next decade, shy of its 7.5% annual target.

Calpers investment chief Ted Eliopoulos’s strategy for the era of lower returns is to reduce costs and the complexity in the fund’s $300 billion portfolio. He and the board decided to pull out of hedge funds, shop major chunks of Calpers’ real-estate and forestry portfolios and halve the number of external money managers by 2020.

“Calpers isn’t taking a passive approach to the anticipated lower return rates,” fund spokeswoman Megan White said. “We continue to reassess our strategies to improve performance.”

Yet the Sacramento-based plan still has just 68% of the money needed to meet future retirement obligations. That means cash-strapped cities and counties that make annual payments to Calpers could be forced to pay more.

That is a concern even for cities such as affluent Costa Mesa in Orange County, which has a strong tax base from rising home prices and a bustling, upscale shopping center.

The city has outsourced government services such as park maintenance, street sweeping and the jail, as a way to absorb higher payments to Calpers. Pension payments currently consume about $20 million of the $100 million annual budget, but are expected to rise to $40 million in five years.

The outsourcing and other moves eliminated one-quarter of the city’s workers. The cost of benefits for those remaining will surge to 81 cents of every salary dollar by 2023, from 37 cents in 2013, according to city officials.

The mayor, Mr. Mensinger, is hopeful for a state solution involving new taxes or a benefits overhaul, either from lawmakers in Sacramento or from a California ballot initiative for 2018 that would cap the amount cities pay toward pension benefits for new workers.

Weaker cities across California could face bankruptcy without help, said former San Jose Mayor Chuck Reed, who oversaw a pension overhaul there in 2012 and is backing the 2018 initiative that would shift onto workers any extra cost above the capped levels. “Something is broken,” he said. “The plans are all based on assumptions that have been overly optimistic.”

Costa Mesa resident James Nance, 52, worries the city’s pension burden will affect daily life. “We could use more police,” said the self-employed spa repairman. “I’d like to know the city is safe and well protected, but I know there have been tremendous cutbacks.”

Costa Mesa ended the latest fiscal year with an $11 million surplus, its largest ever. But that will soon disappear, Mr. Mensinger said, as pension costs swallow up $2 of every $5 spent by the city.

“We have this gigantic overhead cliff called pensions.”

Justin Trudeau is billing Canada as a stable option for international investors amid market uncertainty in the aftermath of the election of Donald Trump in the United States.

Speaking at the end of a day spent courting some of the world’s largest wealth managers, the Prime Minister added a clear political spin to his government’s pitch that investors should be working with Ottawa on infrastructure projects.

“The fact is Canada is lucky to have citizens that are forward-thinking, that are reasonable, that are understanding that drawing in global investment will lead to good Canadian jobs,” he said.

Mr. Trudeau said Canada is attracting attention from people who wonder how the country remains open to investment, trade and immigration during a period of uncertainty, making reference to the “election of the Republican candidate in the United States” without naming Mr. Trump.

Mr. Trudeau is encouraging banks, pension funds, insurance companies and private wealth funds to take equity stakes in Canadian infrastructure projects through a new Canada Infrastructure Bank announced this month. Advocates say such a bank could group public and private funds together for large projects, allowing more construction to proceed more quickly.

Politics aside, some of the investors in attendance gave the government’s presentation an enthusiastic response.

Mark Machin, chief executive officer of the Canada Pension Plan Investment Board, was among the roughly two dozen Canadian-based investors who met Monday morning with Mr. Trudeau and senior ministers to discuss infrastructure spending.

“It’s a terrific initiative,” he said in an interview at the CPPIB’s Toronto headquarters following the meeting. Mr. Machin said the infrastructure plan should “absolutely” attract new money from institutional investors because the bank will offer firms a single point of contact and is promising to do the advanced research in order to prioritize infrastructure projects that are good candidates for private partnerships.

“I would think if this gets off the ground the way it should, then it should result in significant increase in activity in infrastructure,” he said.

The CPPIB announced earlier this month that the assets of the CPP fund have climbed above $300-billion as of Sept. 30, which is up from $287.3-billion the year before.

The CPP fund has just one current investment in Canadian infrastructure: a 40-per-cent share of Ontario’s 407 toll highway, which runs through the Greater Toronto Area.

Mr. Trudeau also met Monday with global wealth managers in the afternoon, among them representatives from BlackRock Inc., which is the largest asset manager in the world.

Executives from the country’s largest banks, pension funds and insurance companies said Monday morning’s meeting affirmed the government’s commitment to developing its infrastructure plan, but several attendees said it was short on details of what the planned infrastructure bank would look like.

Ministers representing the departments of Finance, Transport, Natural Resources and Infrastructure and Communities outlined the types of infrastructure deals and projects that are most interesting to the government. Some executives offered thoughts on what made certain infrastructure deals work well in other parts of the world, and they suggested different investment structures that could work for building new projects such as pipelines and electricity transmission.

“I believe that they have a vision to put together a model which is pretty ground-breaking,” said Ron Mock, chief executive officer of the Ontario Teachers’ Pension Plan, after the session. He noted that private funding models exist in Britain, Australia and Mexico and that Canada could be a leader with its plan. “In terms of the details of how it will actually be executed, I think they are correctly looking to the expertise that exists in the country for input and advice on how to move this agenda forward.”

Attendees characterized the meeting as an early step in gathering input and support for the part of the government’s planned $180-billion spending spree that is counting on an influx of private capital. But some said they were hoping there would be more clarity on what happens next, rather than being asked for another round of input on how to make the plan work.

During the session, the group discussed the widespread interest in so-called “brownfield” assets – where investors buy and operate existing infrastructure, rather than taking on the risk of constructing new projects from scratch. The government has expressed more interest in using private capital in building new infrastructure projects, called “greenfield.”

Questions about how the federal government would align its objectives with the provincial and municipal governments that traditionally control a lot of infrastructure spending were also top of mind for many participants. Constructing new infrastructure where users must pay fees or tolls may be a tricky sell to these lower levels of government and their constituents.

“Clearly the execution of this becomes important, and that in many cases requires the federal, provincial, municipal alignment, which is which is pretty key,” Mr. Mock said. “Because most infrastructure in this country is either provincial or municipal and it’s the federal government that is wanting to initiate such a plan.”

Prime Minister Justin Trudeau pitched fund managers from around the world on the merits of investing billions in Canadian infrastructure projects Monday, earning praise from some but leaving others with questions about how such deals would work.

Ottawa is setting up a new entity — the Canada Infrastructure Bank — to promote large national and regional projects, including revenue-generating ones it hopes will draw the interest of big institutional investors, including domestic pension funds.

Monday’s meetings in downtown Toronto — a morning session with Canadian pension funds managers and top bankers, and an afternoon discussion with international investors — brought the prime minister and key cabinet ministers face-to-face with some of the money managers they will need to attract to make the bank a success.

Ron Mock, chief executive of the Ontario Teachers’ Pension Plan, said Trudeau and his cabinet have “got their head in the right place” in creating projects that would draw on government money and investment from institutions, such as pension funds.

“They did a great job,” Mock said as he left the morning meeting, which also included Trudeau, Finance Minister Bill Morneau and top representatives from the Caisse de dépôt et placement du Québec and the Canada Pension Plan Investment Board.

But Hugh O’Reilly, chief executive of the Ontario Public Service Employees Union Pension Trust, said many details needed to be ironed out.

“We still have many questions about how this infrastructure bank will work,” he said. “But the federal government acknowledged that — and are looking to pension funds to provide advice.”

The plan, which has $16 billion in assets, will look at opportunities case by case, he added.

After the meeting, Trudeau said he was “tremendously pleased to see so many business leaders at the table.”

“We know that partnerships with the private sector can be done right, and we look forward to working with these significant global investors to see how we can make sure we’re responding to their needs,” he said.

His government has pledged $81 billion over the next 10 years for infrastructure, including public transit and renewable power projects. The first $15 billion will become available in the spring 2017 budget.

A spokesman for the Canada Pension Plan Investment Board called the talks “constructive.”

The Canadian Infrastructure Bank should offer “an intelligent bridge between what investors are looking for and what governments can offer. (CPPIB officials) look forward to seeing the pipeline of potential infrastructure investments.”

The prime minister said he hoped the bank would “be up and running in 2017, but we’re also working very, very hard with experts and listening to people to make sure we get it right.”

Earlier Monday, a few blocks from the Trudeau meeting, Marc Garneau, the transportation minister, told another group of investors Ottawa’s recently announced $10.1-billion funding commitment to upgrade trade transportation corridors does not depend on participation by the private sector.

Garneau said he expects there will be interest from the public–private partnerships to invest in the trade transportation improvements. But even if there isn’t, the federal government will go ahead with the spending.

“The funding is there,” Garneau said in a brief interview after his speech at a conference organized by the Canadian Council for Public-Private Partnerships, which attracted about 1,200 investors, project proponents and governments from around the world.

“If there is not large institutional investors that want to become involved with it, we will still be using the money, as I said in my speech, to reduce bottlenecks and congestion and make our trade transportation corridors as efficient as possible.”

Morneau announced the $10.1 billion in trade transportation funding in his fall fiscal update this month. The trade corridor upgrades are part of a massive boost in planned infrastructure spending.

Garneau said improving transportation corridors is so important for Canada’s trade, it won’t need to wait for private funding. About one-fifth of Canadian goods is shipped by rail, and much of that is destined for export.

Transportation volumes are increasing. Over the past 30 years, the amount of goods moved by rail has increased 60 per cent, while the amount shipped by sea is up 40 per cent.

The $10.1 billion in funding is designed to remove bottlenecks that are slowing traffic on important export corridors.

That doesn’t mean the government is not interested in encouraging private-sector involvement. The new infrastructure bank is intended to foster private investment in projects.

Garneau said Ottawa understands some projects, especially in public transportation, might require tolls to encourage private-sector investment.

“We’re open to that concept,” he said, in answer to a question from the audience.

Canada's Liberal government is speaking to sovereign wealth funds and global private equity firms as well as domestic pension funds as it ramps up efforts to attract funding for its new infrastructure bank, according to two sources.

The overseas investors that the officials developing the infrastructure bank are speaking to include the Government Pension Fund of Norway, one of the world's largest sovereign wealth funds, said the sources, who declined to speak on the record because of the sensitivity of the talks.

The government said earlier this month it would set up an infrastructure bank and give it access to C$35 billion ($26 billion) to help fund major projects.

Prime Minister Justin Trudeau and Finance Minister Bill Morneau are attending an event in Toronto on Monday aimed at attracting private investment. The event is part of a series of meetings with private investors ahead of the launch of the bank, which Ottawa hopes will be up and running next year, the sources said.

Trudeau and Morneau had previously expressed a desire to attract investment from Canada's biggest pension plans such as the Canada Pension Plan Investment Board (CPPIB), the Caisse de depot du Quebec and the Ontario Teachers' Pension Plan.

A significant proportion of the projects the bank hopes to fund will be built from scratch, known as "greenfield" investments, rather than "brownfield" investments which have already been built.

The Canadian pension funds, among the world's ten biggest infrastructure investors, have invested more in projects overseas than in their domestic market.

That is partly because they have preferred to invest in existing infrastructure which has established revenue streams and does not carry construction risk. However, that stance is changing as investors seek alternatives to government bonds and volatile equity markets.

Last week, CPPIB's Chief Executive Mark Machin said in an interview the fund would be open to investing in greenfield projects through the infrastructure bank.

Meanwhile, the Caisse, Quebec's public pension fund, is planning to build a new 67 kilometer public transit system in Montreal, investing C$3 billion and seeking to supplement that with C$2.5 billion of federal and provincial government funding.

That project could be one of the first to be funded by the new infrastructure bank, the sources said.

Sources said the Ontario Teachers Pension Plan is also planning to invest more in greenfield projects.

• Andrew told me that OTPP, CPPIB, OMERS and the rest of Canada's large pensions are not interested in small DMBF/ PPP projects which are typically social infrastructure like building schools, hospitals or prisons. Why? Because they're small projects and the returns are too low for them. However, he said these are great projects for construction companies and lenders because you have the government as your counterparty so no risk of a default.
• Instead, he told me they are interested in investing in "larger, more ambitious" infrastructure projects which are economical and make sense for pensions from a risk/ return perspective. In this way he told me that they are not competing with PPPs who typically focus on smaller projects and are complimenting them because they are focusing on much larger projects.
• Here is where our conversation got interesting because we started talking about Australia being the model for privatizing infrastructure to help fund new infrastructure projects. He told me that while Australia took the lead in infrastructure, the Canadian model being proposed here takes it one step further. "In Australia, the government builds infrastructure projects and once they are operational (ie. brownfield), they sell equity stakes to investors and use those proceeds to finance new greenfield projects. In Canada, the government is setting up this infrastructure bank which will provide the bulk of the capital on major infrastructure greenfield projects and asks investors to invest alongside it" (ie. take an equity stake in a big greenfield project).
• Andrew told me this is a truly novel idea and if they get the implementation and governance right, setting up a qualified and independent board to oversee this new infrastructure bank, it will be mutually beneficial for all  parties involved. 
• In terms of subsidizing pensions, he said unlike pensions which have a fiduciary duty to maximize returns without taking undue risk, the government has a "financial P&L" and a "social P & L" (profit and loss). The social P & L is investing in infrastructure projects that "benefit society" and the economy over the long run. He went on to share this with me. "No doubt, the government is putting up the bulk of the money in the form of bridge capital for large infrastructure projects and pensions will invest alongside them as long as the risk/ return makes sense. The government is reducing the risk for pensions to invest alongside them and we are providing the expertise to help them run these projects more efficiently. If these projects don't turn out to be economical, the government will borne most of the risk, however, if they turn out to be good projects, the government will participate in all the upside" (allowing it to collect more revenues to invest in new projects).
• He made it a point to underscore this new model is much better than the government providing grants to subsidize large infrastructure projects because it gets to participate in the upside if these projects turn out to be very good, providing all parties steady long-term revenue streams.

The California State Teachers' Retirement System announced on Wednesday that it had calculated the total costs and fees paid to manage its entire investment portfolio, likely the first public pension fund to do so.

CalSTRS found total expenses, including carried interest, reached $1.6 billion in calendar year 2015, or less than 1 percent of the portfolio's $186 billion net asset value.

Presented for first time at Wednesday's meeting of CalSTRS' board, the new cost report marks a milestone among public pension funds to keep tabs on investment expenses and may motivate other funds to track their fees.

It also comes at a time when public pension funds, which manage the retirement benefits of public sector workers and retirees, face growing pressure to disclose the fees that they pay.

The task was not an easy one, however. CalSTRS has over 600 partnership investments, separately managed accounts, joint ventures and co-investments within its portfolio, and there is no industry standard for cost reporting.

As a result, to tally up all of the carried interest, management fees, partnership expenses and portfolio company fees paid by CalSTRS, information had to be collected one investment at a time through direct engagement.

"To the best of my knowledge, this is the most comprehensive review of investment costs," Allan Emkin of Pension Consulting Alliance said at Wednesday's meeting. "On the issue of transparency and disclosure, you will be seen as the new leader."

On Monday, CalSTRS sister fund, CalPERS, announced it had shared about 14 percent of the profit made on private equity investments in the past year with firms managing its private equity asset class.

CalSTRS took fee disclosure a step further, calculating the fees and costs for its entire portfolio. Of the $1.6 billion, approximately 61 percent was external and internal costs, while 39 percent was carried interest, or profits shared.

CalSTRS said it paid an outside firm to compile the data, with the total cost of the project reaching $425,000 plus 1,500 hours of staff time.

Board members said the report was worth the money because it clarified important investment costs.

"This is absolutely fantastic," said Board Member Paul Rosenstiel. "I think it’s very well worth the time and the expenditure."

This is just accounting – how hard can this be?

The problem may be that they used to subtract carried interest from return.

Capitalization of some structuring cost can be another issue – there are rules about what is capital and what is not.