The National Pension Hub (NPH) for Pension Knowledge and Research is gearing up:

Through collaboration with leading Canadian pension plans, service providers, academia, and policy makers, the Global Risk Institute has established the National Pension Hub for Pension Knowledge and Research.The purpose of the NPH is to provide a sustainable pipeline of independent and objective pension research that, among other things, will lead to innovative solutions to pension design, governance and investment challenges. It leverages the global leadership of Canadian pension plans and consulting plans and engages the academic community on complex research topics to produce objective pension-focused and industry-relevant research and insights. We strive to offer local pension design insights as well as globally-relevant pension investment and governance research to establish Canada as a source for leading pension research.

Interested in contributing your research? Please visit our Call for Proposal page for more information (submission deadline: May 11, 2018).

I had a brief chat with Barbara Zvan, Chair of the NPH, and Chief Risk & Strategy Officer at Ontario Teachers' Pension Plan, to go over the latest developments. For some background on the NPH, see an earlier comment of mine here.

Barb basically told me that they are in the process of awarding two contracts to academics at different universities and she told me to circle back in June when she will be able to provide more details.

She told me the NPH is up to 21 members which includes all the major Canadian pensions and even a large well-known insurance company, Great West Life (click on image):

Great West Life is a holding of the Desmarais family and seniors and juniors sit on its board of directors (click on image):

Desmarais' Power Corporation is also a major sponsor of the Montreal Conference which includes the Montreal Pension Conference.

Who else sits on the Board of Great West Life? A fellow my blog readers will surely recognize (click on image):

Yes, that's Don Raymond, the former CIO of CPPIB who is now Managing Partner and Chief Investment Officer, Alignvest Management Corporation and Alignvest Investment Management Corporation.

By the way, for those of you who don't know, Alignvest Personal Pension Plan helps incorporated professionals retire with more assets versus RRSPs through higher contributions and lower taxes while offering world-class investment management. Learn more about this personal pension plan here.

Anyway, back to the National Pension Hub (NPH). It's gearing up, evaluating submissions and proposals from academics. The major themes are the following:

• Technology Disruption and Innovations
• Cyber Security and Fraud
• Climate Change and Environmental Risk
• Regulatory Compliance and Financial Stability
• Systemic Risk
• Macroeconomic Risk
• Risk Management Practices

Somebody told me that Ontario Teachers' has a "Benchmark Committee" steered by its CEO, Ron Mock, and is made up of him, the CIO and Barbara Zvan, the head of Strategy & Risk. This committee makes sure nobody is gaming their benchmark in any investment activity.

I asked him why doesn't anyone from the Board sit on this committee and he replied: "The Board approves the benchmarks but it's up to management to make sure they are strictly adhered to in terms of risk. If management doesn't do its job, the Board can change the benchmark and even fire the CEO."

Good point. This person also told me that CPI + 400 or 500 bps is a fine benchmark to use in private markets and most deals aim to ensure CPI + 700 to have an "extra cushion". He added: "Private markets aren't liquid, there is a lot of time and energy involved in deals, so it's ok to want an extra premium over benchmark in deals."

As far as the risk, he stated: "The biggest risk in private market deals is permanent loss of capital but if the compensation is structured over a four or five-year rolling return period, the manager is aligned with the organization's objective not to take excessive risk by gaming the benchmark."

That is an important point, there are no perfect benchmarks in alternative investments, you want pension fund managers to take risk but not to go crazy and risk losing a ton of money on any given year. If the compensation is structured to primarily reward long-term performance, you can do away with a lot of these private markets benchmark gaming issues.

And remember, benchmarks can be gamed everywhere, including public markets and hedge funds, it's not just a private markets problem. If a manager is taking excessive or stupid risks, be it liquidity or leverage or whatever, it should be reflected in their benchmark. Period.

Is alternative data a thing now? Dr. Ashby Monk the Executive and Research Director of the Stanford Global Projects Center believes it is. At a roundtable discussion last week at the Global Risk Institute’s headquarters in Toronto, he delivered a persuasive admonishment to the pension executives present. His message was: give serious  consideration to the emerging role of alternative data.

This was the National Pension Hub’s inaugural Roundtable discussion. It was well attended by the biggest pension funds in central Canada. Following a few words of introduction by the GRI’s president Mark Caplan and the institute’s executive in residence, Gareth Whitten, Dr. Monk, proceeded with a technological history lesson designed to highlight the disrupting technologies that have become commonplace over the last 15-20 years alongside the fact that, as financial analysts, we are still using Yahoo Finance, a technology that was available over 20 years ago. We’re now accessing it on our phones which is new, but the underlying data is old hat.

The point was well taken. Surely, the cutting edge of financial analysis could use more edge. Dr. Monk went on to explain that advances in artificial intelligence (AI) and machine learning (ML) were beginning to do our jobs faster and more comprehensively than we ever could. This is no surprise given that a large part of our jobs is sifting through information and raw data to arrive at a conclusion. With parameters and strict rules, machines could certainly arrive at conclusions from a set of data far more efficiently than any human but… what does that mean?

Asset managers that currently make use of AI and ML are grappling with this question right now. Bloomberg has reported that at one of Man Group’s biggest funds, the AHL Dimension Programme, approximately 50% of the fund's profits were attributed to AI strategies. Man Group is not alone. Many other large asset managers are experimenting with AI technology and building expert teams. The issue, however, is this: Are the managers that deploy AI technology to manage their assets fulfilling their fiduciary duty? If they cannot explain the positions or the trades that the algorithms execute, are they really responsible stewards of their client’s assets?

I’m very wary of predictions of the future of technological disruption. It’s been my experience that change follows its own meandering path that somehow always seems to elude even the closest watchers. As such, I’m not convinced that our jobs are at imminent risk. I am convinced though, that Alternative Data will become increasingly essential to those who manage long-term assets.

Alternative Data is often called “big data” or “metadata”. It is typically collected as a by-product of providing some other service like banking, e-commerce, social media or satellite imagery. Because of what this data has the potential to reveal, if it can be organized and analyzed, these data sets have value. It seems that organizing and analyzing this data would be an excellent application of AI and ML.

Dr. Monk’s point concerning alternative data is that currently, the biggest beneficiaries of the value created by alternative data are the world’s largest hedge funds and other institutional investment companies. He believes that pension funds ought to get in on the action, especially considering the value to be gained from insights into the revenue streams of their longer-term investments. Anything that informs the bidding process on longer-term projects, like toll roads or parking lots, or helps with liability management, is something that pension funds might want to sit up and pay attention to.

The hedge fund industry, once known for innovation and high absolute returns now lags the passive investing indices (e.g. SPY, during the period from 2009 to 2016). Most hedge funds trade the same strategies, have the same risk factor exposures, and have effectively replicated each other. In recent years, systematic hedge funds have sought to automate these well-known hedge fund strategies and have substantially done so. Research teams for hedge funds have not generated enough ideas to keep pace with asset growth. Annual returns without the deduction of management fees have declined to 5.43% per year on average from 2011 to 2015. Recently startups have created crowd research tools to address this gap between alpha production and alpha demand. We believe they will be successful if the crowd researchers are not required to become domain experts in trade execution. Cloudquant using Anaconda and other open source python toolsets provides research tools to simulate execution and a business model that enables data scientists to generate alpha ideas at scale by allowing them to focus on data science.

The Canada Pension Plan Investment Board is among the anchor investors in India’s first private infrastructure investment trust.

Sponsored by L&T Infrastructure Development Projects Ltd., the CPPIB and Allianz Capital Partners will take a combined 55 per cent stake in the IndInfravit trust. The trust will focus on developing toll roads and other road infrastructure. It will initially acquire five operational toll roads spread across four Indian states.

The CPPIB is taking a $200-million stake, amounting to 30 per cent of the trust’s units, in addition to taking a board position.

“This investment allows CPPIB to deepen our relationships with Allianz Capital Partners and L&T IDPL, and demonstrates our commitment to investing in India. The rapidly growing Indian economy brings with it a need for sound infrastructure, and we are pleased to be able to support this growth, while delivering solid long-term risk adjusted returns for the CPP fund,” said Scott Lawrence, managing director and global head of infrastructure at the CPPIB, in a press release.

In another investment move, the CPPIB is spending $1.8 billion to enter into a joint venture and acquire 49 per cent of a selection of Enbridge Inc.’s North American onshore renewable power assets. It’s also acquiring a 49 per cent interest in two German offshore wind projects.

“The monetization of $1.75 billion of renewable assets through our newly formed joint venture with CPPIB is an important step in achieving the objective we set when we rolled out our three-year plan and strategic priorities in December,” said Al Monaco, president and chief executive officer of Enbridge, in a press release.

“This deal makes a significant contribution to our $3-billion asset sales target for the year and will also eliminate $500 million of equity capital requirement that we had previously included in our funding plan. This transaction, in addition to our other funding actions taken since April, accelerates funding for our secured capital program and gives us increased financial flexibility.”

The assets in the joint venture include all of Enbridge’s Canadian renewable assets, as well as two U.S. entities, the Cedar Point wind farm in Colorado and the Silver State North solar project in Nevada.

In addition, the CPPIB and Enbridge have agreed to work together on forming a 50/50 joint venture involving European offshore wind projects in the future.

“We are also very pleased to be partnering with CPPIB in future development of our European offshore wind business, which we believe will have great opportunities for years to come,” said Monaco. “The combination of our operating and development capability with CPPIB’s resources and experience creates a powerful Canadian champion for developing offshore renewable energy projects in Europe.”

And finally, the CPPIB announced a joint venture to acquire to acquire a Grade A office building, the Kumho Asiana main tower in Seoul, for about $500 million. “The opportunity to invest in one of the largest office markets in Asia through this prime office building fits well with CPPIB’s strategy to invest in top-tier, well-located real estate,” said Jimmy Phua, managing director and head of real estate for Asia at the CPPIB.

• Canada Pension Plan Investment Board and Allianz act as anchor investors in the first private infrastructure investment trust in India 
• Canada Pension Plan Investment Board Signs Agreements to Acquire 49% of Enbridge’s Interests in Select Renewable Power Assets in North America and Europe
• CPPIB and GIC Enter into Joint Venture Partnership to Acquire an Office Property in Seoul’s Central Business District  

Very Negative Signal for Earnings Estimates (a few short term charts are circulating, but the relationship goes back at least 40 years and the correlation is rising) pic.twitter.com/2HygQGmoBi

— Not Jim Cramer (@Not_Jim_Cramer) May 9, 2018

Shares in Enbridge Inc. rose Wednesday after it announced it will gain nearly $3.2 billion through two deals to sell renewable power facilities in North America and Europe and natural gas gathering and processing assets in the United States.

The deals announced hours before its annual general meeting in Calgary allow Enbridge to declare mission accomplished on its goal of raising $3 billion from non-core asset sales in 2018 to reduce its heavy debt load and help fund its $22-billion growth program.

Enbridge shares rose as high as $41.48 in morning trading on the Toronto Stock Exchange, up about 2.6 per cent from Tuesday’s close.

Enbridge said it had inked a $1.75-billion agreement with the Canada Pension Plan Investment Board (CPPIB) to sell a 49-per-cent stake in most of its wind and solar power assets.

“The monetization of $1.75 billion of renewable assets through our newly formed joint venture with CPPIB is an important step in achieving the objective we set when we rolled out our three-year plan and strategic priorities in December,” said Enbridge CEO Al Monaco in a news release.

“This deal makes a significant contribution to our $3-billion asset sales target for the year and will also eliminate $500 million of equity capital requirement that we had previously included in our funding plan.”

Separately, the Calgary-based firm said it will also sell Midcoast Operating LP to an affiliate of private equity firm ArcLight Capital Partners LLC for about $1.44 billion.

Midcoast operates facilities in Texas and Oklahoma to process and treat natural gas and natural gas liquids.

The sale is an important step in the company’s shift to a pure regulated pipeline and utility model, Monaco said.

Enbridge and CPPIB have agreed to create a joint venture that includes all of its Canadian renewable power assets, as well as the Cedar Point Wind Farm in Colorado and the Silver State North Solar Project in Nevada.

The deal also includes Enbridge’s interests in two German offshore wind projects that are under construction — CPPIB has agreed to fund its share of the remaining costs to complete the projects, estimated at about $500 million.

In a news release, the CPPIB said it is buying a stake in 14 long-term fully contracted operating wind and solar assets in four Canadian markets. With the two plants in the U.S., there is a combined installed capacity of approximately 1.3 gigawatts, it said.

“Since December 2017, CPPIB has committed to wind and solar investments in Brazil, India, Canada, and now the U.S. and Germany,” said Bruce Hogg, managing director and head of power and renewables for the CPPIB.

“Through the joint venture, we will have the opportunity to grow our renewables portfolio across the European offshore wind market. As power demand grows worldwide, we will continue to seek opportunities to expand our power and renewables portfolio globally.”

Enbridge and CPPIB have also signed a deal to form a 50-50 joint venture to pursue future European offshore wind projects.

Enbridge said it will retain its interests in certain other U.S. renewable power assets.

Both the Midcoast and CPPIB transactions are expected to close in the third quarter, subject to regulatory approvals and customary closing conditions.

Hedge fund magnate Daniel Loeb is increasing his bets against a suddenly volatile stock market.

Following a quarter in which his two flagship funds posted losses, the head of Third Point said he is increasing short positions that proved to be profitable during an otherwise rough first quarter.

"An important shift in markets happened in the first quarter," Loeb said Thursday on an earnings conference call for Third Point Reinsurance, which posted a 26 cent per share loss for the first three months of the year.

"Investors have become increasingly concerned about multiples, particularly since after many years of low rates, there finally was an alternative to equities in the form of relatively riskless two-year money," he added.

Indeed, the quarter marked a number of changes, with rising bond yields being one of the biggest market movers.

In the years since the financial crisis, the search for yield had forced most investors into higher than normal stock allocations, fueling a nine-year bull market run that had seen few interruptions. However, major indexes have seen multiple dips into correction territory so far in 2018, and allocations to bonds have been rising as government yields have hit multiyear highs.

Loeb's major funds at Third Point posted losses for the first quarter. The Offshore Fund lost 0.6 percent and the levered Ultra Fund was off 1.5 percent, according to a letter he sent last week to clients.

The firm posted an 18.1 percent return for 2017, which was below the S&P 500's total gain of 21.8 percent.

In addition, he disclosed during the conference call that the reinsurance company's portfolio was off 0.2 percent for the first quarter, actually outperforming the S&P 500, which declined about 0.8 percent.

However, he said an equity short allocation returned 2.4 percent, "and we intend to further increase short exposure to fundamental single names and quantitative-derived baskets in 2018, and less on market hedges to dampen volatility and reduce net exposure."

Stock pickers such as Loeb generally like periods of market volatility as it presents pricing opportunities.

"Looking ahead, we still see S&P growth in the U.S. supported by fiscal stimulus in 2018," he said. "We remain focused on maintaining a portfolio that can deliver compelling risk-adjusted returns across market cycles and will opportunistically adjust the portfolio across expected further waves of volatility."

Loeb said the firm also is watching the economy "to see if a recession, which we don't think is close, might be getting closer."

Let’s run through some fun retirement-savings jargon: DB, for defined benefit, means a traditional pension plan. The monthly payout is defined from the start and guaranteed by the plan sponsor. DC, for defined contribution, is an individual retirement account such as a 401(k). The amount of money you put in is defined by you, and maybe your employer chips in a match. After that, good luck!

A lot has been written in recent years about the drawbacks of both systems. DB plans require providers to take on big, long-term risks, which private employers in the U.S. have generally decided they don’t want to do anymore and some state and local governments have done an awful job of managing. DC plans put all those risks on the shoulders of individual workers and retirees, with predictably mixed results.

It sounds like there ought to be a middle way, right? There is, and it’s being developed mainly outside the U.S.

A name I had previously heard for these middle-way schemes is collective defined contribution, which doesn’t exactly roll off the tongue and has an acronym that in the U.S. has already been claimed by the Centers for Disease Control. The Financial Times called them “target benefit” plans in an article this week on their possible rise in the U.K., but “TB” is already taken, too. So my new favorite term for these plans, which I learned Tuesday from John Kiff of the International Monetary Fund, is “defined ambition.” As Niels Kortleve, innovation manager with the Dutch pension fund manager PGGM, put it in a 2013 article in the now-defunct Rotman International Journal of Pension Management, DA plans usually start out looking a lot like DB plans, with a target benefit based on salary and years of service. Then comes the twist:

The main difference for DA contracts is that when asset value and longevity change, the benefits are adjusted downward in poor times and upward in good times. This should happen through well-communicated preset rules, such that all stakeholders know beforehand what will happen in each situation and how it will affect their contributions and benefits. If life expectancy increases, the retirement age can increase and retirees’ benefits can be adjusted accordingly. In the case of a negative shock in financial markets, the benefits can be lowered.

Dutch pension funds were forced by their regulators to make such adjustments during and after the global financial crisis, although not exactly with “well-communicated preset rules.” The funds mainly just stopped adjusting pension benefits for inflation for a couple of years, although a few also had to make small cuts in nominal benefits. Since then the pension funds and the government have been working on better defining and communicating the rules. (1)

There are a few target-benefit plans in Canada, too, although a bill to encourage their wider use has run into lots of opposition. In the U.K., Royal Mail PLC, which recently froze its DB plan, is looking to shift its many workers to something along the lines of DA. In the U.S., a few union-run multi-employer pensions have moved in recent years to variable defined-benefit plans in which payouts are to some extent dependent on investment returns. But DA is as yet not a big theme here.

Instead, private employers have been moving to take at least a few DC responsibilities off their employees’ hands by automatically deducting money from paychecks (unless the employee opts out) and plunking it into target-date funds, while state and local governments that still offer DB plans have been under lots of pressure to shift workers at least partly to DC. At the national level, Social Security is a DA plan of sorts, but not an optimally designed one. That is, retiree benefits will under current law be reduced to match payroll tax revenue after the Old-Age and Survivors Insurance Trust Fund runs out of money, which is currently projected to happen in 2035, but most people assume Congress will step in and make changes before that.

The advantage of DA over DB is that it’s more sustainable. The advantage of DA over 401(k)-style DC is that pension funds generally achieve higher investment returns than individual retirement accounts. That’s partly because they’re run by professionals, partly because those professionals can make long-run illiquid investments of a sort not available in most 401(k) plans, and partly because the administrative costs are usually much lower. The administrative costs are kept especially low when, as in the case of the major Dutch funds, the pension funds are gigantic member-owned cooperatives. Two researchers for the Dutch central bank found in a 2007 study that “the administrative costs of collective pension schemes offered by pension funds constitute only a fraction of the operating costs of private pension schemes offered by insurers (over the last five years an estimated 4.4% versus 12.9% of the gross contributions).”

In the U.S., the shift to individual DC in the private sector is so far along that it’s hard to imagine how DA plans could gain much of a foothold there. But for troubled state pension funds, and maybe even for Social Security down the road, the idea of building in some flexibility while not giving up on the bulk provision of retirement income seems really sensible.

Defined-benefit pensions are plans where an employer or plan sponsor promises a specified pension amount upon an employee’s retirement. The pension is determined by a formula that is defined and known in advance, and usually based on the employee’s earning history, years of service and a multiplier. The formula typically does not change. Target benefit plans are exactly that – a target -- they provide a general sense of what the final pension amount will be. But that target can move if the pension plan does not perform well.

Most defined-benefit plans have indexation, to ensure retirees’ incomes keep up with inflation. Some plans provide full indexation based on, for example, the Consumer Price Index; other plans may provide a portion of indexing based on the Consumer Price Indexing. Some pension plans have an indexing formula based on average inflation over a set period of time. Target benefit plan indexing is typically conditional on positive plan performance. Further, some plans may have rules or limits on how much of the plan’s money can be used on indexing.

Defined-benefit plans are currently facing a new element of risk – rising costs due to difficult markets and shifting demographics. Target benefit plans may eliminate some of this risk by providing flexibility in the benefits that are paid, and in thereby shifting the risk of making up for shortfalls from the employer to the employees and retirees.

In recent years, it has been difficult to accurately account for defined benefit plans’ performance and make projections on their sustainability. As a result, we’ve seen many companies and governments, particularly in the United States and Europe, run into serious difficulties. Ideally, accounting in target benefit plans is based on contributions made, which is similar in practice to defined-contribution plans – in effect, a “real time” projection of the health of the fund and the benefits that can be paid from it.

Target Benefit Plans 101:

• What are target benefit plans?
• How do target benefit plans differ from defined-benefit pension plans? 
• How do target benefit plans differ from defined-contribution plans?
• What are the risks?
• Honour Your Promise
• What's next?

Every child grows up learning the importance of sharing. It’s also fundamental to the labour movement. Unions bargain with employers to ensure that workers share in the fruits of their labour. This makes for a stronger, stable economy and a fairer society.

Sharing is also at the heart of workplace pensions. Part of the wages and salaries that unions bargain get deferred until retirement, in the form of pensions. When our negotiated pension plans experience funding shortfalls, as they have in the last six years, unions have stepped up and agreed to pay more into the pension fund, even temporarily cutting back on benefit levels. In return, unions expect that employers will live up to their commitments and pay retirees the pensions they’ve earned over a working lifetime – the essence of the defined-benefit (DB) pension deal.

Even as our pensions return to health, however, employers are looking for ways to rid themselves of the cost and headache of pension plans altogether. And the federal government is lending a hand. In April, the federal government announced that it is proposing target-benefit plans or so-called “shared risk” pension plans in the federal private sector, and for Crown corporations.

In fact, so-called “shared risk” plans have nothing to do with sharing. Let’s look at some of the myths around these plans:

Myth 1: “Shared-risk” plans split the risk and rewards between employers and employees.

These plans don’t “share” risk; they dramatically reduce employers’ risk by shifting it onto plan members and pensioners. Employers would enjoy cost-certainty and strict limits on future risk, while plan members face an open-ended risk of benefit cuts, even when retired. Employers converting their existing DB plans would be able to turn promised pension commitments (once a legal obligation that could not be revoked) into fully reducible “target benefits” that may or may not be delivered.

Myth 2: “Shared-risk” plans strike a balance between worker-friendly DB plans and the defined-contribution (DC) plans that employers prefer.

For employers, switching to a “shared-risk” plan brings significant advantages: Employer contributions are capped, no pension guarantees of any kind are made to employees, and no pension liabilities appear on the employer’s financial statements. Plan members, however, experience a massive loss of security: The legal protection for already-earned benefits is taken away, and everything can be reduced, including pension cheques being mailed to retirees.

Myth 3: If benefits are reduced in a “shared-risk” plan, they will only be temporary reductions.

In fact, there is no requirement in a “shared risk” plan that benefit reductions only be temporary. Permanent benefit reductions are indeed a possibility in this model. This means, absurdly, that temporary shortfalls in the plan could lead to permanent reductions in benefits.

Myth 4: The “shared-risk” plan is a hybrid, in which some benefits are guaranteed and some (like inflation protection) are conditional.

Not true. There are no legal benefit guarantees of any kind in “shared risk” plans. All benefits (whether basic pension benefits, or additional benefits like inflation indexing) can be legally reduced without limit.

Myth 5: Unions have embraced the “shared-risk” model.

The vast majority of unions do not support the conversion of DB plans into “shared-risk” plans. Faced with the distinct possibility that their pension plan would be wound up, a small number of New Brunswick bargaining units supported “shared risk” plan conversions for a few severely-underfunded pension plans. By contrast, “shared risk” conversions are now being proposed for healthy and sustainable pension plans, across the country.

The fact of the matter is that the “shared-risk” approach is about one thing: reducing employers’ risk and cost. But Canadians cannot allow the conversation to be restricted to just employers’ costs. We have to talk about adequacy and security of retirement income, and in that respect, we’re not making progress. Access to pensions at work continues to dwindle as a share of the working population, and a growing number of families face a retirement plagued by financial insecurity.

Over 60% of working Canadians have just one pension plan at work: the Canada Pension Plan or the Quebec Pension Plan. These plans are truly shared, paid for equally by employers and employees. The Canadian Labour Congress calls on the federal government to expand the Canada Pension Plan and Quebec Pension Plan. The government’s misguided shared-risk initiative will only further undermine the retirement security of Canadians.

1. World class governance where pension investments are completely separated from government and done in the best interest of all stakeholders; and
2. A shared-risk model which involves inter-generational equity and temporarily reduces benefits (typically, a small adjustment in the cost-of-living adjustment until the plan's funded status is fully restored).

Even if stocks hit a few speed bumps, they are showing signs of renewed strength that could propel the market higher in the summer months.

Instead of talk about stocks bottoming, there's more chatter recently about new highs, as small caps flirt with their former highs and money is jumping in to tech after this spring's washout.

"I think the incremental positive is we broke the string of lower highs that's been in place since January. Our take is the correction that began in January is coming to an end," said Ari Wald, technical analyst with Oppenheimer.

A number of analysts say ignoring the "sell in May" phenomena this year should be a good thing.

"I think you're seeing leadership reassert. Twenty-five percent of the market cap — tech — is now doing better. The fact we've seen small-cap outperformance is reflective of a market that does seemingly want to take on some risk," said Keith Parker, chief U.S. equity strategist with UBS.

Last week, investors "moved back to an old friend: tech," wrote Jefferies analysts. Tech ETFs took in $774 million last week, while the QQQ, representing the Nasdaq 100, pulled in $1.3 billion, the analysts noted. More than $1 billion also poured into small-caps.

Parker also said the market stands to gain going into the summer simply on the sheer power of corporate buybacks. Buyback announcements are up 80 percent this year, and the actual buybacks are up about 50 percent, according to UBS. Corporations should be buying stock back for the next few weeks until the quiet period ahead of earnings in June, he said (click on image).

The market is not without risks, and those things that have been worrying it — trade wars, higher interest rates, geopolitical tensions — have not gone away. Oil prices could become a brake on market gains at some point, but so far stocks have taken a near four-year high in oil prices in stride. But if Middle East tensions set off an oil price spike, that would be a worry for stocks.

Analysts say the fears about trade wars, however, seem to be fading, in part because it appears there will be a new NAFTA agreement.

Also, President Donald Trump appears to have eased his stance toward China, after his weekend tweet on ZTE, and there are now signs the two countries are moving toward a deal that could give the company a reprieve from U.S. sanctions.

The more positive news on trade helped push stocks higher Monday. But the small-cap Russell 2000 ran against the trend, giving back gains after touching an intra-day high of 1,614, just a point below its all-time high. The index closed down 6 at 1,600.

The S&P 500 was higher on Monday by 2 points, at 2,730, and is now up 2.1 percent year-to-date, though 5 percent below its all-time high. Energy led with a 0.6 percent gain on higher oil prices, and technology was flat. In the last month, S&P technology has risen about 6 percent, while energy is up about 8 percent.

Ryan Detrick, LPL Financial senior equity strategist, said the fact that the S&P 500 turned positive for the year during the month of May is a positive signal in itself. He looked back at the 36 times the S&P was positive for the year on a total return basis at some point during the month of May. He found that it ended the year higher, on a total return basis, 35 out of the 36 times.

Detrick said it could be an easy leap for the S&P 500 to reclaim its old high.

"We think it definitely could happen sometime this summer. The small-caps leading is very powerful. The last time we saw something like this with the small-caps breaking away was January 2013 ... that was not the worst time to be bullish over the next six months or so," he said.

He said the market should be able to defy the old adage "sell in May," a warning that comes with concerns that the second part of the year, specifically between May and October, is weaker.

Robert Sluymer, technical analyst at Fundstrat, said the market could see a brief pause or move lower before a summer rally. But he also sees the market getting back to its uptrend after the winter and spring correction.

"I do think the S&P retests its old highs, as we move into Q2 and into Q3. Beyond a near-term pullback, you're going to see large-caps retest their old highs," Sluymer said.

But Wald sees weakness later in the summer after weeks or months of gains. As investors consider the mid-term elections in late summer, stocks could get choppy but resume their move higher later in the year.

"There are some things that could jump in the mix and throw cold water on market sentiment, primarily politics," said Katie Nixon, chief investment officer at Northern Trust's Wealth Management unit. "We're coming up to midterm elections." She said investors could worry that a change in congressional makeup, ending GOP majorities, would also reverse or end some of Trump's market-friendly policies.

"There's some potential noise that could work its way into the system. If you look beyond the summer, we're talking about healthy earnings" as well as a Fed that will not be moving quickly. "That's typically a really good environment for risk assets," said Nixon.

Parker said other positives are that inflation is relatively contained, so the Fed won't be pushed to hike interest rates more rapidly. "Growth is picking up through the third quarter as fiscal stimulus works its way through, and earnings continue to deliver and corporate buying is strong," he said.

He said even with the 23 percent growth in first-quarter earnings, there have not been that many upgrades to the second, third or fourth quarters, even to just reflect the base effect of first-quarter gains, so there could be earnings beats that continue to boost the market.

If gas prices stay roughly where they are now, it'll wipe out about one-third of the extra take home pay coming from the tax cuts this year. https://t.co/0mSuolbvgm

— Lisa Abramowicz (@lisaabramowicz1) May 13, 2018

• I might be wrong, global growth might not be crumbling, just pausing before it reverts back up. I would need to see global PMIs reversing course and heading back up to change my views.
• The yield on the US 10-year could then reach 4% and risk assets, inclding stocks, corporate bonds and commodities will continue ralllying despite the Fed rate hikes. Think back to 1999, the Fed was hiking and stocks kept melting up. I know there is plenty of liquidity out there but strongly doubt this melt-up scenrario will materialize.

The Canada Pension Plan Investment Board posted a net annual return of 11.6 per cent as the end of its fiscal year on March 31, 2018.

Adding $39.4 billion to its overall holdings, the fund now boasts $356.1 billion in assets under management. The increase included a $36.7-billion return after all expenses and $2.7 billion in contributions from Canadian workers.

“While strong annual results are encouraging, we maintain a long-term perspective,” said Mark Machin, president and chief executive officer of the CPPIB, in a news release.

“We fully expect that one year in 10, the value of the fund will drop by at least 12.5 per cent. The long-term investment horizon of the fund means that we are well prepared to withstand short-term market declines in order to maximize long-term returns.”

Results from Canadian public equity were lacklustre compared with the prior year, pulling in a 2.2 per cent return versus 19.2 per cent in 2017. The fund also decreased its holdings in that segment of its portfolio, finishing the 2018 fiscal year with $8.7 billion in Canadian equity and $1.8 billion less than in 2017. Foreign and emerging markets fared better, with returns of 11 per cent and 18.6 per cent, respectively, but still not reaching the 18.9 per cent that each category gained the prior year. The CPPIB increased its holdings in both areas, raising foreign equity by $14.9 billion to reach $103.3 billion and make up 29 per cent of the fund’s overall portfolio. Emerging market equities rose by $8.5 billion to reach $26.4 billion.

Foreign private equity vastly outstripped the fund’s allocation to Canadian private equity, making up 17.3 per cent and 0.3 per cent of its assets, respectively. The former saw a $10.2 billion increase in the last fiscal year. As for returns, foreign and emerging market private equity earned 16 per cent and 19.5 per cent, respectively, compared to 1.8 per cent for its Canadian investments in that asset class.

Marketable bonds saw a 1.6 per cent gain, compared with 2017’s negative return of 0.9 per cent. Non-marketable bonds fared better, posting a 2.7 per cent gain, versus 1.8 per cent last year.

Real estate grew to $46.1 billion in assets. It posted a 9.4 per cent return, up from 8.3 per cent the year before. Infrastructure grew by $4.3 billion to $28.6 billion and pulled in a 15.2 per cent return, a significant increase from the 7.4 per cent it posted in 2017. Other real assets, consisting of natural resources and agriculture investments, saw a negative return of 9.8 per cent, compared with a positive result of 16.8 per cent the year before.

While fund’s credit investments grew to $22.6 billion from $17.6 billion, the segment’s return fell to 6.9 per cent from 13.9 per cent in 2017.

Notably, the board did see higher costs than the prior year, spending $3.2 billion versus $2.8 billion during the 2017 fiscal period. The release noted operating expenses for the fund were 31.5 basis points, falling in line with its five-year average of 31.6. Other costs consisted of $1 billion in management expenses, $709 million in performance fees paid to external managers and $401 million in transaction costs.

The release noted management expenses increased because of the growth in the fund’s assets with external managers, as well as higher performance fees paid to them due to the strong returns they were able to deliver in the past year.

The CPPIB, which manages Canada’s national pension fund and invests on behalf of 20 million Canadians, said it ended the year ended March 31 with net assets of C$356.1 billion ($278.7 billion), compared with C$316.7 billion a year ago.

“Soaring public equity markets through the first nine months of the fiscal year were the primary source of growth. As volatility returned during the fourth quarter, our private holdings proved resilient, adding significant value,” Chief Executive Mark Machin said in a statement.

The fund has diversified internationally, becoming one of the world’s biggest investors in infrastructure and real estate.

It is also a major global investor in equities and bonds, with most of its earnings derived from overseas.

In CPPIB’s annual report, Mr. Machin delved into the challenges of putting the fund’s capital to work in an investment climate of public market volatility, low yields on income-oriented investments and fierce competition for pricey private market assets – all chased by more large institutional investors.

“While recent increased volatility has dampened values a little, assets of most every type remain expensive from a historical perspective,” he wrote in the report. “This not only makes it hard to pick our spots; it elevates the risk of a correlated decline in prices in both public and private markets. In fact, it is generally expected that as the economic cycle in the U.S. in particular – and to some extent in the rest of the world – becomes more mature, then most financial assets are likely to generally underperform.”

For CPPIB, all this means expected lower returns in many assets over the next few years, and more work trying to carve out where it’s most likely to be able to grow investments over the long term. The fund performed 275 global transactions in fiscal 2018, up from 182 in 2017. The fund said 60 of these transactions were valued at more than $300-million each.

CPPIB’s board of directors also recently endorsed CPPIB’s newly developed 2025 strategic direction, which updates the fund’s 2020 plan. Board chairperson Heather Munroe-Blum said this new approach looks at, among other things, “the growing significance of emerging markets to the world economy, and the need to leverage the power of technology and data to position the organization to better drive investment decisions and operational excellence.”

One goal set for 2025 is that the fund will invest up to a third of its assets in emerging markets, with the expectation that these places will account for 47 per cent of global GDP. This would about double the $56.1-billion, or 15.8 per cent of the fund’s total assets, allocated to emerging markets right now – much of that in China.

CPPIB also expects to spend money to improve its technology and data capabilities that it says will lead to better investment decisions, among other things.

Highlights include:

• Net annual return of 11.6%
• Assets increase by $39.4 billion second largest annual growth since inception
• Investment portfolio outperforms benchmark by $5.7 billion after all costs
• Compounded dollar value-added since inception approaching $20 billion
• Operating expenses of 31.5 basis points in line with five-year average of 31.6 bps

TORONTO, May 17, 2018 (GLOBE NEWSWIRE) -- The CPP Fund ended its fiscal year on March 31, 2018, with net assets of $356.1 billion compared to $316.7 billion at the end of fiscal 2017. The $39.4 billion increase in assets consisted of $36.7 billion in net income after all CPPIB costs and $2.7 billion in net Canada Pension Plan (CPP) contributions.

The investment portfolio achieved 10-year and five-year annualized net nominal returns of 8.0% and 12.1%, respectively. For the fiscal year, the investment portfolio returned 11.6% net of all CPPIB costs.

“The Fund reached a new high of $356.1 billion at the end of our fiscal year due to continued strong equity markets,” said Mark Machin, President & Chief Executive Officer, Canada Pension Plan Investment Board (CPPIB). “Soaring public equity markets through the first nine months of the fiscal year were the primary source of growth. As volatility returned during the fourth quarter, our private holdings proved resilient, adding significant value.”

In fiscal 2018, CPPIB continued to prudently execute its long-term investment strategy of seeking value-building growth while also diversifying the CPP Fund across multiple geographies and asset classes. All of CPPIB’s investment departments provided positive returns in the fiscal year.

“Our investment teams continue to execute on diversification,” added Mr. Machin. “Our investment framework actively seeks to manage risk, maintain balance and help contribute to the sustainability of the CPP itself. While we don’t expect every investment department to produce gains in any given year by design, all our departments made strong contributions this fiscal year.”

In the five-year period up to and including fiscal 2018, CPPIB has now contributed $150.1 billion in cumulative net income to the Fund after all CPPIB costs. Since CPPIB’s inception in 1999, it has contributed $215.6 billion on a net basis.

“While strong annual results are encouraging, we maintain a long-term perspective,” added Mr. Machin. “We fully expect that one year in 10, the value of the Fund will drop by at least 12.5%. The long-term investment horizon of the Fund means that we are well prepared to withstand short-term market declines in order to maximize long-term returns.” (click on image)

Long-Term Sustainability

CPPIB’s 10-year annualized net nominal rate of return of 8.0%, or 6.2% on a net real rate of return basis, was above the Chief Actuary’s assumption of an average 3.9% return over the 75-year projection period of his report. The real rate of return is reported net of all CPPIB costs to be consistent with the Chief Actuary’s approach.

“While periodic economic stress affecting global markets will place downward pressure on the Fund, our portfolio is designed to be resilient over longer periods and weather the ups and downs of multiple market cycles,” added Mr. Machin. “Through our investment programs, global footprint and top talent, we are helping to ensure that the CPP will be there for people who aren’t even born yet.”

In the most recent triennial review released in September 2016, the Chief Actuary of Canada reaffirmed that, as at December 31, 2015, the CPP remains sustainable at the current contribution rate of 9.9% throughout the forward-looking 75-year period covered by the actuarial report. The Chief Actuary’s projections are based on the assumption that the Fund’s prospective real rate of return, which takes into account the impact of inflation, will average 3.9% over the 75-year period.

The Chief Actuary’s report confirmed that the Fund’s performance was ahead of projections for the 2013-2015 period as investment income was 248%, or $70 billion, higher than anticipated.

Relative Performance against the Reference Portfolio

CPPIB also measures its performance against a market-based benchmark, the Reference Portfolio, representing a passive portfolio of public market indexes that reflect the level of long-term total risk that we believe is appropriate for the Fund.

In fiscal 2018, the Investment Portfolio’s net return of 11.6% outperformed the Reference Portfolio’s return of 9.8% by 1.8%. The Investment Portfolio’s single-year net dollar value-added return was $5.7 billion above the Reference Portfolio return, after deducting all costs from the Investment Portfolio and CPPIB’s operations.

The Investment Portfolio grows not only through the value added in single years but also through the compounding effect of continuous reinvestment of gains (or losses). We calculate compounded dollar value-added as the total net dollars CPPIB has added to the long-term Investment Portfolio through all sources of active management, above Reference Portfolio returns alone. CPPIB has generated $19.3 billion of compounded dollar value-added, after all costs, since the inception of active management at April 1, 2006.

“Our active management strategy has added nearly $20 billion to the Fund since the start of the active management program in 2006, and created a more resilient portfolio by taking advantage of our comparative advantages,” said Mr. Machin. “Strong relative returns this year is certainly good to see, but we expect significant swings in performance relative to this benchmark in any single year because of our deliberate choice to build a prudently diversified portfolio beyond just public equities and bonds.”

Managing CPPIB Costs

CPPIB is committed to maintaining cost discipline. This fiscal year operating expense ratio is lower than both the fiscal 2016 and 2015 ratios, and remained relatively flat compared to fiscal 2017. Importantly, our focus continues to be creating a global platform that will deliver value-building growth over the long term, after all costs.

To generate the $36.7 billion of net income from operations after all costs, CPPIB incurred costs of $3,192 million for fiscal 2018, compared to $2,834 million for the previous year. CPPIB costs for fiscal 2018 consisted of $1,053 million, or 31.5 basis points, of operating expenses; $1,029 million in management fees and $709 million in performance fees paid to external managers; and $401 million of transaction costs. CPPIB reports on these distinct cost categories, as each is materially different in purpose, substance and variability. We report the net investment income that our investment departments generate after deducting these fees and costs. We then report on total Fund performance net of these fees and costs, as well as CPPIB’s overall operating expenses.

Investment management fees increased primarily due to the strong returns generated by our external managers resulting in higher performance fees paid as well as the continued growth in the level of assets and commitments with external managers.

Transaction costs decreased by $46 million compared to the prior year. Transaction costs vary from year to year as they are directly correlated to the number, size and complexity of our investing activities in any given period.

Portfolio Performance by Asset Class

Portfolio performance by asset class is included in the table below (click on image).

A more detailed breakdown of performance by investment department is included in the CPPIB Annual Report for fiscal 2018, which is available at www.cppib.com.

Asset Mix

We continued to diversify the portfolio by the return-risk characteristics of various assets and countries during fiscal 2018. Canadian assets represented 15.1% of the portfolio, and totalled $54.0 billion. Assets outside of Canada represented 84.9% of the portfolio, and totalled $302.3 billion. (click on image)

Investment Highlights:

Highlights for the year include:

Public Market Investments

• Invested a combined US$391 million in ReNew Power Ventures Pvt. Ltd. (ReNew Power), one of India’s leading clean energy companies with more than 5,600 megawatts of capacity diversified across wind, utility-scale solar and rooftop solar power-producing assets.
• Invested a further €200 million in Elis SA (Elis), a market leader in the industrial laundry, textile rental, and hygiene and well-being industry in Europe and Latin America, to help fund its transformational acquisition of Berendsen. Combined with additional open market purchases, CPPIB’s ownership stake in Elis is now approximately 9%.

Investment Partnerships

• Committed US$380 million to a newly formed fund managed by Enfoca through a direct secondary transaction. The fund will focus on investing in Peruvian mid-market companies. CPPIB led the transaction with Goldman Sachs Asset Management LP’s Vintage Funds as co-lead.
• Invested US$250 million in Meituan-Dianping, China’s largest service-focused e-commerce platform, alongside Tencent, Trustbridge and other investors through a Series C financing. Meituan-Dianping connects more than 280 million annual active buying consumers with more than five million annual active local merchants across 2,800 cities in China.
• Acquired Nord Anglia Education, Inc. (Nord Anglia) alongside Baring Private Equity Asia for US$4.3 billion, including the repayment of debt. Nord Anglia operates more than 45 leading premium international schools globally in 15 countries in Asia, Europe, the Middle East and North America.

Private Investments

• Entered into a partnership agreement with Thomson Reuters for its Financial & Risk (F&R) business as part of a consortium led by Blackstone. Under the partnership agreement, the consortium will, subject to regulatory approvals, own 55% of the equity in a new corporation created to hold the F&R business and Thomson Reuters will retain a 45% equity stake, at an overall valuation of US$20 billion. Thomson Reuters F&R is a world-leading data and financial technology platform.
• Invested approximately £525 million for a 30% stake in BGL Group, a U.K.-based leading digital distributor of insurance and household financial services. BGL Group owns brands including comparethemarket.com, LesFurets.com and BeagleStreet.com.
• Agreed to purchase a portfolio of Spanish non-performing real estate developer loans with a gross book value of approximately €700 million from Banco de Sabadell, S.A.
• Invested US$900 million in the take-private of Calpine Corporation, one of the largest independent power generators in the United States. CPPIB made this investment as part of a consortium comprised of Energy Capital Partners and other investors for US$5.6 billion in cash.

Real Assets

• Signed an agreement with Votorantim Energia, the energy subsidiary of Brazil’s Votorantim Group, to form a new joint venture focusing on investments and developments in the Brazilian power generation sector. The joint venture has initially acquired two operational wind parks in Northeastern Brazil with combined generation capacity of 565 megawatts. As part of the transaction, CPPIB has initially contributed approximately R$ 690 million (C$272 million) in equity. The acquisitions are subject to customary closing conditions and regulatory approvals.
• Partnered with Alpha Investment Partners Limited (Alpha) and Keppel Data Centres Holding Pte. Ltd., for an initial allocation of up to US$350 million alongside the Alpha Data Centre Fund (ADCF), with the option to invest another US$150 million. Launched in 2016 by Alpha, ADCF aims to develop a quality portfolio of data centre assets in key data centre hubs across Asia Pacific and Europe.
• Signed an agreement with Gas Natural Fenosa to acquire a 20% minority equity interest, alongside Allianz Capital Partners (ACP), in Gas Natural Fenosa’s Spanish natural gas distribution business (Nedgia) for €1,500 million. CPPIB will invest €900 million and ACP will invest €600 million. Nedgia is the largest gas distribution network in Spain with more than 5.3 million connection points and serving some 1,100 municipalities.
• Invested US$928 million in in the privatization of Parkway, Inc. (Parkway), a Houston-based real estate investment trust, through the acquisition of the company’s outstanding common shares. Parkway owns one of the largest office portfolios in Houston, totalling approximately 8.7 million square feet across four campuses.

Asset Dispositions:

Highlights for the year include:

Private Investments

• Sold our 18% ownership stake in ista International GmbH, a European heat and water sub-metering company. Net proceeds to CPPIB from the sale were €659 million. CPPIB acquired its ownership interest in 2013.
• Sold our 25% stake in AWAS, a Dublin-based aircraft lessor, to Dubai Aerospace Enterprise. The sale was made alongside Terra Firma. Net proceeds to CPPIB from the sale were US$542 million. CPPIB had been an investor in AWAS since 2006.

Real Assets

• Sold our 50% ownership interest in Constitution Square, an Ottawa office property. Net proceeds to CPPIB from the sale were approximately C$240 million before customary closing adjustments. CPPIB acquired its ownership interest in 2005.

Investment highlights following year end include:

• Signed agreements with Enbridge Inc. and its related entities (Enbridge) to acquire 49% of Enbridge’s interests in select North American onshore renewable power assets, as well as 49% of Enbridge’s interests in two German offshore wind projects, for approximately C$1.75 billion.
• Announced that CPPIB and Allianz Capital Partners (ACP), on behalf of Allianz insurance companies, are acting as anchor investors in the first private infrastructure investment trust in India, known as IndInfravit Trust (IndInfravit). Sponsored by L&T Infrastructure Development Projects Limited, IndInfravit will initially acquire five operational toll roads in India. CPPIB will invest approximately C$200 million for 30% of IndInfravit units.
• Entered into a joint venture partnership with GIC to acquire Kumho Asiana Main Tower, a Grade A office building in Seoul, South Korea, from Kumho Asiana Group, parent of Asiana Airlines, for KRW418 billion (US$380 million). CPPIB and GIC will each own a 50% stake in this landmark property, which is located in Seoul’s Central Business District.
• Acquired a US$400 million interest in a US$3.3 billion A-note secured by a Class-A office building located in the Central Business District of Hong Kong.
• Signed an agreement to acquire a portfolio of six Canadian operating wind and solar power projects from NextEra Energy Partners, LP for C$741 million, inclusive of working capital and subject to customary adjustments. The transaction is subject to customary regulatory approvals and closing conditions.
• Invested an additional INR 9.38 billion (C$185 million) into the Island Star Malls Developers Pvt. Ltd. (ISMDPL), the strategic investment platform it co-owns with The Phoenix Mills Limited (PML). Through this second tranche, CPPIB’s total investments into ISMDPL is now INR 16.62 billion (C$328 million), for a 49% ownership stake.

Corporate Highlights:

• On April 24, 2018, CPPIB announced the following senior executive appointments, effective June 1, 2018:
• John Graham was appointed Senior Managing Director, and will lead the Credit Investments team.
• Suyi Kim was appointed Senior Managing Director & Head of Asia Pacific.
• Deborah Orida was appointed Senior Managing Director & Global Head of Active Equities.
• Poul Winslow was appointed Senior Managing Director & Global Head of Capital Markets and Factor Investing.
• Shane Feeney, Senior Managing Director & Global Head of Private Investments, will become Senior Managing Director & Global Head of Private Equity.
• Following fiscal year end, Scott Lawrence was appointed as Managing Director, Head of Infrastructure. Scott was previously Head of Fundamental Equities and takes over the Infrastructure role following the departure of Cressida Hogg who had led the group since 2014.
• CPPIB Capital Inc. (CPPIB Capital), a wholly owned subsidiary of CPPIB, completed five international debt offerings, totalling US$3.5 billion and €3.0 billion, ranging in tenor from 21 months to 15 years. CPPIB utilizes a conservative amount of short- and medium-term debt as one of several tools to manage our investment operations. Debt issuance gives CPPIB flexibility to fund investments that may not match our contribution cycle. Net proceeds from the private placements will be used by CPPIB for general corporate purposes.

About Canada Pension Plan Investment Board

Canada Pension Plan Investment Board (CPPIB) is a professional investment management organization that invests the funds not needed by the Canada Pension Plan (CPP) to pay current benefits on behalf of 20 million contributors and beneficiaries. In order to build a diversified portfolio of CPP assets, CPPIB invests in public equities, private equities, real estate, infrastructure and fixed income instruments. Headquartered in Toronto, with offices in Hong Kong, London, Luxembourg, Mumbai, New York City, São Paulo and Sydney, CPPIB is governed and managed independently of the Canada Pension Plan and at arm's length from governments. At March 31, 2018, the CPP Fund totalled $356.1 billion. For more information about CPPIB,please visit www.cppib.com or follow us on LinkedIn, Facebook or Twitter.

Disclaimer

Certain statements included in this press release constitute forward-looking statements with respect to CPPIB’s future financial or business performance, strategies or expectations. Forward-looking statements are typically identified by words or phrases such as “trend,” “potential,” “opportunity,” “believe,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “assume,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve,” and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may” and similar expressions. The forward-looking statements are not historical facts but reflect CPPIB's current expectations regarding future results or events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations, including available investment income, intended acquisitions, regulatory and other approvals and general investment conditions. Although CPPIB believes that the assumptions inherent in the forward-looking statements are reasonable, forward-looking statements are not guarantees of future performance and, accordingly, readers are cautioned not to place undue reliance on such statements due to the inherent uncertainty therein. CPPIB does not undertake to publicly update such statements to reflect new information, future events, and changes in circumstances or for any other reason. The information contained on CPPIB’s website is not a part of this press release.

While CPPIB’s focus is firmly set on the long term, we are neither immune from nor indifferent to short-term events impacting global markets and investors. From natural disasters to geopolitical risks, to new federal pension developments with the creation of the additional stream of CPP, fiscal 2018 brought to both Board and Management a number of significant developmental considerations and related activities along with a sustained focus on long-term investment performance.

As our CEO, Mark Machin, completes his second year at the helm of CPPIB, he continues to demonstrate that CPPIB is in strong, capable hands. He leads the enterprise with resolute focus on CPPIB’s mandate and special public purpose, its long-term investment strategy, organizational culture and talent development. With his leadership and an outstanding community of CPPIB colleagues, the organization continues to move forward on a firm course through an important period of development against a global backdrop of some uncertainty.

In addition to overseeing the organization as it embarks on the CPPIB 2025 strategic direction, the Board is also intently focused on the oversight of CPPIB’s preparations for additional CPP contributions, which begin on January 1, 2019.

The additional contributions mean the CPP Fund will grow larger and faster. The Board has been deeply engaged with Management, seeking confidence about how the different risk profiles of the existing and additional parts of the CPP will be managed, how to ensure the best interests of both parts, what operating efficiencies may be achieved and what opportunities might be gained with a larger investment Fund to manage. The Board is engaged with establishing the most appropriate governance framework to ensure CPPIB is well-positioned to manage these additional assets.

“While strong annual results are encouraging, we maintain a long-term perspective,” added Mr. Machin. “We fully expect that one year in 10, the value of the Fund will drop by at least 12.5%. The long-term investment horizon of the Fund means that we are well prepared to withstand short-term market declines in order to maximize long-term returns.” 

Julia La Roche reports, Here's what the biggest hedge funds have been buying and selling:

The stock trades that the biggest hedge fund managers made in the first quarter have been revealed.

Hedge funds of a certain minimum size are required to disclose their long stock holdings in filings to the SEC known as 13-Fs. Of course, the filings only provide a partial picture since they do not show short positions or wagers on commodities and currencies. What’s more is these filings come out 45 days after the end of each quarter, so it’s possible they could have traded in and out of the positions.

Still, it does provide a partial look into where some of the top money managers have been placing money in the stock market.

Facebook gains friends

Facebook’s stock was featured prominently in the news during the first quarter after the Cambridge Analytica data breach scandal came to light and CEO Mark Zuckerberg was grilled on Capitol Hill. Still, many hedge funds grabbed shares of the social network.

Tiger Global, led by Chase Coleman, added 2,545,238 more shares of Facebook (FB). Coleman’s fund is a “Tiger cub,” or a hedge fund that was seeded by legendary hedge fund manager Julian Robertson of Tiger Management.

Billionaire “Tiger cub” Andreas Halvorsen’s Viking Global also loaded up on Facebook during the first quarter, adding 5.5 million more shares, bringing the entire stake north of 9.3 million shares. Fellow “Tiger cub” billionaire Rob Citrone of Discovery Capital also added to his Facebook stake, buying 806,600 more shares, bringing the fund’s position to 1.37 million shares. Citrone’s Discover Capital also bought calls on 2.3 million Facebook shares. Facebook remained the No. 1 position for Viking and Discovery.

Daniel Loeb, the activist hedge fund manager and CEO of Third Point, added another 600,000 shares to his existing Facebook stake, bringing the total position to 4 million shares at the end of the quarter. David Tepper, the founder of Appaloosa, also boosted his Facebook stake, adding 680,559 more shares to last hold just over 6.2 million at the end of the quarter.

Activist hedge fund manager Barry Rosenstein’s JANA Partners sold its entire stake in Facebook, dropping 473,526 shares in the quarter. Billionaire Stanley Druckenmiller’s family-office hedge fund Duquesne Capital sold its entire Facebook stake of 1.08 million shares.

Dropping Apple

Tepper’s Appaloosa and Larry Robbins’s Glenview Capital both exited their Apple (AAPL) stakes in the first quarter. Philippe Laffont’s Coatue sold just over half of its Apple stake during the quarter.

Bloomberg noted that institutional investors abandoned Apple at a rate not seen since 2008.

Meanwhile, Warren Buffett’s Berkshire Hathaway added nearly 75 million shares of Apple during the first quarter, bringing the entire stake to just over 239.5 million shares, a position valued at more than $44.6 billion as of Tuesday’s close.

Out of Amazon and into Alibaba

E-commerce was another area that saw a bunch of moves among the hedge funds.

Discovery Capital ditched all of its Amazon (AMZN) shares during the first quarter. Viking Global also shed most of its Amazon stake, selling 482,469, or about 93% of the position. Viking last held 35,751 shares of the e-commerce giant.

Meanwhile, Viking initiated a new position in Chinese e-commerce giant Alibaba (BABA), snapping up 2.2 million shares. Citrone’s Discovery Capital also boosted its Alibaba stake.

Lee Ainslie, another “Tiger cub and the founder of Maverick Capital, also added to Alibaba.

Loeb’s Third Point trimmed its Alibaba stake, selling 2 million shares to last hold 4 million of the e-commerce giant. Tepper’s Appaloosa also slightly pared back its Alibaba stake. The position remained a top 5 long equity holding for both Loeb and Tepper.

Cutting cable

Cable providers also saw some action. Laffont’s Coatue and Halvorsen’s Viking Global both bailed on Time Warner (TWX), dumping their entire positions during the first quarter. Loeb’s Third Point sold 2 million shares of Time Warner and instead purchased call options on 2 million shares.

Rosenstein’s JANA Partners, Julian Robertson’s Tiger Management, and Tiger Global closed their stakes in Comcast (CMCSA).

Healthcare moves

And lastly, healthcare stocks, which have been in the news frequently during the first quarter, gained favor among the hedge funds.

Billionaire Leon Cooperman’s Omega Advisors and Julian Robertson’s Tiger Management disclosed new positions in UnitedHealth Group (UNH). Rosenstein’s JANA Partners also snapped up a new position in Anthem (ANTM), while Robertson’s Tiger Management trimmed its stake by about half.

Billionaire Larry Robbins, the founder of Glenview Capital, disclosed a new stake in Express Scripts (ESRX). Robbins pitched Express Scripts as a long idea at the Sohn Conference earlier this month while downplaying the threat that Amazon poses to the healthcare industry, specifically the pharmaceutical sector.

Loeb’s Third Point exited its position in health insurer Aetna (AET), selling 1.85 million shares.

Below is a roundup of the biggest funds’ first quarter moves:

Appaloosa Management (David Tepper)
New: Wells Fargo (WFC)
Boosted: Micron Technologies (MU), Facebook (FB), Allergan (AGN)
Exited: Apple (AAPL)

Baupost Group (Seth Klarman)
New: PG&E (PCG), Tesla (TSLA) (PRN)
Boosted: Pioneer Natural Resources (PXD), 21st Century Fox (FOXA)
Trimmed: Amerisource Bergen (ABC)
Exited: Express Scripts (ESRX)

Coatue Management (Philippe Laffont)
New: Micron Technologies (MU), TAL Education (TAL)
Boosted: Twitter (TWTR)
Trimmed: Apple (AAPL), Nvidia (NVDA), Netflix (NFLX), Snap Inc. (SNAP)
Exited: Bank of America (BAC), Time Warner (TWX), Alphabet (GOOGL)

Discovery Capital (Rob Citrone)
New: iShares MSCI Emerging Markets ETF (EEM)
Boosted: Alibaba (BABA), Facebook (FB)
Exited: Amazon(AMZN), Bank of America (BAC)

Duquesne Capital (Stanley Druckenmiller)
New: Micron Technologies, Alibaba, Netflix
Exited: Facebook, Wells Fargo

Glenview Capital (Larry Robbins)
New: Express Scripts (ESRX), FedEx (FDX), Facebook
Trimmed: Anthem
Exited: Apple (AAPL)

JANA Partners (Barry Rosenstein) 
New: Anthem (ANTM), AutoDesk (ADSK)
Boosted: Pinnacle Foods (PF), Jack In The Box (JACK)
Exited: Facebook (FB), Comcast (CMCSA)

Maverick Capital (Lee Ainslie)
New: Mohawk Industries (MHK)
Boosted: Alphabet (GOOG), Alibaba (BABA), Intel, Lowe’s (LOW)
Trimmed: Molson Coors (TAP)

Marcato Capital (Mick McGuire)
New: Univar (UNVR), Astec Industries (ASTE)
Boosted: InterActiveCorp (IAC)
Exited: Sotheby’s (BID)

Omega Advisors (Leon Cooperman)
New: Thermo Fisher (TMO), UnitedHealth
Boosted: United Continental (UAL), Citigroup (C)
Trimmed: Shire (SHPG)
Exited: Zynga (ZNGA)

Pershing Square Capital (Bill Ackman)
New: United Technologies (UTX)
Trimmed: Restaurant Brands (QSR), Mondelez (MDLZ), ADP (ADP), Howard Hughes (HHC)
Exited: Nike (NKE)

Third Point LLC (Daniel Loeb)
New: United Technologies, Wynn Resorts (WYNN)
Boosted: Facebook, TimeWarner (TWX) (CALL)
Exited: Aetna (AET), TimeWarner (TWX)

Tiger Global (Chase Coleman)
New: Twitter (TWTR)
Boosted: Facebook, Netflix (NFLX)
Exited: Comcast (CMCSA), Alphabet (GOOGL) (GOOG)

Tiger Management (Julian Robertson)
New: Royal Caribbean Cruises (RCL) (CALL), UnitedHealth Group (UNH), Workday (WDAY), eBay (EBAY)
Boosted: JPMorgan Chase (JPM)
Trimmed: Anthem (ANTM)
Exited: Comcast (CMCSA), S&P500 SPDR ETF (SPY) (PUT)

Viking Global (Andreas Halvorsen)
New: Alibaba (BABA)
Boosted: Facebook (FB), Wells Fargo (WFC), Anthem
Trimmed: Amazon (AMZN)
Exited: TimeWarner (TWX)

• Market Underestimating Great Earnings?
• Market Worried About Oil and Rates?
• End of Days For Markets?
• Is Global Growth Crumbling?
• Sell in May and Go Away?
• Betting Against the Stock Market?
• Setting Up For a Summer Rally?

The BC Investment Management Corp., one of the country’s largest pension managers, has laid off “about 20” of its investment professionals, a mix of analysts and portfolio managers who largely worked in equities.

The layoffs, most of which took place in February and affected approximately half of the equities group, have according to sources hurt morale at the organization, which manages $135 billion of assets.

“People are very concerned about their jobs,” said one observer.

Part of the problem was the sudden, and seemingly chaotic way in which the layoffs were carried out.

On the day of the layoffs, a source said, emails were sent advising some staff to go to one location and the rest to another, to hear the good or bad news. But some wound up in the wrong room and had to be pulled out and redirected before the news was delivered.

The decision to cut employees was made a few days after the manager’s human resources department issued a note advising assistance was available to those feeling stressed.

For some employees, stress reduction has apparently come from venting their frustration on the website Glassdoor, a job site that contains reviews of employers. “Terminations and re-orgs are now the status quo,” said a recent anonymous post.

The layoffs have left some wondering how replacements will be found given the relative lack of money management talent in Victoria.

BCIMC has stated its plan is to internalize active management on a global basis, and the investment managers needed — who would most likely have to be recruited from Calgary, Toronto or Montreal — may rethink given what’s happened.

“In a nutshell they’ve treated people like dirt,” noted the observer, adding the approach was “different” from that employed by former chief executive Doug Pearce who left in mid-2014. “Doug had a different philosophy, one that was more of a cultural fit with Victoria.”

One pension fund consultant said if such employee cuts were made by a private sector manager, the clients “would have responded and fired the manager. But in bcIMC’s case, the clients are captive.” In all, bcIMC has 31 institutional clients with almost 98 per cent of the assets being either public sector pension funds or from “government bodies.”

“It’s (essentially) part of the government, but has now added this Wall Street mentality. What’s the board doing?” asked the consultant.

The layoffs are the latest in a series of changes that kicked off almost four years back when Gordon Fyfe replaced Pearce as chief executive. Fyfe was the former chief executive of the $90 billion PSP Investments.

Over time, Fyfe has hired a number of former PSP staffers: of the nine members of its executive management team, three came from PSP, five are long-term employees and one came from a fund outside Canada.

“I think they wanted new people, a bit of a housekeeping exercise,” is how the observer described the personnel and structural changes.

The pension fund’s stated goal of becoming “an in-house asset manager that uses sophisticated investment strategies and tools,” has meant a greater allocation to private equity, mortgages, real estate, renewable resources and infrastructure. In 2016 it launched QuadReal, a real estate manager.

For whatever reason, the fund’s three-year plan of internalizing the investment management and cutting ties with external managers has progressed more slowly than expected.

Last fall, Daniel Garant, a former PSP first vice-president, came on board, an arrival that coincided with the departure of Bryan Thomson, senior vice president of public equities.

Garant is now senior vice-president public markets.

We sought comment from bcIMC on staff cuts, severance costs, morale and progress on the plan to internalize investment management.

“I’m respectfully declining your request as BCI does not publicly comment on or discuss personnel matters,” a spokesperson said.

Victoria was only fifth-hottest based on average price -- up 6 percent to $1.2 million from 2016, with a high of $9 million -- behind Paris; Washington; Orange County, California; and San Diego. But the little city of afternoon teas and lush gardens soared when it came to sales volume and speed, which Christie’s weighted more heavily. The number of sales grew by 29 percent from 2016, while the average time to find a buyer was only 32 days, among the fastest turnover anywhere.

Welcomed BCIMC CEO Gordon Fyfe and executives to India this morning. Impressive team. @CanadainIndia @BParrottSTCInd pic.twitter.com/77A2X2nBTw

— Nadir Patel (@nadirypatel) November 24, 2015

I think that Gordon underestimated exactly how small Victoria is.

His predecessor recruited people by telling them that they had to move to Victoria and become part of the community.

When I was approached to join bcIMC, I asked them if I could commute back and forth from Vancouver. The answer was no.

Gordon is breaking that promise (hence, the comment about a Wall Street approach). Funny, he is from Victoria so he should know this. He probably underestimates how badly it will be received.

As finance minister in the last B.C. Liberal government, Mike de Jong relished those briefings with the credit rating agencies where he would be asked “tell us about your pensions.”

The agencies were on the lookout for unfunded liabilities, brought on by politicians granting hefty taxpayer-financed retirement benefits to public sector workers while neglecting to fund those guarantees going forward.

“Happily, that is not the story that we have,” de Jong would tell the analysts. “Our joint custody public sector pension plans are well-managed. They are well-funded and that’s important for people that want to know that the security exists around their retirement future.”

The good news story continues under the current NDP government. When New York-based S&P Global this spring reconfirmed its top-ranked Triple A credit rating for B.C., among the reasons was: “We consider the province’s pension liabilities very manageable and not a risk for B.C.’s finances.”

Here’s Toronto-based DBRS on the same subject: “The province has limited unfunded pension liabilities. As of March 31, these are projected to be $187 million, one-tenth of one per cent of gross domestic product. Unfunded pension liabilities are expected to remain low.”

The most recent edition of the audited financial statements of the province indicate that, far from falling short of obligations, three of the four public pension plans are overfunded.

For the main pension plan for provincial public servants, assets totalled 106 per cent of obligations. The plan for municipal workers weighed in at 104 per cent and the one for college and university employees topped out at 103 per cent.

Only the teachers’ pension plan lagged, with assets matching only 97 per cent of obligations, a shortfall of $372 million. As the plan, like the other three, is joint trusteed, the liability is shared equally between teachers and provincial taxpayers, needing a top up from both.

“The pension story doesn’t attract a lot of attention here in B.C.,” as de Jong noted in one of his briefings near the end of the Liberal term of office, “but it is a very positive one and one that distinguishes us from circumstances that exist in many other jurisdictions around North America.”

While basking in the glory of fiscal responsibility, he ought to have acknowledged the debt to the previous NDP government and the public sector unions. Together in the late 1990s, they engineered the current fully-funded joint trusteeships.

Ironically, the current NDP government was called to account this week over reports that the current plans are significantly invested in the fossil fuel industry.

Holdings include Kinder Morgan, developer of the Trans Mountain pipeline expansion, which the B.C. New Democrats oppose. As noted here recently, the B.C. pensions also have a stake in Cheniere Energy, the U.S.-based rival to B.C.’s hopes of developing a liquefied natural gas industry.

When Premier John Horgan was challenged about his own MLA pension and others in the public sector being partly invested in Kinder Morgan and other fossil fuel companies, he didn’t deny the optics.

“It may raise a few eyebrows,” Horgan conceded to reporters Tuesday. “Often times this looks bizarre to the public.” He also made the point that the plans are managed independently — and managed well — by professionals working for the B.C. Investment Management Corp.

BCIMC is jointly overseen by the unions and government. The unions fill a majority of seats on the seven-member board of directors, which hires the management and shapes the investment policies, so the government could not by itself bring about a change of direction.

There’s been talk of the New Democrats and unions working together to shift toward more progressive investment strategies. However the pension corporation is already active on that score.

“As we believe that companies that manage environmental, social and governance (ESG) matters perform better over the long term, we integrate responsible investing into our approach and processes across all asset classes,” writes CEO Gordon Fyfe in the covering letter to the corporation’s latest report on responsible investing.

Rather than simply divesting as some activists prefer, BCIMC prefers to seek change by engaging directly with companies via its holdings in their shares.

With Rio Tinto and Suncor Energy, BCIMC joined other investors in successfully supporting “proposals that called for additional disclosure relating to the companies’ exposure to climate change risks.” With Anglo American mining, it backed a requirement to report annually on the resiliency of its business model under different climate change scenarios for 2035 and beyond.”

More quixotic was backing a proposal that did not pass, calling on the Potash Corporation of Saskatchewan “to assess its human rights responsibilities related to sourcing phosphate rock from Western Sahara.”

The investment corporation joined others in defeating excessive compensation and bonus schemes at Canadian Pacific Railway, Crescent Point Energy and BP. “Our primary focus is on pay for performance,” to quote the responsible investing report.

BCIMC’s performance in managing $135 billion worth of assets — witness the testimonials of the auditors, the actuaries and the credit rating agencies — has made its executives and managers among the highest paid in the public sector.

All that could change if more politically-active folks in the government and the unions decided to remake the board and its investment strategies.

An activist takeover could also risk returns on investments, which is why it would be wiser to keep the job with the professionals and out of the hands of the politicians.

The California Public Employees’ Retirement System has said it will create a separate entity to make direct private equity investments.

Last week, the $349 billion Sacramento-based pension fund unveiled what it will call CalPERS Direct. Poised to launch in the first half of next year, CalPERS Direct will consist of two funds. One will focus on late-stage investments in technology, life sciences and health care, and the other fund will focus on long-term investments in established companies, CalPERS said in a news release. The pension fund plans to invest about $13 billion a year in private equity deals, with a goal of having 10 percent of its investment portfolio in private equity.

“Our investment team has spent months exploring options in order to design an approach to private equity that takes advantage of our size and brand,” CalPERS chief investment officer Ted Eliopoulos said in a news release. “We believe it will drive stronger private equity returns and help achieve economies of scale over time.”

CalPERS' move to create its own private equity investment vehicle is the latest step in its transition away from hiring outside money managers, as the pension fund looks to cut down its expenses on commissions and fees. CalPERS has already internalized 75 percent of its asset management, with most of that invested in publicly traded assets, Eliopoulos said in an interview on Bloomberg Television.

CalPERS Direct will be governed by a separate, independent board, Eliopoulos said. That structure “allows us to access the talent we need to invest in the private marketplace,” he said on Bloomberg Television.

As a separate entity, CalPERS Direct will be able to pay high enough compensation to bring in top investment talent, Eliopoulos said. If the new private equity managers were CalPERS employees, they would have to be hired under state government pay scales.

Through external fund managers, CalPERS has been investing in private equity since the early 1990s. Over the past 20 years, it's been the pension fund’s highest-returning asset class, with a 10.6 percent annual return, according to CalPERS.

The largest U.S. public pension fund plans to set up two funds managing up to $13 billion to invest directly in leveraged buyouts, it said on Thursday, underscoring how major investors are looking to lessen their dependency on private equity firms.

The decision by the California Public Employees’ Retirement System (CalPERS), which manages $349 billion, follows similar moves by Canadian funds to staff up on direct investment teams in an effort to save money in fees in private equity firms.

Investing directly by leading one’s own deals goes a step beyond what some large pension and sovereign wealth funds have done in recent years, which is to team up with private equity firms to co-invest in corporate takeovers.

“We believe it will drive stronger private equity returns and help achieve economies of scale over time,” CalPERS’ chief investment officer, Ted Eliopoulos, said in a statement.

Private equity firms buy companies with the expectation of selling them a few years down the line for a profit. The industry pulled in a record amount of cash last year as investors turned to the asset class for public-market-beating returns.

However, larger money managers are keen to cut down on paying the fees demanded by firms, which typically collect a roughly 1.5 management fee and a 20 percent cut of any profits.

“The move by CalPERS is part of a broader trend amongst large institutional LPs, led by large Canadian pension, looking to disintermediate traditional fund managers to lower the cost of private equity and venture capital investment,” said James Gelfer, senior analyst at financial data firm PitchBook.

CalPERS Direct, which is expected to begin work in 2019 subject to final board approval and would only invest CalPERS money, would be made up of two funds. The first would target late-stage investments in technology, life sciences and healthcare, and the second on long-term investments in established companies.

CalPERS said its private equity program, which began in the early 1990s, has been the fund’s highest-returning asset class over the last two decades.

CalPERS in February said it lost 4.6 percent in value during the stock market’s tumble earlier this year, highlighting the appeal of private markets.

CalPERS is searching for a manager to run its private equity emerging manager program, said Megan White, spokeswoman for the $355.9 billion pension fund.

CalPERS launched the search in April in which it invited a targeted list of firms to compete, with responses due May 24. Incumbent Grosvenor Capital Management has been invited to rebid. Its contract expires in October. A hiring decision is expected in the fall.

Officials of the Sacramento-based California Public Employees' Retirement System have said they planned to commit up to $500 million in new capital to its private equity emerging manager fund-of-funds program between June 2016 when the plan was announced and 2020. CalPERS launched the program in 2012. Grosvenor manages $300 million.

Charles Asubonten, whose background and experience came into question months after he was hired as the chief financial officer of CalPERS, is no longer with the giant pension fund, the organization acknowledged Monday.

The circumstances of Asubonten's departure from the CalPERS executive ranks are unclear. CalPERS made no announcement that he was leaving, but a spokesman acknowledged that he is "no longer with CalPERS." The spokesman said Asubonten's departure is being treated as a "personnel matter" and therefore no further information would be provided. His place will be taken on an interim basis by Marlene Timberlake D'Adamo, CalPERS' chief compliance officer. D'Adamo also served as interim CFO after the departure of Cheryl Eason in 2016.

CalPERS also declined to discuss the timing of Asubonten's departure. But at the May 15 meeting of the board's finance and administrative committee, at which he had been scheduled to give as many as six presentations, his place was taken by D'Adamo. Asubonten could not be reached Monday for comment.

Asubonten's departure should intensify questions about whether CalPERS management and its board members are up to the task of overseeing a $350-billion retirement and healthcare system serving more than 3 million present and past public employees and their families. The questions apply not only to Asubonten's qualifications, but the process that led to his appointment to a post with responsibilities requiring top-flight management skills and experience.

Treating his departure as a state secret won't quell these doubts. That's especially so given what appears to be CalPERS management's complicity in exaggerating Asubonten's work experience. CalPERS should come clean about the process.

Asubonten was named as CFO of the California Public Employees' Retirement System in September. As we reported last month, questions were raised by the financial blog nakedcapitalism.com about whether he had experience commensurate with the job, amid signs that his resume may have overstated his experience.

Among other issues, Asubonten claimed to have served as "managing director" of a private equity firm before joining CalPERS, an assertion CalPERS repeated in its press release announcing his appointment last year.

But that looked misleading: The "private equity firm" was a consulting firm Asubonten had founded that did no investing of its own. Rather, as Asubonten acknowledged in an interview with The Times, it consulted for investors overseas. Asubonten declined to discuss the scale of those investors. The managing director title appeared to be one he bestowed upon himself.

Nathalie Bernier, our SVP, Strategic and Business Planning and CFO, won the Canadian CFO of the Year Award, a prestigious distinction that recognizes outstanding financial leadership. Congratulations Nathalie! pic.twitter.com/Lss4BrSwHK

— InvestPSP (@InvestPSP) May 18, 2018

Successful hedge fund managers should do something unusual if they want to stay that way: Say no to new investors.

The bigger a hedge fund gets, the worst it tends to perform, according to a new academic study.

Holding other features constant, a 10 percent increase in fund size results­­­ in a decrease of 13 basis points per month (or 1.53 percent per year) in raw returns on average and a decrease of 10 basis points per month (or 1.21 percent per year) in style-adjusted returns, according to the paper from Purdue University.

"A key implication of our findings for investors is that performance persistence is achievable when funds maintain a small size," researchers Chao Gao, Tim Haight and Chengdong Yin wrote. "Fund performance declines with fund age and that declining performance is not significantly related to a variety of fund and family-level characteristics, nor is it significantly related to young funds assuming higher downside risk."

The paper clarifies prior literature that found that hedge fund performance peaks during the first few years of a fund's life, but declines thereafter at an average rate of 42 basis points per year.

The decline in performance, according to the Purdue researchers, appears to be due to managers taking their eye of the ball and focusing more on asset gathering (and the steady fees that come with them) rather than investing.

Other studies hold that historical compensation contracts in the hedge fund industry, such as 2 percent management and 20 percent performance fees, is not effective at aligning managers' incentives with investors' interests.

Yin's 2016 study, for example, demonstrates that the management fee comprises a larger portion of total compensation when funds grow large and thus a fund's optimal size, from a compensation perspective, exceeds the size that is optimal for performance.

The research comes amid an ongoing move by funds to offer more competitive fee structures amid lackluster performance, declining revenues and rapidly evaporating investor patience.

"When funds grow large, fund managers may have less incentive to improve fund performance because most of their compensation comes from the asset-based management fee," the researchers concluded. "Thus, investing in small funds, regardless of age, may provide for superior and sustainable returns."

• No doubt, smaller hedge funds that survive their first year in operation are by definition hungrier for performance and much more focused on performance. Why? Because in order to survive, they need to perform and raise their assets under management to a decent level over the first three years.
• What is the critical threshold for assets under management? It depends on the strategy but some say it's $300 million, some $500 million and some over $1 billion to survive and deal with all the regulatory, compliance and institutional demands.
• Large hedge funds are able to address all these demands. They also have a lot of money to pay their people well which allows them to attract the best talent. So, it's not true that all large hedge funds are lazy asset gatherers who stopped focusing on performance. Many are but there are plenty very much still focused on performance and if they weren't, they'd be out of business. 
• I can also tell you there are A LOT of crappy small funds which is why most investors don't bother with them, preferring to focus on the 'best of breed' large funds which are scalable and offer them peace of mind (if they blow up, less career risk since other large institutions also invested in them).  

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It is a sad fact that only 20 per cent of private-sector workers are covered by pension plans in their workplace. In stark contrast, nearly 100 per cent of public-sector workers are covered. Of course, none of this is news; pension envy among private-sector workers is as Canadian as hockey and Timbits.

What is perhaps more interesting and less well understood is the garbled message the government is sending with the pension programs it provides to its own employees. I will single out the federal Public Service Pension Plan (PSPP), not only because it has more than half a million members, or because it is generous even by public-sector standards, but also because the federal government has the power to effect change in a way that would benefit millions of Canadians.

The classic defence of plans such as the PSPP is that everyone benefits when civil servants can retire in dignity. Besides the obvious advantages for the participants themselves, good government-sponsored pension plans create a benchmark for other employers to emulate.

In the case of the federal government, however, this rationale contains a fatal flaw. The last thing the federal government would ever want is for all private-sector employers to adopt pension plans like the PSPP. The consequences would be disastrous for both the Canadian labour force and for tax revenues.

Consider the labour force first. At present, we have about four workers for every retiree. Fifty years ago, that ratio was 6.6 to 1 and in another 20 years it is forecast to dwindle to just 2.3 to 1. Barring a robotic revolution, we will probably not have enough workers to keep the economy running.

Don’t count on immigration to make up for the looming shortage of workers. It is already running at the highest rate in a century (with the exception of 1956, when the Hungarian refugee crisis occurred); the general public is unlikely to want to see immigration rise much more, even if we had the infrastructure to support it.

A higher birth rate is another possible way to change the worker-to-retiree ratio, but it is not clear what, if anything, would cause the birth rate to rise any time soon. Besides, the impact on the worker-to-retiree ratio would be negligible for at least 30 years.

The inescapable conclusion is that the only viable way to ensure there will be enough workers in the future is to encourage people to keep working longer. Alas, the federal PSPP does just the opposite. The plan’s retirement rules incentivize long-term civil servants to retire as early as age 50. If private-sector employers had maintained similar pension plans all along, the labour force today would have roughly one million fewer workers.

The effect on income-tax revenues if everyone had a PSPP-like pension plan would be equally damaging. A C.D. Howe paper by Malcolm Hamilton estimates that the average Canadian worker contributes about 14.1 per cent of pay toward retirement. (This includes employee and employer contributions to registered retirement savings plans and pension plans but not tax-free savings accounts.) In the case of federal public-sector workers, the contribution rate could exceed 25 per cent in a year when the PSSP has a big deficit. If private-sector workers (and their employers) made tax-deductible contributions at that rate, overall tax revenues would drop by more than $15-billion a year. Clearly, the federal government would never allow this to happen.

The time has, therefore, come to change the federal PSPP to better reflect the public interest. (Or actually, to change it further. Some amendments were made during the Harper era though they did not go nearly far enough.) The plan is a relic from an era during which the country had more potential workers than the economy could absorb but this is no longer the case.

So what should the federal government do to set a good example for private-sector employers? First, it should remove all incentives within the PSPP to retire early. Employees could still retire early, of course, but with the same penalty that applies to all participants in the Canada Pension Plan. Retiring early in comfort may require them to save a little extra in an RRSP and/or a TFSA, the same as what most other Canadians already do.

Second, it should reduce total employee and employer contributions under the PSPP to 18 per cent of pay, including any deficit payments that may have to be made in the future. Even at 18 per cent, the amounts being contributed by, and on behalf of, federal civil servants would still be at the high end of the spectrum.

Of course, these recommendations will not go over well with all stakeholders. No doubt the public-sector unions would strenuously defend the status quo on the basis that PSPP members contribute a high percentage of pay and should be entitled to a generous pension benefit in return. On this point, I would note that over the 12-year period from 2006 to 2017, PSPP contributions by members constituted barely one-third of total contributions (37 per cent to be exact). In most large public-sector plans, member contributions fund 50 per cent of the total pension cost and that includes the cost of paying off any plan deficits that may arise. It is time the federal PSPP fell into line.

The effect of the suggested changes would not be felt immediately since new retirement rules can be applied only to future service. They are, nevertheless, important if the federal government truly wants to set a good pension example for the rest of the country.

I agree that the federal PSPP is, from the taxpayers' perspective, a disgrace and that something should be done about it.

My description of the problem, and how best to solve it, is quite different.

This article fails to point out that the federal government already took measures a few years ago to address the unduly rising cost of the Pension Plan for the Public Service of Canada (PPPSC) mainly by increasing the pensionable age from 60 to 65 for members hired after 2012.

As can be seen in Table 4 on page 9 of the actuarial report on the Pension Plan for the Public Service of Canada (PPPSC) as at March 31, 2014 (http://www.osfi-bsif.gc.ca/Eng/Docs/PSSA2014.pdf), its current service cost is about 17.5% of payroll for the post-2012 hires, shared equally by the members and the government (employer), which is appreciably lower that the about 20.7% cost for pre-2013 hires. This favourably happens to fall below the prescribed fiscal 18% limit above which pension contributions are immediately subject to income taxes.

In other words, the government pays less than 9% of payroll for the post-2012 hires' pensions, which in my view is reasonable considering the important role that pension plans play for the alleviation of seniors' poverty.

I think that you need to add a couple of things.

First, Bernard's description of the changes to the PSPP is quite misleading. Many members hired after 2012, specifically those hired under the age of 30, will be able to retire at the age of 60, not 65 as Bernard contends.

More importantly, only 50% of the cost of the PSPP is covered by contributions. The other 50% is covered by risk-taking. Since taxpayers bear all of this risk, they end up paying much more than Bernard suggests. For this, we can thank defective public sector accounting standards, which allow governments to claim, as does Bernard, that pension plans costing 40% of pay really cost 20% of pay.

In private sector financial statements, this would simply not be tolerated.

US state and local balance sheets have deteriorated significantly since the turn of the millennium and are staring down a nearly $2.5tn deficit - with some very optimistic assumptions - without the "full faith and credit" of the Federal government. pic.twitter.com/a4T319kBsR

— Αarοn Chan (@macrodidact) May 24, 2018

With corporate debt hitting its highest levels since before the financial crisis, Moody's is warning that substantial trouble is ahead for junk bonds when the next downturn hits.

The ratings agency said low interest rates and investor appetite for yield has pushed companies into issuing mounds of debt that offer comparatively low levels of protection for investors. While the near-term outlook for credit is "benign," that won't be the case when economic conditions worsen.

The "prolonged environment of low growth and low interest rates has been a catalyst for striking changes in nonfinancial corporate credit quality," Mariarosa Verde, Moody's senior credit officer, said in a report. "The record number of highly leveraged companies has set the stage for a particularly large wave of defaults when the next period of broad economic stress eventually arrives."

Though the current default rate is just 3 percent for speculative-grade credit, that has been predicated on favorable conditions that may not last.

Since 2009, the level of global nonfinancial companies rated as speculative, or junk, has surged by 58 percent, to the highest ever, with 40 percent rated B1 or lower, the point that Moody's considers "highly speculative," as opposed to "non-investment grade speculative."

In dollar terms, that translates to $3.7 trillion in total junk debt outstanding, $2 trillion of which is in the B1 or lower category.

"Strong investor demand for higher yields continues to allow all but the weakest issuers to avoid default by refinancing maturing debt," Verde wrote. "A number of very weak issuers are living on borrowed time while benign conditions last."

The level of speculative-grade issuance peaked in the U.S. in 2013, at $334.5 billion, according to the Securities Industry and Financial Markets Association. American companies have $8.8 trillion in total outstanding debt, a 49 percent increase since the Great Recession ended in 2009.

During that time, there's been a strong divergence in debt issuance, with investment-grade firms (shown below in the green line) pulling back as a share of total debt issuance, while speculative grade debt (the blue line) has increased.

Credit conditions have been conducive to lower-rated companies going to market, as global central banks have kept rates low and helped keep liquidity flowing through the system.

That's had some positive impacts, as smaller firms with greater access to capital have been able to implement game-changing technologies into multiple industries, particularly energy.

At the same time, higher-rated companies have been issuing debt and using it to reward shareholders with buybacks and dividends. As a result, their debt, while still investment grade, often has fallen a few notches, with the very top of the ladder shrinking from 21 percent pre-crisis to 14 percent currently.

Moody's warned that the trend could result in more "fallen angels," or companies that see their pristine ratings dinged as they continue to roll up debt.

Overall, median debt when compared with EBITDA has risen 30 percent for investment-grade companies and 10 percent for speculative.

"For many speculative-grade issuers, debt capacity may have reached its limit but structural protections continue to weaken," Verde said. "Many of these highly leveraged borrowers have more latitude than at any other time in the past to engage in potentially credit-eroding activities such as asset sales or debt-accretive transactions without needing to get lender consent."

Lower-rated companies have managed to keep their defaults below the historical average even though their credit metrics are "deeply stretched," Verde added.

"This extended period of benign credit conditions has helped many weak, highly leveraged companies to avoid default," she wrote. "These companies are poised to default when credit conditions eventually become more difficult."

Italian bonds have witnessed one of their worst trading weeks since the euro zone sovereign debt crisis, with many traders getting a stark reminder of the volatility that once characterized markets in the region.

On Friday, two-year Italian bond yields rose 35 basis points in one day — almost equivalent to the entire range of the year for U.S. 10-year Treasurys. This was the weakest session in five years and continued a month that's seen these yields rise 70 basis points in total.

Yields move inversely to a bond's price and a spike higher is seen as investors feeling more concerned about lending to Italy's government. More specifically, traders usually sell short-maturity paper when there are growing credit risk concerns at a sovereign level.

The original catalyst for the selling came from the populist parties hoping to take control of Italy after inconclusive elections in March. Lega and the Five Star Movement (M5S) plan to issue short-term bills to finance state activity in their economic policy proposals. Market participants were taken aback and many have interpreted that initiative as laying the foundation for a potential parallel currency in the future, further amplifying the potential new government's collision course with the rest of Europe.

But the fear has not been limited to short-dated paper. Ten-year Italian bonds have also came under pressure with yields topping 2.5 percent and are now trading at their widest gap with German paper in over four years.

There is palpable anxiety in the market as Italy's political future remains uncertain. Over the weekend, M5S and Lega looked to have failed in their bid to form a government after President Sergio Mattarella rejected their pick for economy minister due to his euroskeptic credentials. This has raised the prospect of a caretaker government to lead the country into yet another round of elections later this year.

In Monday's trading session, and with liquidity in markets thin due to the U.S. Memorial Day, Italian two-year yields briefly snapped back 15 basis points tighter before paring all the gains of the day. Traders have pointed to short covering in the market.

However, the relief rally may be short lived. One head of trading at a large fund manager, who preferred to remain anonymous due to the sensitive nature of the situation, told CNBC that a "big unwinding" is beginning for Italian bonds and Monday's pullback would not last long.

Ratings agencies are also beginning to raise alarm bells. On Friday, Moody's hinted that it may look to review Italy's debt rating, citing concerns over the two anti-establishment parties' fiscal plans that could ratchet up spending by as much as 100 billion euros ($117 billion), according to some analysts.

With outstanding debt of more than 2.3 trillion euros and one of the highest levels of debt-to-gross domestic product in the advanced world, Italy's public finances will come under scrutiny again if spending ramps up.

Gene Frieda, a global strategist at Pimco, told CNBC via email that the immediate concern for investors is that another round of elections and the prospect of a right-wing anti-European populist government undermines the economic recovery in Italy.

"(It) threatens further rating downgrades. In that context, even after the recent sell-off, BTPs (Italian bonds) do not look particularly cheap," he said.

On Monday, Matteo Salvini, the leader of the right-wing Lega party, further added to market concerns saying that there is no point staying in the EU if the rules don't change. This has prompted some analysts to believe that if there is another election on the horizon, one that would effectively be a referendum on the euro.

According to Goldman Sachs analysis, the European Central Bank owns around 20 percent of outstanding Italian bonds due to years of quantitative easing, but foreign investors also own about 37 percent.

The question is then, will investors still want to own that risk into what could be a binary event?

While most investors are focused on Italian politics - the parallel currency 'mini-BoT' fears and potential for a constitutional crisis - Spain is now facing its own political crisis amid calls for a no-confidence vote against Rajoy. However,'Spaxit' remains a distant concern for investors as another member of the PIIGS peripheral problems is starting to signal concerns about 'Portugone'?

As Statista's Brigitte van de Pas notes, on average, European Union countries had a gross government debt of roughly 81 percent of GDP in 2018.

This average disguises real differences between EU countries. Whereas Greece had a government debt of 177.8 percent in 2018, Estonia had a debt of only 8.8 percent - the lowest in the entire EU zone.

You will find more infographics at Statista

While the high Greek debt is well-known, a number of other countries however also have a debt that is higher than their own GDP. The Italian debt, for example, is lower than the Greek but still significant, at over 130 percent of GDP.

Portugal, in third place, had a debt of 122.5 percent.

One small positive note though: all three countries had even higher debts in 2017, and the European Commission forecasted a slow, but a further decrease of their government debt in 2019. Whether this holds true for Italy, with their newly-elected government of Movimento 5 Stelle and Lega remains to be seen.

Public Sector Pension Investment Board, one of Canada’s largest and fastest growing pension systems, is doing more direct deals as part of a strategy intended to transform its approach to private equity and infrastructure investing.

Over two-plus years, PSP Investments has deployed billions of dollars to a series of global transactions, shining a light on the characteristically low-profile institution.

One result has been growth in PE co-sponsorships and co-investments to “slightly above” half of portfolio assets today from 40 percent in 2015, Guthrie Stewart, PSP senior vice president and global head of private investments, told PE Hub Canada.

PE investing set a new record in PSP’s fiscal 2017, when outlays totalled $4.8 billion, more than half of them earmarked for direct deals. Stewart says activity in fiscal 2018, about which PSP will report in June, will show the “momentum has continued.”

PSP has been just as aggressive on the infrastructure side, investing $2.6 billion in fiscal 2017, nearly 70 percent of it on a direct basis.

Combined deployments in this period lifted PE and infrastructure assets to more than $27 billion, up 57 percent from two years earlier.

Stewart says these statistics mark a “dramatic shift” since 2015, when he came onboard to overhaul the private-markets operation.

At the time, both asset classes were underallocated. PSP’s goal was to turn things around by “broadening the strategy, taking a more disciplined approach, and achieving more diversification,” Stewart said.

Initiatives included scaling the talent and capabilities of internal personnel, split between PSP’s Montréal headquarters and London office opened last year. Focus was also given to building more external relationships that could add value and “drive direct investments,” Stewart said.

External partners are mostly select PE firms. PSP commits capital to more than 30 general partner teams, a “foundational number” that will likely continue to expand, Stewart said. About a dozen infrastructure firms also secure commitments.

Examples include American Securities, which in March supported PSP’s investment in early childhood educator Learning Care, and Ardian, which in December sold stakes to PSP and Caisse de dépôt et placement du Québec in industrial engineering group Fives, reportedly for US$1.8 billion.

Two others are BC Partners, which in October teamed up with PSP and Ontario Teachers’ Pension Plan in the US$3.1 billion buy of ceramic products supplier CeramTec, and Blackstone, which early last year partnered with PSP and CDPQ in the US$6.1 billion buy of hospital staffing provider Team Health.

Other disclosed examples are Apax Partners, Apollo, Lightyear Capital, MBK, New Mountain Capital, Partners Group and TPG.

Stewart says a linchpin of the new strategy is the ability of PSP’s in-house investment pros — led by Simon Marc, head of private equity, and Patrick Samson, head of infrastructure — to “exercise strong judgement and execute rapidly” when picking partners and opportunities.

“We strive to be as non-institutional as possible, to move at the same speed as our GPs,” he said.

Getting bigger

Doing more direct deals is essential to returns and “rounding out diversification,” as well as being “more deliberate about the assets we add to the portfolio,” Stewart said.

It is also key to generating investment volumes that facilitate PSP’s rapid growth.

PSP is the youngest of Canada’s four largest pension systems, overseeing $139 billion in retirement savings on behalf of federal public employees, including defence and police forces. Its capital pool, fueled both by contribution flows and investment returns, is projected to exceed $200 billion by 2026 and $250 billion by 2029.

Stewart, 61, was recruited to PSP by André Bourbonnais, who was appointed president and CEO in 2015 after running private investments at Canada Pension Plan Investment Board.

Earlier this year, Bourbonnais departed PSP for BlackRock. He was replaced by Neil Cunningham, previously global head of real estate and natural resources.

Stewart’s prior career included serving as a partner at EdgeStone Capital Partners. He also spent 15 years in executive roles in the telecom industry, including as president and CEO of Teleglobe Canada.

[...] in private equity, PSP invests with top funds and pays hefty fees ("2 and 20 is very costly so you need to choose your partners well"), however, they also do a lot of co-investments (where they pay no fees or marginal fees), lowering the overall fees they pay. André said "private equity is very labor intensive" which is why he's not comfortable with purely direct investments, owning 100% of a company (said "it's too many headaches") and prefers investing in top funds where they also co-invest alongside them on larger transactions to lower overall fees (I totally agree with this approach in private equity for all of Canada's mighty PE investors). But he said to do a lot of co-investments to lower overall fees, you need to hire the right people who monitor external PE funds and can analyze co-investment deals quickly to see if they are worth investing in (sometimes they're not). He gave the example of a $300 million investment with BC Partners which led to $700 million in co-investments, lowering the overall fees (that is fantastic and exactly the right approach).

1. Purely direct: This is where the pension sources its own deal and invests 100% in a private company, taking it over to improve its operations over time and selling it for multiples of what it bought it for. These purely direct deals are extremely rare because most pensions don't want the headaches that come with owning 100% of a company. Also, pensions can’t compete with private equity giants on the very best deals all over the world.
2. Co-investments: This is a form of direct investing because pensions pay no fees to co-invest alongside GPs on larger transactions but in order to gain access to these co-investments, the pension needs to pay fees to the GP's traditional private equity funds (typically 2% management fee on committed capital which declines as the fund's life progresses and 20% carry or performance fee). The GPs are happy because they still get their juicy fees and the LPs (limited partners or investors) are happy because they get to co-invest with their GPs on large transactions to lower overall fees and scale up their private equity portfolio.
3. Bids on companies when fund's life ends: Yet another form of direct investing is an auction that can take place when a PE fund's life nears its end and the GP wants to auction off some portfolio companies. If the LP is interested in carrying this company longer in its books (remember, pensions have a longer investment horizon than PE funds), then it is invited to bid on a portfolio company.

The Caisse de dépôt et placement du Québec and the Ontario Teachers’ Pension Plan are part of a consortium of investors acquiring global energy service provider Techem GmbH.

Joined by private equity firm Partners Group and Techem’s management team, the consortium is buying the Germany-based company from Macquarie European Infrastructure Fund 2, which acquired it in 2008. The transaction, which is expected to close in the third quarter of 2018, values Techem at 4.6 billion euros, according to a press release.

“Energy efficiency, which is at the centre of Techem’s offering, is key to building a sustainable future,” said Stéphane Etroy, executive vice-president and head of private equity at the Caisse, in the release. “Given CDPQ’s desire to support the transition to a low-carbon economy, investing in Techem is a very attractive opportunity for us. Techem’s business model positions it to benefit from growing urbanization and demand for housing energy efficiency over the long term. We are confident that together with Techem’s solid management team, Partners Group and Ontario Teachers’, the company will continue on its path of success.”

Techem’s energy business provides services and devices for the metering and billing of energy and water, plus device sales, rental and maintenance. In addition, it delivers heat, cooling, flow energy and light, as well as the planning, set-up, financing and operation of energy systems and energy monitoring and controlling services.

Following the acquisition’s close, the consortium will work with Techem’s management team to support the company’s development in existing markets and expand its presence geographically.

“Techem is a well-positioned business that looks set for continued domestic and international growth,” said Jo Taylor, senior managing director, international at Ontario Teachers’. “It serves the growing, global need for energy conservation and empowers users in multi-occupancy properties to have greater control over their own energy consumption by providing accurate billing.

“Ontario Teachers’ has a strong track record in the energy and infrastructure sectors, as well as significant experience in the sub-metering space and we are delighted to partner with Techem’s innovative management team and with Partners Group and CDPQ.”

Partners Group, the global private markets investment manager, is leading a consortium of investors in the acquisition of Techem GmbH ("Techem" or "the Company"), a global market leader in the provision of heat and water sub-metering services. Partners Group, which will invest on behalf of its private equity and infrastructure clients, will be joined in the acquisition by Caisse de dépôt et placement du Québec ("CDPQ") and Ontario Teachers' Pension Plan ("Ontario Teachers'") as well as Techem's management team. The consortium is acquiring Techem from Macquarie European Infrastructure Fund 2, which acquired 100% of the Company in 2008. The transaction, which is expected to close in the third quarter of 2018, values Techem at an enterprise value of EUR 4.6 billion.

Founded in 1952 and headquartered in Eschborn, Germany, Techem caters to a global client base of real estate operators and private home owners from its 150 branches in more than 20 countries. Its principal Energy Services business provides services and devices for the metering and billing of energy and water, plus device sales, hire and maintenance. In addition, its Energy Contracting business delivers heat, cooling, flow energy and light, as well as the planning, set-up, financing and operation of energy systems and energy monitoring and controlling services. Techem is the market leader in Germany, the largest sub-metering market in the world, as well as in an additional 13 European markets. Techem solutions today account for 6.9 million tons of emission savings in CO2 per year, thus contributing to the ambitious global climate protection objectives. In the 2016/17 financial year, Techem's 3,640 employees serviced 11 million apartments worldwide, recording sales of EUR 782.7 million.

Following the close of the acquisition, Partners Group together with CDPQ and Ontario Teachers' will work with Techem's management team, led by Frank Hyldmar, to support the development of the Company in existing markets and expand the Company’s presence geographically. One value creation initiative will focus on the introduction of new technologies to Techem's strong, existing platform and installed base to enhance the customer experience. There will also be a continued focus on customer services and quality excellence programs as the Company grows.

Frank Hyldmar, CEO of Techem, comments: "A decade after delisting from the Frankfurt Stock Exchange, Techem can show a solid track record of growth. However, even with our market-leading position today, we believe there is plenty of future growth potential for our Company and look forward to working with Partners Group, an experienced private equity and infrastructure investor, as well as its strategic partners CDPQ and Ontario Teachers', to realize our ambitions and deliver an exceptional service to our customers around the world."

Jürgen Diegruber, Partner, Private Equity Europe, Partners Group, adds: "Techem is a market leader in a highly-regulated industry with high barriers to entry and strong tailwinds. With increasing global awareness of energy usage, Techem's products and services are a key element of the fight against energy waste, enabling heating and energy supplies to be managed in a more precise and sustainable manner. We look forward to working with Frank Hyldmar and his talented team, as well as with our partners CDPQ and Ontario Teachers', to expand Techem's market-leading position."

Stéphane Etroy, Executive Vice-President and Head of Private Equity, CDPQ, says: "Energy efficiency, which is at the center of Techem's offering, is key to building a sustainable future. Given CDPQ's desire to support the transition to a low-carbon economy, investing in Techem is a very attractive opportunity for us. Techem’s business model positions it to benefit from growing urbanization and demand for housing energy efficiency, over the long term. We are confident that together with Techem's solid management team, Partners Group, and Ontario Teachers', the company will continue on its path of success."

Jo Taylor, Senior Managing Director International, Ontario Teachers', comments: "Techem is a well-positioned business that looks set for continued domestic and international growth. It serves the growing, global need for energy conservation and empowers users in multi-occupancy properties to have greater control over their own energy consumption by providing accurate billing. Ontario Teachers' has a strong track record in the energy and infrastructure sectors, as well as significant experience in the sub-metering space and we are delighted to partner with Techem’s innovative management team and with Partners Group and CDPQ."

About Partners Group

Partners Group is a global private markets investment management firm with over EUR 62 billion (USD 74 billion) in investment programs under management in private equity, private real estate, private infrastructure and private debt. The firm manages a broad range of customized portfolios for an international clientele of institutional investors. Partners Group is headquartered in Zug, Switzerland and has offices in Denver, Houston, New York, São Paulo, London, Guernsey, Paris, Luxembourg, Milan, Munich, Dubai, Mumbai, Singapore, Manila, Shanghai, Seoul, Tokyo and Sydney. The firm employs over 1,000 people and is listed on the SIX Swiss Exchange (symbol: PGHN) with a major ownership by its partners and employees. www.partnersgroup.com

About Caisse de dépôt et placement du Québec

Caisse de dépôt et placement du Québec (CDPQ) is a long-term institutional investor that manages funds primarily for public and parapublic pension and insurance plans. As at December 31, 2017, it held $298.5 billion in net assets. As one of Canada's leading institutional fund managers, CDPQ invests globally in major financial markets, private equity, infrastructure, real estate and private debt. For more information, visit cdpq.com, follow us on Twitter @LaCDPQ or consult our Facebook or LinkedIn pages.

About Ontario Teachers'

The Ontario Teachers' Pension Plan (Ontario Teachers') is Canada's largest single-profession pension plan, with $189.5 billion in net assets at December 31, 2017. It holds a diverse global portfolio of assets, approximately 80% of which is managed in-house, and has earned an average annualized rate of return of 9.9% since the plan's founding in 1990. Ontario Teachers' is an independent organization headquartered in Toronto. Its Asia-Pacific region office is located in Hong Kong and its Europe, Middle East & Africa region office is in London. The defined-benefit plan, which is fully funded, invests and administers the pensions of the province of Ontario's 323,000 active and retired teachers. For more information, visit otpp.com and follow us on Twitter @OtppInfo.

Canada’s biggest public pension funds could be long-term buyers of Kinder Morgan Canada Ltd’s Trans Mountain pipeline but are unlikely to invest until the $7.4 billion project has been built, several pension fund sources said on Tuesday.

The Canadian government said on Tuesday it will buy the Trans Mountain assets for $4.5 billion, hoping to salvage a project that faces formidable political and environmental opposition. The pipeline is intended to move Canadian crude to ports in the Vancouver area for shipment to foreign markets.

Although the federal government has taken stakes in other struggling energy projects, Tuesday’s announcement marked the first time it is being an entire pipeline, and Ottawa said it does not want to hold the asset for the long term.

Frank McKenna, Toronto-Dominion Bank’s deputy chairman and a former New Brunswick premier, said he expected pension funds and private equity players to be interested in the asset as well as other pipeline or infrastructure players.

“I think there will be a lot of private sector interest in this project once the political risk is taken out of it. These are very desirable assets. They pay good economic rents and they’re long-life assets,” he said. TD is the biggest lender to the project.

The Canada Pension Plan Investment Board, Canada’s biggest public pension plan, said on Tuesday it was “not actively assessing an investment in the extension opportunity.”

The Canadian government could bring in partners to help finance the expansion, according to pension fund sources. However, it is unlikely to do so through its Infrastructure Bank, set up last year to facilitate public-private partnerships but not yet operational, they said.

Canadian pension funds have a long-held preference for buying assets that are already built rather than those with construction risks, and the reputational risk associated with the project could also be a turnoff.

With that in mind, pension fund sources said the federal government may have to hold the asset for a number of years to eventually attract the best price and give it the best chance to recover money for taxpayers, or even make a profit.

Caisse de depot et placement du Quebec, Canada’s second biggest public pension and Kinder Morgan Canada’s biggest independent shareholder, has shown the most appetite for financing the construction of new infrastructure among Canada’s biggest pension plans. It declined to comment.

Ontario Teachers Pension Plan, Canada’s third biggest public pension fund, did not immediately comment.

So now Justin Trudeau owns a pipeline. Who will take it off his hands remains an open question.

Canada said Tuesday it would buy Kinder Morgan Inc.’s Trans Mountain pipeline, with its expansion project and shipping terminal, for $3.5 billion before eventually selling the project to a new buyer. Finance Minister Bill Morneau, speaking Tuesday in Ottawa, said it was too soon to say if Canada would sell in the short or medium term, but didn’t want to hold the project in the long term.

Finding a buyer for Trans Mountain could be tricky amid ardent opposition from British Columbia, the Pacific Coast province it crosses, along with environmental and some indigenous groups. That opposition was enough to make Kinder throw up its hands and halt construction last month. Even as Morneau struck an upbeat tone on the potential pool of buyers, he didn’t give a specific time frame for a deal.

“Many investors have already expressed interest in the project, including Indigenous groups, Canadian pension funds, and others,” he said.

One analyst floated another potential home: Kinder Morgan itself.

Canada’s purchase may “‘be a vehicle to indemnify the project against regulatory risk,” Katie Bays, an analyst with Height Securities LLC in Washington, said in a telephone interview. “Once the construction is complete or once regulatory risk evaporates, whichever comes first, the project could be repurchased by Kinder Morgan.”

Kinder Morgan Canada, the unit that raised C$1.75 billion (US$1.3 billion) for the project in an initial public offering last year, declined to comment on the speculation.

PRIVATE EQUITY

If Kinder doesn’t want it back, some investors have shown interest in the project in the past.

Before deciding on taking the Canadian unit public, Houston-based Kinder Morgan ran a dual-track process that also entailed exploring a joint venture of the pipeline project. That possibility attracted interest from U.S. private equity firm ArcLight Capital Partners and Australia’s IFM Investors Pty Ltd., people familiar with the matter said at the time.

Brookfield Asset Management Inc., which was said to be another bidder on the joint venture and eventually became one of Kinder Morgan Canada’s largest investors, could be a potential partner in Trans Mountain now. The Toronto-based alternative-asset manager already has a joint venture with Kinder Morgan, Natural Gas Pipeline Company of America, through its publicly traded Brookfield Infrastructure Partners. A representative declined to comment.

Among pension funds, the Ontario Municipal Employees Retirement System and the Alberta Investment Management Corp. could also be interested in the project. OMERS’ infrastructure arm is invested in several pipeline assets, including the Czech Republic’s NET4GAS sro, CLH Pipeline System in the U.K. and Spain, as well as the U.K.’s Scotia Gas Networks.

MIDSTREAM VETERAN

OMERS also appointed Michael Ryder as the senior managing director of its infrastructure unit, OMERS Infrastructure. Ryder joined in January from U.S. private equity giant Blackstone Group LP, where he was responsible for leading the firm’s midstream energy and oilfield services investment strategy. A representative for the fund declined to comment.

AIMCo, as the Alberta fund is known, is supportive of measures to boost investor confidence and address market uncertainty, Denes Nemeth, a spokesman for the fund, said in an email, while declining to comment on whether AIMCo would be interested in investing in the project.

Canada Pension Plan Investment Board, the country’s largest pension fund, said in an emailed statement it was not “actively assessing an investment in the extension opportunity."

LARGEST INVESTOR

Meanwhile, Caisse de Depot et Placement du Quebec, Canada’s second-largest pension fund, last month disclosed holdings of 10.2 million shares in Kinder Morgan Canada, making it the largest investor outside of its parent company. A spokesman declined to comment on whether the Caisse would consider an investment in the Trans Mountain pipeline Tuesday.

Caisse Chief Executive Officer Michael Sabia told reporters last week in Montreal that the Kinder Morgan investment was made prior to the pension fund announcing a new strategy in October to reduce its holdings in carbon-intensive industries in favor of renewable energy. He said last week that the Kinder Morgan Canada investment, along with all future investments, would be reviewed in light of the new policy.

After Kinder said it was halting work on the project until it had more certainty, the province of Alberta was named as a potential buyer for all or part of the project. Premier Rachel Notley said at the time that the province would consider all options for ensuring the project was built. “At this point, we don’t think that’s necessary,” she said Tuesday.

OTHER PROJECTS

Canada’s other major pipeline operators are not seen as likely to enter the fray, either. Enbridge Inc. and TransCanada Corp., both based in Calgary, already operate major pipelines that carry oil-sands crude, and both are enmeshed in their own major projects. TransCanada’s proposed Keystone XL pipeline has battled delays for roughly a decade, and Enbridge’s Line 3 replacement and expansion still hinges on a critical regulatory ruling in Minnesota.

TransCanada spokesman Grady Semmens said in an e-mailed statement that the company isn’t involved in discussions about the Trans Mountain pipeline, and that it won’t comment further about speculation on the project. Suzanne Wilton, a spokeswoman for Enbridge, said the company is focused on its C$22 billion growth program and would not speculate on the project.

BAD TIMING

The time is not right for either company to take on a project like Trans Mountain, said Laura Lau, who helps manage C$1.5 billion in assets, including shares of TransCanada and Enbridge, at Brompton Corp. in Toronto. Enbridge has been selling assets to help whittle down debt it took on in last year’s purchase of Spectra Energy Corp. TransCanada would be more able to buy it, but the company had its credit rating cut by Standard & Poor’s earlier this month, she said.

The purchase also would distract and draw resources away from their current projects, which Lau said she’s optimistic will go through.

“If they buy Trans Mountain, they have to not do something else,” Lau said in an interview. “There’s only so much money to go around.”

On behalf of the Board of Directors, Janice Fukakusa, Chair of Canada Infrastructure Bank, today welcomed Pierre Lavallée as the organization’s incoming President and Chief Executive Officer (CEO), effective June 18, 2018.

As CEO, Mr. Lavallée will lead Canada Infrastructure Bank’s strategy and day-to-day operations, and report to the board.

Over the last six years, he has held various roles at Canada Pension Plan Investment Board (CPPIB), most recently Senior Managing Director & Global Head of Investment Partnerships, where he led a team managing approximately $94 billion of assets. Prior to joining CPPIB, Mr. Lavallée was Executive Vice-President at Montreal-based Reitmans (Canada) Limited and a Partner with Bain & Co., where he worked for more than 18 years, including several years as Managing Partner for Canada. In addition, he has previous international trade experience in Ottawa and Japan.

“With an exceptional combination of investment and public-sector expertise, Pierre is well placed to set the strategic course and direction of Canada Infrastructure Bank and develop a high-performing management team,” said Ms. Fukakusa.

“I am excited to build a team and start working with the board, private and institutional investors and public-sector proponents on innovative transactions to develop new infrastructure projects for Canadians,” said Mr. Lavallée.

As announced earlier, Canada Infrastructure Bank appointed Annie Ropar to the position of Chief Financial Officer and Chief Administrative Officer, effective June 1, 2018.

With the appointment of these key leaders, Canada Infrastructure Bank is building the expert team, systems and processes needed to make investments, advise governments across Canada on revenue-generating infrastructure projects, and collect and share infrastructure data to enable more effective decision-making.

Bruno Guilmette, who has been serving as interim Chief Investment Officer, will return to the board on June 1, 2018 and will continue working with the incoming Chief Executive Officer during the leadership transition. Mr. Guilmette was appointed to the board of directors in November 2017 and stepped down temporarily while serving as interim CIO.

“I wish to sincerely thank Bruno for his leadership in building up the investment and advisory capabilities of Canada Infrastructure Bank,” said Ms. Fukakusa. “He has set a solid foundation for further advancing the bank’s internal capacity for its investing, advisory and data roles.”

About Canada Infrastructure Bank

Canada Infrastructure Bank uses federal support to attract private sector and institutional investment to new revenue-generating infrastructure projects that are in the public interest. By engaging the expertise and capital of the private sector, the Bank will help provide more infrastructure for Canadians. www.canadainfrastructurebank.ca/

In the face of persistent fears that the world could be facing a trade war and a synchronized slowdown, the U.S. economy enters June with a good deal of momentum.

Friday's data provided convincing evidence that domestic growth remains intact even if other developed economies are slowing. A better-than-expected nonfarm payrolls report coupled with a convincing uptick in manufacturing and construction activity showed that the second-half approaches with a tailwind blowing.

"The fundamentals all look very solid right now," said Gus Faucher, chief economist at PNC. "You've got job growth and wage gains that are supporting consumer spending, and tax cuts as well. There's a little bit of a drag from higher energy prices, but the positives far outweigh that. Business incentives are in good shape."

The day started off with the payrolls report showing a gain of 223,000 in May, well above market expectations of 188,000, and the unemployment rate hitting an 18-year low of 3.8 percent.

Then, the ISM Manufacturing Index registered a 58.7 reading — representing the percentage of businesses that report expanding conditions — that also topped Wall Street estimates. Finally, the construction spending report showed a monthly gain of 1.8 percent, a full point higher than expectations.

Put together, the data helped fuel expectations that first-quarter growth of 2.2 percent will be the low-water point of 2018.

"May's rebound in jobs together with yesterday's report of solid income growth and the rise in consumer confidence points to the economy functioning very well," National Retail Federation chief economist Jack Kleinhenz said in a statement. "Solid fundamentals in the job market are encouraging for retail spending, as employment gains generate additional income for consumers and consequently increase spending."

The most recent slate of widely followed barometers could see economists ratchet up growth expectations.

Already, the Atlanta Fed's GDPNow tracker sees the second quarter rising by 4.8 percent. While the measure also was strongly optimistic on the first quarter as well, at one point estimating 5.4 percent growth, other gauges are positive as well. CNBC's Rapid Update, for instance, puts the April-to-June period at 3.6 percent.

Andrew Hunter, U.S. economist at Capital Economics, said the ISM number alone is consistent with GDP growth of better than 4 percent, though he thinks the second quarter will be in the 3 percent to 3.5 percent range.

"With global growth set to hold up fairly well in the near term, this suggests that manufacturing activity should continue to expand at a solid pace," Hunter said in a note. "That said, if the Trump administration continues to pursue protectionist policies and provoke retaliation from other countries, the export-focused manufacturing sector would be most exposed."

Indeed, there are a spate of headwinds still out there, and trade continues to top the list.

The White House's decision this week to forge ahead with steel and aluminum tariffs stoked fears that the administration could be its own worst enemy on the road to 3 percent-plus growth. While the tariffs themselves are expected to have minimal economic impact on their own, fears remain that they could spark retaliatory measures and, ultimately, an all out trade war.

Exports make up just 12.4 percent of the U.S. economy, but S&P 500 companies generate about 43 percent of their sales internationally. That's why markets tend to recoil every time the administration saber-rattles about tariffs.

Still, manufacturers remain largely upbeat.

Respondents to the ISM survey released Friday relayed mostly positive sentiments. One typical statement, from an unidentified transportation equipment firm, said, "We are currently overselling our forecast and don't see an end to the upswing in business," while noting that "we are very concerned" about the tariff situation and "are focusing on alternatives to Chinese sourcing."

Others noted price pressures, while an index that tracks order backlogs hit its highest level since April 2004. The pricing index also registered its highest since April 2011, as firms noted that inflationary pressures are building heading into the second half.

That's consistent with news out of the trucking industry, which is reporting a shortage of drivers amid huge demand for delivery vehicles.

While inflation could prompt more aggressive action in the form of Federal Reserve interest rate hikes, PNC's Faucher sees an economy resilient enough to withstand that and other headwinds.

"The tight labor market is going to lead businesses to invest in capital that makes their workers more productive. Then you've got stronger government spending with the increase in discretionary spending caps," he said. "I think we'll see growth better than 3 percent in the final three quarters of the year."

A quick look at the five most important numbers from Friday's nonfarm payrolls report:

1) Payroll growth hit 223,000 for May, its highest level since February, beating market expectations for 188,000.

2) The headline unemployment rate fell to 3.8 percent, the lowest reading since April 2000, while the "real" rate, which includes discouraged workers and the underemployed, dropped to 7.6 percent, its best since May 2001.

3) Average hourly earnings rose 2.7 percent, in line with expectations and enough to convince markets that the Fed will raise interest rates at least two more times in 2018.

4) Full-time jobs rose an eye-popping 904,000 for the month, while part-time positions declined by 625,000.

5) Unemployment for blacks continues to decline, with the rate falling to a record 5.9 percent, down a full point from March.

What it all means: From Eric Winograd, U.S. economist at AB (formerly AllianceBernstein): "We remain in a virtuous circle: the labor market is strong, which supports consumption, which drives production, which keeps the labor market strong. Until something disrupts that cycle, we should expect the good economic times to continue."

The US unemployment rate, released today, is 3.8%. This rate ties the lowest rate observed over the last 48 years! There was one print of 3.8% in April of 2000 and today’s. No number has been lower since late 1969.

Intuitively, this is good economic news as very few people in the labor force are wanting of a job, but empirically, the last time unemployment was this low was directly ahead of the end of the then 10yr-long economic expansion. As we have previously shown here, low unemployment numbers are a late-cycle indicator.

It is interesting to examine the time surrounding the last time we saw a 3.8% unemployment number; here is what happened. The 10yr US Treasury rose by 10.5 basis points in the two trading days after the number’s release, but amazingly, that high yield print of 6.57% on 5/8/2000 has never since been seen; rates have only been lower since. Two weeks after this number was released, the Federal Reserve raised rates for the last time in that cycle, from 6% to 6.5%

Within one month of that number, the 10yr had fallen 31 basis points, within 3 months had fallen 56 basis points, within a year had fallen 128 basis points, and in 3 years had fallen 255 basis points. The US was in recession in 10 months from the number. The US stock markets made their cycle peak two months before this number in March. While the S&P 500 would later re-test the highs in September of that year, the Nasdaq was in free-fall throughout this period. From peak to trough, the S&P 500 fell 49% and the Nasdaq fell 78%.

With a comparison this specific, it is dangerous to expect the same outcomes in the same amount of time, but if one is looking for another sign to indicate the end of the stock bull market and the beginning of the US Treasury bull market, this is a good one.

I recently wrote about a looming credit crisis that’s stemming from high-yield junk bonds. The crisis itself will have massive consequences for investors. But that’s not the worst part.

The crisis will create a domino effect and trigger global financial contagion, which I usually refer to as "The Great Reset."

The collapse of high-yield bonds will hit stocks and bonds. Rising defaults will force banks to reduce their lending exposure, drying up capital for previously creditworthy businesses.

This will put pressure on earnings and reduce economic activity. A recession will follow.

Global Recession

This will not be just a U.S. headache, either. It will surely spill over into Europe (and may even start there) and then into the rest of the world. The U.S. and/or European recession will become a global recession, as happened in 2008.

Europe has its own set of economic woes and multiple potential triggers. It is quite possible Europe will be in recession before the ECB finishes this tightening cycle.

As always, a U.S. recession will spark higher federal spending and reduce tax revenue. So I expect the on-budget deficit to quickly reach $2 trillion or more. Within four years of the recession’s onset, total government debt will be at least $30 trillion.

This will further constrain the private capital markets and likely raise tax burdens for everyone—not just the rich.

Political Backlash

Meanwhile, job automation will intensify, with businesses desperate to cut costs. The effect we already see on labor markets will double or triple. Worse, it will start reaching deep into the service sector. The technology is improving fast.

The working-class population will not like this and it has the power to vote. “Safety net” programs and unemployment benefit expenditures will skyrocket.

Studies show that the ratio of workers covered by unemployment insurance is at its lowest level in 45 years. What happens when millions of freelancers lose their incomes?

The likely outcome is a populist backlash that installs a Democratic Congress and president. They will then raise taxes on the “rich” and roll back some of the corporate tax cuts and increase regulatory burdens.

At a minimum, this will create a slowdown but more likely a second recession. Recall (if you’re old enough) the back-to-back recessions of 1980 and 1982. That was an ugly time for those of us who lived through it.

Of course, that presumes a recession before the 2020 election. It may not happen—I put the odds at about 60%–70%.

The Great Reset

Unemployment may approach the high teens by the end of the decade and GDP growth will be minimal at best.

What do you call that condition? Certainly not business as usual.

Long before that happens, the Federal Reserve will have engaged in massive quantitative easing.

As this recession unfolds, we will see the Fed and other developed world central banks abandon their plans to reverse QE programs. I think the Federal Reserve’s balance sheet assets could approach $20 trillion later in the next decade.

Not a typo—I really mean $20 trillion, roughly five times as much as what we had after 2008.

The world simply has too much debt, much of it (perhaps most) unpayable. At some point, the major central banks of the world and their governments will do the unthinkable and agree to “reset” the debt.

How?

It doesn’t matter how, they just will. They’ll make the debt disappear via something like an Old Testament Jubilee.

I know that’s stunning, but it’s really the only possible solution to the global debt problem. Pundits and economists will insist “it can’t be done” right up to the moment it happens—probably planned in secret and announced suddenly.

Jaws will drop, and net lenders will lose.

While all that is brewing, technology will keep killing jobs. As we get into the 2020s, the presidency and Congress will again be whipsawed, and we will begin to discuss Bernie Sanders’ “crazy” universal basic employment idea, or others like it.

By then, the idea will not be considered crazy, but the only feasible choice. Even conservative politicians can see the light when they feel the heat.

All of this is going to lead to the most tumultuous decade in U.S. history, even if we somehow (hopefully) avoid throwing a war into the mix, as is typical of a Fourth Turning.

Typically, the end of a Fourth Turning (which started in 2007, according to Neil Howe), has been accompanied by wars. This one could, too, though I think we will more likely see multiple low-grade skirmishes.

If we somehow get through all that, and particularly the Great Reset, the 2030s should be pretty good. In fact, think incredible boom and future. No one in 2039 will want to go back to the good old days of 2019. Our kids will think it was the Stone Age. But we have to get there first.

Caisse de Depot et Placement du Quebec, Canada’s second-biggest pension fund, has developed a unique model for infrastructure investing in its home province of Quebec. The Caisse has struck a deal with the local transit authority in Montreal to develop a 67-kilometer (42-mile) rapid transit network, known as the Réseau express métropolitain (REM), in conjunction with funds from the provincial and federal governments. It’s a unique project for the pension fund, which usually invests in mature infrastructure assets. This time around, the Caisse is building the rail network from the ground up. The whole project is expected to cost C$6.32 billion ($4.88 billion), with the first trains scheduled to run in early 2021. Michael Sabia, chief executive officer of the Caisse, discusses the project, the bumps it’s already encountered, and how the pension fund plans to mimic REM in other jurisdictions, including in the U.S.

Scott Deveau: How does this investment differ from the other infrastructure investments the Caisse has made?

Michael Sabia: It’s the first time a pension fund has ever done this. There are two differentiating elements here. The first is that this is an entirely greenfield project. I’ll give you the history. The government did not have the financial wherewithal to pay for two projects it initially presented to us as something that needed to be done. The one was a link from the South Shore suburbs to downtown, and another one was a link from downtown toward the West Island. We looked at that and decided that wasn’t the best solution and that the best solution was to build a new integrated network that would run from the North Shore to the South Shore and from downtown to the West Island to the airport. It was an entire network that we proposed to build and connect to the existing Métro system—much bigger than the original plans. Our role was from conception, development and planning, financing, and overall overseer and project manager. We will build it. We own it. We will operate it. It’s from nothing to an operating transit system, and we’ve been responsible for the total span of that.

Differentiation No. 2 is in the financing of it. There we’ll have 53.5 percent of the equity in the business, and the two levels of government [provincial and federal] will have subordinated equity both in the amount of 23.3 percent each. The way that works is that we are able to earn a return of something of the order of 8 percent or 9 percent. The two levels of government earn a return of up to approximately 3.8 percent each, which is significantly higher than their cost of borrowing. Typically, governments finance these things as an expense where they get no return whatsoever and they borrow the money to do it.

Pension funds usually prefer to buy assets that are mature, or so-called brownfield assets, because it removes the risk associated with building the infrastructure. So why have you decided to go for greenfield assets?

Because it’s not the only thing we’re going to do. In other parts of our infrastructure business, we continue to do more traditional brownfield. But we think that the market is changing. Having conceived, planned, developed, owned, and operated infrastructure is an important differentiator for us in the years ahead. It’s in effect new product development. It’s what we’re doing to differentiate ourselves in a market that we think is increasingly commodified and where brownfield assets are becoming very expensive to prohibitively expensive.

The 8 percent to 9 percent return is typically a little smaller than what you would get on an infrastructure investment, isn’t it?

Well, no, I wouldn’t say so. There are brownfield deals being done at astonishingly low rates of return. There have been recent things in the market getting done at 5.5 percent or 6 percent. That sort of demonstrates the extent to which investor interest in infrastructure is bidding down brownfield returns. That’s why we want the capability of delivering greenfield because we do believe there is a significant dividend so long as you believe you can manage the risks. Those are the capabilities we are developing.

Those lower returns are a function of increased competition and billions of dollars chasing the same assets, I presume.

Yes.

Have you had to do fairly dramatic changes internally to accommodate this shift in strategy?

Yes, we’ve had to build an entirely new team that [is capable of] project planning, project management, engineering, and tender process management. We’ve had to build all those skills in an entity that will become a subsidiary of the Caisse, an operating subsidiary.

Outside of Quebec, is there an opportunity to export this model?

We have had a great deal of interest in the United States from both mayors of major cities and governors of major states. I can’t go further than that, because those conversations remain confidential. All I can say is there has been a great deal of interest and we are actively engaged in at least two or three conversations with respect to doing this in the United States.

Will you have to prove out the model before those projects proceed?

I don’t know yet. But I’ll tell you how we think about this. Before we embark on another project of this kind, we will want to have made some meaningful progress in the actual construction of the network here. We want to stay focused on making sure we deliver here, because this project has always been proof of concept in our mind. We’re using a market that we know well—Montreal—that’s right in our backyard, to prove out the concept, and then we want to take that concept in effect on the road and export it. I’m convinced there’s a very interesting market out there for a pension fund like ours to do these projects elsewhere. There’s also interest, a little less advanced than in the U.S., but we’ve also had expressions of interest from other provinces.

Some of the risks associated with building this project have already manifested themselves: It’s gone over budget and been delayed by about a year. Does that concern you?

We said pretty much from the beginning it would be about C$6 billion to C$6.1 billion, and we’re at C$6.32 billion now. That’s with firm turnkey proposals from the two consortia [led by SNC-Lavalin and Alstom SA] that are going to build this thing. We had some negotiating to do as of November, and to get that done at the prices we wanted, which we have now done, imposed a three- or four-month delay. We had said our hope was to have the first trains running on one of the lines we’re going to build by 2020. Now it will probably be in the winter or very early spring of 2021.

Wasn’t the original budget meant to be about C$5.5 billion?

No, that was before the final configuration of the network. We added three stations from the initial proposal to better connect to the existing network. That and some other adjustments in the network itself [were made] to make it go a little farther west.

Do you have any concerns about the pace of progress?

No, to be honest, this whole thing has gone better than we had expected in terms of the process of getting all this stuff approved and the financing we needed from two levels of government and the tender process, which was a very complicated process. We did have to do some negotiating to get the prices in a zone that we thought was appropriate and would protect our returns. But at every turn this thing has gone reasonably well.

There seemed to be a lot of enthusiasm around the project, but lately it appears to have become a political punching bag. The Montreal mayor has called for greater trans­parency on the terms of the deal, including its fees and noncompete clauses, and the provincial separatist party, the Parti Québécois, has even called for it to be scrapped. What do you make of these complaints?

There’s a lot of misunderstanding around this. I’m not going to comment on the political situation in Quebec. You can draw your own conclusions. We’re just in the business of building an infrastructure project, and the political class will do and say as they wish in the election season that is under way here. We will be releasing the texts of these agreements, and I think people will see there has been a lot of miscommunication, so we’re going to put them out publicly. This concern about incremental costs hitting the municipalities, there’s no issue there. We have said for the last year or year and a half that this project will cost the totality of the municipalities—all of them—something like a potential increase of C$40 million to C$60 million annually. But that’s it. They will have an entirely new transit system for that incremental expense over what they’re paying today. The more recent concern is that it will be higher than that. No, it will not be higher than that. Period. Full stop.

In terms of this sort of noncompetitive thing, this is how the transit authority here works. It’s not just for us. It’s for other transit systems as well. The objective is really no more complicated than if we’re going to build a rail system over the Champlain Bridge and into downtown—it’s to protect us from somebody starting a competing bus service. If that were to be the case, then we can’t fulfill our fiduciary duties to our depositors because, all of a sudden, there’s a competitive system running parallel to ours. It throws off our revenue and traffic projections. There’s been people here saying that it means they’re not going to be able to build any more transit systems in Montreal. That is wrong. There’s nothing in the agreements we’ve signed with the province or the transit authorities here that would preclude the development of any transit system across the Isle of Montreal.

You’ve had to make some tough decisions already. The decision to award train manufacturer Alstom the train car and related equipment came as a surprise to many in Quebec because it’s a competitor to Quebec’s Bombardier Inc., whose rail division the Caisse has a significant investment in. How did you come to that decision?

Because we ran a competitive process, and Alstom won. We’re an investor in a lot of companies, and many of those companies were involved in the bidding on this project. So we thought from the very beginning it was important to create a tender process that was beyond reproach. We set up very specific criteria for which the bidders would be judged. We set up a process whereby two external auditors audited everything that was done and attended virtually every meeting we had with the bidders. Then we set up a committee chaired by a former justice of the Supreme Court to oversee the whole thing so there could be no concern around conflict of interest or anything else. We went through that whole process, and our experts went through all the bids. The people who won on the rolling stock won on the merits of their bid.

It’s sort of interesting this project was being developed outside of the federal government’s Canada Infrastructure Bank, which has been set up to help finance projects like this across the country.

Well, yes and no. We wanted to secure the federal funding in a manner that allowed us to keep to our schedule. The federal government made a commitment to this in the amount of essentially C$1.3 billion with the option—and we’re working on this right now—in effect transferring that investment from the federal government to the Infrastructure Bank itself. So it may be that that funding comes as one of the investments or potentially one of the first investments from the Infrastructure Bank.

The NZ$38 billion ($26.9 billion) New Zealand Superannuation Fund has submitted an unsolicited proposal to New Zealand's government to form an international consortium to "design, build and operate" a planned light rail network for Auckland, a government news release said Wednesday.

Matt Whineray, NZ Super's acting chief executive, said in a separate news release, "we wish to explore whether a NZ Super Fund-led consortium leveraging our international relationships can fund and deliver the project, on a fully commercial basis."

New Zealand Super "considers the Auckland Light Rail network to be an infrastructure project of sufficient scale and significance to be an attractive prospect for investment," said Mr. Whineray.

The government news release, by Transport Minister Phil Twyford, said NZ$1.8 billion in seed funding had been earmarked for the 10-year transportation plan, which included the Auckland light rail projects.

Local news reports in New Zealand on Wednesday peg the total price for the light rail projects at NZ$6 billion. Danya Levy, senior press secretary for the transportation minister, couldn't immediately be reached for comment.

A spokeswoman for NZ Super said her fund will partner with CDPQ Infra, the infrastructure arm of C$298.5 billion ($232.5 billion) Caisse de Depot et Placement du Quebec on the Auckland project. She declined to provide further details.

The NZ Super news release said other members could potentially be added to the consortium.

The government welcomed New Zealand Super's interest, while adding that it will review "all other proposals in the same way as the Super Fund's proposal is assessed."

New Zealand Super's latest report for the period ending March 31 showed the fund allocating 2% of its portfolio, or roughly NZ$760 million, to infrastructure, and 14.5%, or NZ$5.4 billion, to investments in New Zealand.

CDPQ Infra, meanwhile, would bring light rail experience to the consortium. The New Zealand Super news release said the unit "is responsible for developing, building and operating Montreal's 67-kilometer (41.6 miles) light rail network."

Caisse manages assets of Quebec's public provincial and municipal pension funds.

A researcher with the Fraser Institute says comparing the Canada Pension Plan to private and public sector pension plans is like comparing apples to oranges.

Moin Yahya said it released today’s study comparing the pension systems, after the federal and provincial governments decided to expand CPP coverage and increase premiums.

He says their study found that private pension plans have regulatory and legal burdens the CPP does not, because the private pensions have characteristics that the CPP doesn’t.

“You should be aware of this is why your plan might be a little costlier than the CPP, but it’s because you’re getting a better product or maybe a more diverse product or a more… nuanced product than just the plain vanilla CP,” he said.

“If you still wanted to have CPP expand, then at least you’ve done so with full disclosure, but you should be aware of what the trade-offs are. This is going to affect the quality and quantity of offerings that their own pension plans will be able to deliver.”

Yahya says it’s important for people to understand what drives the cost differences between the CPP and private and public alternatives.

Compared to the Canada Pension Plan (CPP), private pensions are subject to far more regulations, are more complex in their make-up and face higher costs as a result, finds a new study released today by the Fraser Institute, an independent, non-partisan Canadian public policy think-tank.

“The regulations governing private pension plans—which can lead to increased transparency and accountability—inevitably also increase costs, but often those same regulations and costs don’t apply to the Canada Pension Plan,” said Moin Yahya, Fraser Institute senior fellow, law professor at the University of Alberta and co-author of Understanding the Regulatory Framework Governing Private and Public Pensions.

The study comprehensively reviews the different rules and regulations governing the CPP compared to other pension plans, including private and public-sector pensions, as well as private registered accounts such as tax free savings accounts (TFSAs) and RRSPs.

The CPP is, for example, exempt from many customer-related and disclosure regulations such as regular financial statements, as well as provincial rules and industry-organization standards. Private plans, on the other hand, face all of these government-imposed regulations, which lead to additional costs.

“Too often people jump to the conclusion that the CPP’s comparatively lower costs are a function of efficiency, but the reality is that substantial regulations are imposed on private plans that the CPP avoids,” explained Yahya.

In addition, private plans have a number of characteristics that the CPP does not, which also affect costs. Notably, private pensions have to account for transferability from one plan to another whereas CPP contributions are not transferable.

And whereas RRSPs, TFSAs and some defined contribu­tion pension plans allow contributors to choose where their funds are invested, the CPP offers no such choice.

Further, there are almost no laws allowing for the CPP to be sued for bad governance, so where the CPP enjoys substantial cost savings from not having to anticipate or defend against any liabilities, private pension plans are under near constant threat of litigation and must account for that.

“Understanding what actually drives the cost differences between the CPP and private alternatives is critical,” Yahya said.

“The reality is that some of the cost of private pensions is a result of government-imposed rules and regulations from which the CPP is exempt.”

A common argument made to expand the Canada Pension Plan (CPP) is that it is cheap to administer. While many studies have cast doubt on this claim, why would a public pension plan be cheaper to administer than a private one? Many factors affect the cost of running a pension plan, but a crucial yet overlooked factor is the regulatory landscape that private pension plan.

This paper examines the regulatory requirements among various types of public and private pension plans to determine whether private pension plans are at a cost disadvantage with respect to public ones, with a specific focus on the CPP. In short, the paper finds that the CPP—due to its characteristics and legal obligations—enjoys a marked cost advantage over other pension plans.

First, consider the legal responsibilities of the various plan administrators. Broadly speaking, private pension plans are subject to a variety of statutory and common law regulations. These require the pension plan administrators to act as fiduciaries. While the administrators of the CPP are also under these requirements, as a practical matter, the CPP is seldom entangled in any lawsuits regarding the administration and management of its assets. On the other hand, private and some public pension plans (mostly provincial) are always under threat of litigation, whether by an individual pensioner or through a class action. Although public pension plans do face litigation rarely, and usually prevail in court, the CPP is almost never sued at all. There are almost no laws allowing for private enforcement of governance laws against the administrators of the CPP, so the CPP enjoys substantial cost savings from not having to anticipate or defend against any liabilities that may arise from bad governance, something private pension plans must account for.

Private pension plans are also subject to far more disclosure and customer-related regulations; the CPP faces no such requirements. For example, anti-money laundering laws—sometimes known as “Know Your Customer” laws— affect individual pension plans, such as RRSPs and TFSAs, and any other private pension plans that engage the use of a bank or brokerage services. While a public pension plan could be engaged by such laws, there does not seem to be any focus on such plans by enforcers of these laws. A search of the CPP Investment Board’s website showed no noticeable compliance with anti-money laundering laws.

Moreover, because the CPP is a federally constituted entity (legally speaking), it is not subject to any provincial regulations. Nor is it subject to the jurisdiction of any regulations by industry organizations. As a practical matter, the CPP and its administrators carry on their business without any real consciousness of legal or regulatory sanction. Private pension plans, as well as RRSPs and TFSAs, all have to pay filing and administrative fees. The CPP pays no such fees. Private plans, depending on the province, have to constantly file reports with their provincial pension superintendent. Again, the CPP does not.

Now consider differences concerning pension plan characteristics. Private and public pension plans have multiple characteristics and options for their members. For example, there are different rules governing contribution rates for each plan, and early withdrawal triggers various consequences depending on the specific pension plan. Payouts also vary depending on whether the member retires early or waits till 65. If a member leaves their employment early, they have several choices regarding whether to take the accumulated funds or not, known as the lock-in rules. Generally speaking, even if they cannot access the pension funds accumulated, they can still transfer the funds to another plan. These possibilities create more uncertainty for the pension plan administrator. It requires more planning and safeguards, and thus costs.

In contrast, the CPP has very simple rules. Every income earner between the age of 18 and 65 contributes to the CPP at one rate per income up to an annual maximum. There is a maximum payout at retirement with some limited flexibility on which age the pensioner chooses to receive their CPP. Other than these two basic variables, the CPP rules are quite rigid, thereby simplifying the administrative costs of running the plan. There is no ability to take the accumulated funds and transfer them to another pension plan. In contrast, RRSPs and TFSAs allow for individuals to withdraw their contributions at any time (although there may be consequences for doing so). All contributions are invested by the CPP administrator in whatever funds they choose, and, unlike an RRSP, TFSA, or even some defined contribution pension plans, individual CPP contributors have no flexibility to dictate where their funds are invested. Any actuarial surplus in the CPP fund, i.e., any excesses not needed to fund current payouts, remain with the CPP and must be invested by the CPP Investment Board.

Additionally, the number of CPP contributors is large and diverse, giving the CPP a diversified set of contributors and payees. A private pension plan may have a skewed demographic in terms of its employee age profiles, which can pose its own unique challenges which the CPP does not face.

Finally, contribution rates that employees and their employers pay are set by CPP administrators and enforced by the federal government without much choice or input from employees. Private and public pension payouts are usually set by a bargaining between employers and employees, whether it is done formally in a unionized setting or whether it is done informally in a competitive marketplace. This means there is no accountability to the employees or even employers for the management of the CPP funds.

I cannot overemphasize how lucky Canadians are to have an organization like the Canada Pension Plan Investment Board managing their CPP contributions.

Let's quickly examine what advantages this offers:

• The CPP pools assets and pools longevity and investment risk. This means individuals won’t outlive their savings like they risk doing with their RRSP or be unable to retire if a financial crisis like 2008 strikes and it clobbers their portfolio.
• Also, CPPIB operates at arm's length from the government and is looking to maximize returns without taking undue risks. It can use its huge size to lower costs and hire smart people to manage assets internally across public and private markets all over the world as well as build solid relationships with world-class asset managers in public and private markets.
• What this means, in effect, is that CPPIB’s long-term strategy to invest in a globally diversified portfolio across public and private markets ensures higher risk-adjusted returns over a traditional 60/40 stock bond portfolio. The value-added is significant over a long period and so is the lower volatility.
• Importantly, the brutal truth on RRSPs and defined-contribution plans is they're not real pensions, they do not guarantee a secure pension payment for life because they are too beholden to the whims and fancies of public equity markets which are very volatile and will remain very volatile in a low-rate, low-return world. 
• Lastly, the authors fail to acknowledge the benefits of Canada's large defined-benefit plans. They are directly and indirectly responsible for creating well-paid jobs and they ensure more people can retire securely, lowering social welfare costs and increasing revenues for governments. None of this is mentioned above.

This is why I can't take these authors from the Fraser Institute seriously (not that I ever took anything from the Fraser Institute seriously).

1. First, just like other large Canadian public pensions, CPPIB is able to bring a substantial portion of the assets internally to lower the administrative and operational costs of managing that money.
2. Second, CPPIB is able to partner with the very best external managers around the world across public and private markets and it uses its clout to lower fees directly or indirectly via large co-investments. Other large Canadian pensions do the exact same thing.