A pair of Canadian pension funds and Prime Minister Justin Trudeau’s government announced an institutional investors’ “leadership initiative” aimed at boosting global efforts on climate change, infrastructure and gender equality.

Michael Sabia, chief executive officer at the Caisse de Dépôt et Placement du Québec, and Ron Mock, chief executive officer at the Ontario Teachers’ Pension Plan Board, unveiled the initiative in Toronto on Wednesday along with Finance Minister Bill Morneau and Environment Minister Catherine McKenna. The group will enhance expertise in infrastructure finance and development in emerging economies, boost roles of women in finance and speed up implementation of climate-related risk disclosure, the Caisse said.

The world needs to invest C$3.3 trillion ($2.6 trillion) in infrastructure annually through 2030 to keep pace with growth, creating an “infrastructure gap” that is particularly critical in capital markets, the Caisse said in a statement. The groups will launch an infrastructure fellowship program, develop diversity policies and set up an advisory committee on climate disclosure.

“This is the start of something that we think is a bit different,” Sabia said in Toronto. The group will focus on collaboration to “take on some big issues,” he said. While the core role is to produce returns, he said “as long-term investors, we know that our returns are affected by the health and strength of countries where we invest.”

The Caisse and Ontario teachers will be joined by partner institutions including Alberta Investment Management Co., Germany’s Allianz SE, London-based Aviva and the California Public Employees’ Retirement System, according to the Caisse statement.

The investors will “promote gender diversity in capital markets, create an infrastructure fellowship program to help develop expertise in emerging and developing economies, and take steps to better recognize and report on the financial risks associated with climate change,” the government said in a statement.

Capital is not “properly aligned with the principles of sustainable development, and we need to change that,” McKenna said Wednesday. McKenna and Sabia lauded recommendations made by the Task Force on Climate-related Financial Disclosures, which was spearheaded by Bank of England Governor Mark Carney, and chaired by Michael Bloomberg, founder of Bloomberg LP.

Other members of the group include Banca Generali S.p.A., Natixis Investment Managers, the Ontario Municipal Employees Retirement System, the Ontario Public Service Employees Union Pension Plan Trust Fund and the Netherlands’ Stichting Pensioenfonds Zorg & Welzijn fund, known as PGGM, according to the Caisse statement.

Those institutions collectively manage more than C$6 trillion, the Caisse said. The groups didn’t pledge any specific investment or new fund. Trudeau will host G-7 leaders later this week in Quebec, with a dispute over U.S. metals tariffs set to dominate the agenda.

Just days before Canada hosts the G7 Summit in La Malbaie, Que., a group of investors, including some of the country’s largest pension funds, has joined together with the federal government to promote three key issues, including increasing opportunities for women in finance and investment worldwide.

“We need to think about how we’re going to ensure half of our population is more successful,” said Finance Minister Bill Morneau at a press conference on Wednesday. He called it a key moment for the public and private sectors to come together. “We don’t have enough women in the fields that are going to drive forward the success of our economy,” he said, adding that pension funds are in a particularly good place to encourage change.

The group of investors is launching a two-pronged approach to increasing opportunities for women in finance worldwide by committing to the development and implementation of diversity policies inspired by global best practices and setting up an internship program with the CFA Institute that focuses on encouraging women studying in developing markets to learn about, prepare for and gain experience in the investment industry.

The group of investors is also focusing on enhancing expertise in infrastructure financing and development in emerging and frontier economies and accelerating the implementation of comparable climate-related disclosures.

The world needs to invest $3.3 trillion in infrastructure annually through 2030 to keep pace with projected growth, according to a press release, which noted the infrastructure gap is particularly critical in emerging markets because of the lack of projects to invest in and the necessary financial and operating expertise. To tackle the issue, the group is launching an infrastructure fellowship program for senior public sector infrastructure managers in emerging and frontier markets.

To address the need for a comprehensive framework for climate-related disclosures, the group of investors is setting up an advisory committee that will assess existing efforts by various organizations that support the adoption of the Financial Stability Board’s task force on climate-related financial disclosures, leverage those efforts into a unified approach and publish sample guidance for other institutional investors.

The group of institutional investors includes the Alberta Investment Management Corp., the Caisse de dépôt et placement du Québec, the Canada Pension Plan Investment Board, the Ontario Municipal Employees Retirement System, the Ontario Teachers’ Pension Plan and the OPSEU Pension Trust.

“Climate change, gender inequality and the infrastructure gap are all significant global problems that need collective action and robust, practical solutions,” said Ron Mock, president and chief executive officer of Ontario Teachers’, in a press release.

“Institutional investors have the resources and the platform to make meaningful contributions in all of these areas. We are pleased that our initiatives align with this year’s G7 themes, while also providing tangible benefits for investors and their members.”

Also in advance of the G7 Summit, a group of 319 investors from around the world, including many Canadian institutions and asset managers, has signed a letter reiterating their commitment to the Paris agreement and their continued efforts in fighting climate change.

The letter urged all governments to act to implement the goals of the agreement “with the utmost urgency.” While the global transition to clean forms of energy is underway, the letter noted, the risks climate change presents will require much more work to ensure the resilience of global society, the economy and the financial system.

Investors around the world are increasingly throwing their economic clout behind the transition to a lower carbon world, as well as considering climate change more significantly in their overall investment processes and risk management strategies, especially when dealing with companies that are high carbon emitters, the letter stated. It also asserted investors’ concern that the current actions taken by governments won’t be enough to achieve the agreement’s goal of “holding the increase in the global average temperature to well below 2 C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5 C above pre-industrial levels.”

This “ambition gap” between governments and that goal is of great concern to investors since, as the letter noted, “it is vital for our long-term planning and asset allocation decisions that governments work closely with investors to incorporate Paris-aligned climate scenarios into their policy frameworks and energy transition pathways.”

The letter’s signatories, representing a collective US$28 trillion in assets under management, include the Alberta Investment Management Corp., the Caisse de dépôt et placement du Québec, the Investment Management Corp. of Ontario, the Ontario Municipal Employees Retirement System, the Ontario Teachers’ Pension Plan and the OPSEU Pension Trust.

Regarding a further cause, 130 Canadian and global institutional investors with $2.3 trillion in assets under management are urging Labour Minister Patty Hajdu to enact legislation to tackle enforced and child labour in global supply chains. Among the group is the Canadian Union of Public Employees’ pension plan, the OPTrust, the pension plan of the United Church of Canada and University of Toronto Asset Management Corp..

“We consider a company’s management of environmental, social and governance risks — including human rights-related risks — in our investment decision-making processes,” the statement said.

“In order to do so, however, we require up-to-date, clear and comparable information from companies about their due diligence on priority issues like modern slavery and child labour in their supply chains.”

1. Enhancing expertise in infrastructure financing and development in emerging and frontier economies;
2. Opening opportunities for women in finance and investment worldwide; and
3. Speeding up the implementation of uniform and comparable climate-related disclosures under the FSB-TCFD framework.

Institutional investors with $26 trillion in assets under management called on Group of Seven leaders on Monday to phase out the use of coal in power generation to help limit climate change, despite strong opposition from Washington.

Government plans to cut greenhouse gas emissions were too weak to limit warming as agreed by world leaders at a Paris summit in 2015, they wrote. U.S. President Donald Trump announced a year ago that he was pulling out of the pact.

“The global shift to clean energy is under way, but much more needs to be done by governments,” the group of 288 investors wrote in a statement before the G7 summit in Canada on June 8-9.

Signatories included Allianz Global Investors, Aviva Investors, DWS, HSBC Global Asset Management, Nomura Asset Management, Australian Super, HESTA and some major U.S. pension funds including CalPERS, it said.

As part of action to slow climate change, the investors called on governments to “phase out thermal coal power worldwide by set deadlines”, to phase out fossil fuel subsidies and to “put a meaningful price on carbon”.

The investors also urged governments to strengthen national plans for cutting greenhouse gas emissions by 2020 and to ensure that companies improve climate-related financial reporting.

Stephanie Pfeifer, CEO of the Institutional Investors Group on Climate Change (IIGC), said it was the first time that such a broad group of investors had called for a phase-out of thermal coal, used in power generation.

“There is a lot more momentum in the investor community” to put pressure on governments, she told Reuters. The IIGC was among backers of the statement, delivered to G7 governments and to the United Nations.

G7 nations Canada, Britain, France and Italy are members of a “Powering Past Coal” alliance of almost 30 nations set up last year and which seeks to halt use of coal power by 2030. Japan, Germany and the United States are not members.

The investors wrote that countries and companies that implement the Paris climate agreement “will see significant economic benefits and attract increased investment.” U.S. gross domestic product was $18.6 trillion in 2016, World Bank data show.

Trump doubts scientific findings that heatwaves, downpours and rising sea levels are linked to man-made greenhouse gas emissions and wants to bolster the U.S. fossil fuel industry. Worldwide, coal is now used to generate almost 40 percent of electricity.

Some of the world’s biggest investors have called on global leaders to scale up their climate change ambitions, increase investment in the switch to a low-carbon economy and help companies to reduce their climate risks.

The call comes as a new report reveals that the G7 nations – the U.S., France, Germany, Canada, Italy, Japan and the U.K. – are still spending at least $100 billion subsidizing fossil fuels even though they have pledged to end such subsidies by 2025 .

Some 288 investors with more than $26 trillion in assets under management have written to the leaders of the G7 nations ahead of their summit in Canada this week, stating that “the global shift to clean energy is under way, but much more needs to be done by governments to accelerate the low carbon transition and to improve the resilience of our economy, society and the financial system to climate risks .”

“We are concerned that the implementation of the Paris Agreement is currently falling short of the agreed goal of ‘holding the increase in the global average temperature to well below 2-degrees Celsius above pre-industrial levels.’” they added.

The investors, which include Allianz Global Investors, Aviva Investors, DWS, HSBC Global Asset Management, Nomura Asset Management, Australian Super, and Calpers, say that they are doing their part by making significant investments into low-carbon assets, incorporating climate change scenarios and climate risk management into their investment processes and engaging with the largest greenhouse gas emitters.

They now want world leaders to urgently step up their efforts. Specifically, they want world governments to:

1) Achieve the goals of the Paris Agreement

2) Accelerate private sector investment into the low carbon transition

3) Commit to improve climate-related financial reporting

Patricia Espinosa, the executive secretary of the United Nations Framework Convention on Climate Change, called on investors around the world to sign on to the statement.

“It’s extremely encouraging to see so many institutional investors coming together around such a powerful message to governments and the international community,” said Ms. Espinosa. "Leveraging private finance to fund the transition to a low-emissions and low-carbon future in order to meet the goals of the Paris Agreement is a necessity—one that public administrations cannot afford to do on their own.”

The statement has been developed by sustainable investment groups Asia Investor Group on Climate Change, CDP, Ceres, Investor Group on Climate Change, Institutional Investors Group on Climate Change, Principles for Responsible Investment and UNEP Finance Initiative.

A year after major U.S. investors and thousands of other American businesses, cities and states stated that "We Are Still In" the Paris Agreement in response to Donald Trump announcing he would pull the U.S. out of the deal, Mindy Lubber, CEO and President of the sustainability non-profit organization Ceres​, said: “In order to maintain that investor confidence in the shift to the clean energy economy and to low-carbon investment portfolios, policymakers, here and abroad, must commit to supporting ambitious climate action and accelerated sustainable investments.”

The business case for investors to act on environmental risk could not be clearer, and climate change is firmly on the agenda of the investment community, added Paul Simpson, CEO of CDP. ​“This investor statement is a direct call to action to government leaders to accelerate their implementation of the Paris Agreement. Political will to improve climate-related financial reporting is an important step towards keeping the promises made in Paris.”

Investors may be acting to manage the risks to their portfolios presented by climate change, but they could do even more if the right policies were in place, the group said.

“For us to achieve a sustainable and low carbon financial sector we need policy and regulatory frameworks that incentivize for more green investments, but also that help us mainstream sustainability factors into finance institutions ‘core decision making,” said Eric Usher, head of the UNEP Finance Initiative​.

The report on fossil fuel subsidies, produced by the U.K.’s Overseas Development Institute, says that “despite their numerous commitments, not only have G7 governments taken limited action to address fossil fuel subsidies but they have also failed to put in place any mechanisms to define and document the full extent of their support to oil, gas and coal, or to hold themselves accountable for achieving these pledges."

The group has created a G7 fossil fuel subsidy scorecard to address this “accountability gap” and track, for the first time, each G7 country’s progress in phasing out fossil fuel subsidies across seven indicators. The U.S. is the worst offender in the G7, with more than $26 billion in subsidies, followed by Germany ($18 billion), Italy ($17 billion) and Japan ($12 billion). The U.K. is close behind with $11 billion, while France spends $8 billion and Canada $4 billion.

Given the U.S. Administration’s opposition to dealing with climate change, Germany’s ongoing persistence in using coal and the Canadian government’s recent purchase of Kinder Morgan’s Trans Mountain Pipeline, the Investor Agenda statement and the subsidies report are likely to have limited impact. However, given frictions over trade and climate change, it is important that global leaders are aware of the growing momentum behind calls for action to tackle the issue.

• Jim told me HOOPP wasn't invited to be part of this global initiative "probably because we don't have a substantial infrastructure portfolio" but that's fine because like other pensions, HOOPP practices responsible investing and integrates available ESG data and information alongside traditional fundamental analysis incorporating financial and economic information. 
• In terms of real estate, Jim told me 40 percent of greenhouse gases come from buildings so it's a major contributor to climate change.
• HOOPP focuses on best environmental standards and takes energy efficiency in its real estate holdings very seriously. Why? Simply put, it adds to the bottom line and makes great sense from a fiduciary and environmental standpoint.
• He gave me the example of One York Street, a joint project of Menkes Developments and HOOPP, which is their headquarters now. He said it achieved LEED Platinum certification, earning 89 points, the highest score ever awarded to a Toronto building and is the most energy efficient building in Canada.
• Interestingly, this energy efficiency is good for HOOPP because operating costs were slashed by 60 percent, allowing them to lock in quality tenants for longer at lower leases. Tenants like Sun Life enjoy lower leases but also lower their carbon footprint which is what shareholders want. 
• Jim told me the building is incredible and the quality of the air is unlike any other building where the vents are on the ceiling and air is "drawn down and sucked right back up" which leads to "stale air and people getting sleepy in the afternoon" (no, it's not just fatigue, the air quality in your building is terrible). At One York, "the vents are on the floor and each area can dial it up or down." 
• That's great for a new building which HOOPP built from scratch with its partner but what about older buildings in HOOPP"s real estate portfolio? Jim told me they're working with property managers to make them more efficient by focusing on three areas: 1) reducing energy consumption, 2) reducing water consumption and 3) reducing solid waste and recycling more.
• That's what HOOPP's seventh annual LEAP Awards were all about last night. Property managers were invited to give their best ideas on making properties more sustainable and energy efficient. 

A new $2.3bn macro hedge fund run by billionaire British investor Alan Howard gained 36.7 per cent in May as it took advantage of volatility in emerging markets and European government debt.

The large gain takes the Brevan Howard AH fund’s return so far this year to 44.3 per cent, a person familiar with the matter said, and marks a comeback for the trader since he launched the standalone fund last year, managed by himself rather than by a team.

The gain, first reported by Bloomberg News, also breaks many years of poor performance for Mr Howard and other macro traders who have struggled to make money at a time when central bank intervention has doused once successful trading strategies.

Mr Howard had previously seen the largest vehicles of the Brevan Howard hedge fund he co-founded haemorrhage assets, shrinking from being one of the largest hedge funds in the world in 2013 to managing less than $10bn in total.

By email, Mr Howard said: “I’m happy that the loyalty and confidence shown by my investors has been rewarded with a very positive result”.

A person familiar with the fund said that it was planning to open it up to new allocations from existing Brevan Howard investors who had not entered Mr Howard’s AH fund.

The fund charges investors a 30 per cent performance fee on profits, as well as a fixed 0.75 per cent management fee, meaning Mr Howard is on track to reap a large payday following its gains for the year so far.

The BH Macro fund, a separate listed vehicle tied to a master fund run by multiple traders at Brevan, has performed less strongly, recording a 9.1 per cent gain in its net asset value in the year so far.

In 2015 Brevan Howard found itself entangled in a non-compete dispute with its former star trader Chris Rokos — who generated $4 billion in profits for the firm from 2004 to 2012.

Mr Rokos, whose surname makes up the “R” in Brevan’s name — which was later settled. Mr Rokos went on to launch his own hedge fund which has since overtaken his former employer in assets.

By 2016 a number of Brevan Howard’s blue-chip public pension fund clients began to pull their money from the firm, with the New York City Employee Retirement System and New Jersey’s State Investment Council among those who redeemed investments.

Howard’s own fund manages about $2.3 billion including his money, that of outside investors and Brevan Howard’s main fund. The AH Master Fund is open to small amounts of new money from existing Brevan Howard investors, at a management fee of 0.75 percent and a performance fee of 30 percent, another person said. A spokesman for the firm declined to comment on performance and assets.

After years of lackluster performance, Brevan Howard’s main fund is also making money. The $4.2 billion Master Fund, which is managed by a team of traders, gained 7.6 percent in May, its best monthly return since the 2008 financial crisis. The return this year is now 8.9 percent. Other macro traders who profited in May include Jeffrey Talpins, whose hedge fund, Element Capital Management, gained 4 percent in May and 17.5 percent this year.

Middling performance over the years had prompted investors to pull money from some of the oldest and most established macro traders including Paul Tudor Jones and Andrew Law. Brevan Howard’s assets have slumped about 75 percent from their 2013 peak to about $8 billion now. The decline had last year fueled speculation that Howard may be the latest hedge fund manager to throw in the towel on his business and turn into a family office -- something the firm ruled out in December.

Brevan Howard has cut fees, employees and returned to a previous business model of running several funds in a bid to reduce reliance on one main money pool.

Macro funds showed signs of staging a comeback earlier this year after posting gains. And investors have poured almost $12 billion into such funds during the first four months of the year, the most of any strategy, according to data compiled by eVestment.

[...] size is not your friend in this market, which is why you see guys like George Soros and Alan Howard seeding their top talent. They know it's better to seed talent and let them try to earn money on their own, hopefully reaping big gains by owning a piece of the management company.

Fret not my dear macro gods, there is good news ahead. As I explained on Friday when I dismissed Ray Dalio's notion that we are witnessing the end of central banks' era, the Fed is making a mistake, raising rates at a time when the US economy is clearly slowing.

I believe the Fed wants to raise rates to have ammunition to cut rates when the next crisis hits us in the not too distant future but as central banks turn hawkish, I worry that they will only exacerbate global deflation.

Smart global macros know exactly what I'm talking about and let me repeat my macro positions:

[..] here are my global currency positions:

1. Long the US dollar. Buy this weakness. The weakness in the US dollar is only temporary. As the US economy slows and everyone is talking about how great Europe is doing, pounce on the opportunity to load up on the greenback. Europe and Japan will also enter a significant slowdown over the near term and their currencies will bear the brunt of this slowdown.
2. Short the CAD, Aussie, Kiwi and commodity-related currencies, including many emerging market currencies. 

I see global economic weakness ahead which is why I'm short oil and other commodities. People are delusional, the US economy isn't as strong as they think. Jim Chanos gets it but to my surprise, so many  others are completely out to lunch.

Hedge fund founder Louis Bacon will double his investment in the new fund set up by former colleague Greg Coffey after it showed a return of 4.6 per cent in the seven weeks since it began trading, according to people familiar with the investment.

The performance of the macro fund, which focuses on emerging markets, compares with a weaker broader sector performance this year. Macro funds were down 0.5 per cent to the end of April, according to data from eVestment, while hedge funds across all strategies were up 0.2 per cent over that period.

Mr Coffey, 47, has returned to the hedge fund industry after more than five years away after he retired as co-chief investment officer of Moore Capital alongside Mr Bacon, the billionaire founder.

Mr Coffey has received commitments of $2bn for the fund, Kirkoswald Capital, but has not received all of it yet. Mr Bacon, who uses his own capital to invest in hedge fund start-ups, had already committed to supporting the launch but doubled the amount after seeing the initial returns, the people said. They would not comment on the amount involved.

Mr Coffey gained attention in the London hedge fund industry when he joined the GLG Emerging Markets desk, where he raked in double-digit returns. In 2008, the year of the financial crisis, the fund’s returns started to sour and it suffered heavy investor redemptions.

After he left to join Mr Bacon at Moore Capital, he was unable to replicate his previous levels of performance. The fund returned 20 per cent in 2009 and 5 per cent in 2010, but became lossmaking in 2011. He decided to take an early retirement near the end of 2012.

Mr Coffey, who grew up in Sydney, Australia, spent the last five or so years with his family in London, Australia, and on the Scottish island of Jura, where he owns the 12,000-acre Ardfin estate and has built a golf course.

Despite being out of the industry for more than half a decade, the allure of a possible return to form was enough to attract backers such as Mr Bacon to Mr Coffey’s launch, which is billed as being the largest in Europe this year based on its fundraising target of $2bn.

After a fallow period, hedge fund start-ups with star traders at the helm appear to be having a successful year of fundraising. Michael Gelband, the fixed-income trader once seen as heir apparent to Izzy Englander at Millennium Management, targeted an $8bn raising for his own fund, ExodusPoint.

Daniel Sundheim, the former chief investment officer at Viking Capital, was looking to raise $4bn for his DI Capital, while Steve Cohen raised more than $3bn after opening his family office to outside investors this year following the expiry of a regulatory settlement that barred him from managing money from others.

As part of a comprehensive plan review, the Ontario Municipal Employees Retirement System is looking at a number of changes, including to indexing provisions.

While a plan executive is offering a more nuanced version of the issue, the Canadian Union of Public Employees union is sounding the alarm about possible changes.

According to CUPE Ontario president Fred Hahn, OMERS has been doing well, with returns exceeding expectations. He says that after the 2008 recession, plan sponsors and staff worked hard on a strategy to improve the plan’s health. OMERS covers almost 120,000 CUPE members in Ontario, according to Hahn.

“It included some adjustments to some benefits for some plan members, and it included increased contributions for all plan members, so that means employers and plan members,” he says of previous efforts to boost the plan.

“Our folks from there were more than happy to make those additional contributions, because they understood it was important to protect their plan. . . . OMERS, in terms of its plan to come back to balance, is so far ahead of schedule [that] not only has it increased its funded status, it’s now at 94 per cent. But this year, [it] was in such a strong position that it was also able to address its discount rate. It was able to bring down the discount rate by 20 basis points, again well ahead of schedule.”

Given those improvements, the union isn’t happy about possible changes to indexing.

“Our position in relation to these kinds of changes has been one where we said we don’t buy, we do not believe that when the plan is doing well, when it is in a strong position, when it is quickly coming back to balance, when it has enacted a plan that is working ahead of schedule, now is not the time to actually remove a benefit that is so incredibly important to plan members like indexing against inflation,” says Hahn.

Paul Harrietha, chief executive officer of OMERS’ sponsors corporation, takes issue with the idea that the plan is de-indexing benefits. The plan, he says, is talking about conditional indexing and not completely removing the inflationary provision.

“It’s a nuance, but it’s an important one. De-indexing says we’re going to eliminate indexing, you’re not going to get it. Conditional indexing is predicated on the assumption that we’re going to maximize the indexing that we provide at any given time,” says Harrietha.

“Basically when you manage a plan like ours, you have two levers currently. One is you either cut benefits or increase cost if the plan suffers financially,” he adds.

“All conditional indexing does on a forward-looking basis is just give you one more lever that serves as a bit of a safety valve if the plan gets into financial trouble. It just allows you to manage the funding and contributions of the plan while the plan gets healthy again. We’ve only looked at it as a risk mitigation strategy that’s in the best interests of all of the members, both current and retired, so that we ensure that the plan remains financially healthy. But then we’re able to manage the contribution and funding rates at the same time so that we don’t have to keep going back to people and asking to pony up in the short term to cover losses potentially.”

Harrietha says the plan’s modelling indicates that if it were to adopt a conditional approach, it could anticipate providing indexing of about 85 per cent of what members would have gotten had it made no changes.

“In terms of other options, and I don’t mean to be flippant about this . . . everything was on the table. On the table was in direct consultation with all of the sponsors, including CUPE — who has two members on our board — to say: Is there a better way to deliver the pension promise? We looked at everything from flat accrual rates given the new CPP that’s coming in that would actually have enhanced benefits for lower-paid members’ lifetime pensions. We’ve looked at the conditional indexing component, we’re looking at service caps, we’re looking at revised early retirement benefits that can be perceived as a positive, we’re looking at expanding coverage potentially for all part-time employees in the sector,” he says.

This month, the board will consider options that would go to a vote in November.

“If the board accepts options in June, that’s all they’re doing,” says Harrietha.

“They’re suggesting these are the options that are meaningful at this time and that they would then socialize those options with our key stakeholders, sponsors, employers, unions and members over a four-month engagement plan. And then we will take that data back and in November, assuming there are any options approved in June, the board would at that time determine if they would vote for permanent changes under the plan.”

Harrietha, who notes a two-thirds vote would be necessary in November to pass any changes, says there would be a transition period. Any changes would be unlikely to take effect before January 2021, he adds, noting they would be prospective and therefore not affect benefits earned to date.

“Again, there’s no desire to disadvantage the members. It’s really just a matter of ensuring that the plan remains sustainable and meaningful and affordable over the time frames,” he says.

What's crucially important to understand is that not only does conditional inflation protection (CIP) address intergenerational risk sharing, it also allows the plan to breathe a little easier if they do experience a severe loss and run into problems in the future.

In effect, as more teachers retire, if the plan runs into trouble and experiences a deficit, CIP allows them to slightly adjust benefits (remove full indexation for a period) until the plan's funded status is fully restored again.

Because there will be more retired relative to active teachers, they will be able to easily shoulder small adjustments to their benefits for a period to restore the plan back to fully funded status.

This isn't rocket science. The Healthcare of Ontario Pension Plan does the same thing and so do other Ontario pension plans like the Ontario Pension Board and CAAT Pension Plan which recently hit 118% funded status, putting it right behind HOOPP in terms of the best funded Canadian plan.

Importantly, while all these plans have different maturities and demographics, they've all adopted a sensible shared-risk model which is fair to all members of their plan, active and retired members, and it ensures the sustainability of their plan for many more years.

In my opinion, the most important point that Fred Vettese addresses is the demographic shift going on in Canada (and elsewhere) where in a few years, we will have more retirees than active workers.

You know where I'm getting at with this? That's right, I want to see the federal Public Service Pension Plan (PSPP) adopt a shared-risk model which forces intergenerational equity.

In particular, I want to see conditional inflation protection adopted so if the plan experiences a deficit, retired members will experience a cut in inflation protection for some time until the plan is fully funded again.

In fact, conditional inflation protection is a critical factor behind HOOPP and OTPP's success and that of other fully funded plans in Canada.

It's mind-boggling that in 2018 we still have public sector unions demanding guaranteed inflation protection as if the rest of society owes it to them no matter what.

I'm sorry, I'm an ardent defender of defined-benefit plans but I absolutely need to see two key elements: 1) world-class governance and 2) a shared-risk model where if needed, contributions are raised, benefits cut (typically for a short time using conditional inflation protection) and/ or both.

We need to defend DB pensions but we also need to make them fairer and more sustainable over the long run.

The Canada Pension Plan Investment Board has announced plans to become the first pension fund in the world to issue a green bond.

The C$356bn CPPIB, which invests the assets of one of the world’s biggest retirement funds, said on Monday it had concrete plans to issue the debt instrument.

The Toronto-based fund said the move would “provide additional funding for CPPIB as it increases its holdings in renewables and energy efficient buildings as world demand gradually transitions in favour of such investible assets.”

The CPPIB plans to invest more than C$3bn in renewable energy and said wind and solar, sustainable water and waste management projects as well as buildings designated ‘green’ would be eligible to receive investment from whatever the eventual bond raised.

It provided no further financial details.

Green bond issuance has soared over the past decade, in part as environmental concerns move into mainstream investing practice. Annual issuance hit $155bn last year according to the Climate Bonds Initiative, a UK-based non-profit organisation, a figure which is expected to reach between $250bn and $300bn this year.

Poul Winslow, CPPIB’s senior managing director and global head of capital markets and factor investing, added:

The issuance of Green Bonds is a logical next step to CPPIB’s investment-focused approach to climate change, and we are pleased to be a pioneer amongst pension funds in this regard. The capital raised will help support strong, long-term investments in eligible green assets that position the Fund for continued success.

Canada Pension Plan Investment Board plans to issue green bonds in Canadian dollars for the first time, joining a growing list of borrowers selling the debt to finance environmentally friendly investments.

“The issuance of green bonds is a logical next step to CPPIB’s investment-focused approach to climate change, and we are pleased to be a pioneer among pension funds in this regard,” Poul Winslow, senior managing director and global head of capital markets and factor investing, said in a statement Monday. “The capital raised will help support strong, long-term investments in eligible green assets that position the fund for continued success.”

CPPIB’s statement doesn’t specify the timing or size of the sale, but says the Toronto-based fund engaged the Centre for International Climate Research, which specializes in providing second opinions on the qualification of debt for green bond status.

CPPIB’s green-bond framework allows for investments in wind and solar energy, sustainable water and wastewater management, as well as green buildings. It plans to invest more than C$3 billion ($2.3 billion) in renewable energy as it prepares for an expected global transition to a lower-carbon economy.

Canada’s green bond issuance, totaling C$8 billion according to data compiled by Bloomberg, has recently been dominated by provincial governments, yet an increasing number of other issuers such as insurers and municipalities have been making forays into the market in recent months.

Manulife Financial Corp. in November became the world’s first life insurer to sell green bonds when it priced securities in Singapore dollars, and followed that transaction in May with the first corporate green bond in Canadian dollars since 2015. The city of Ottawa sold green bonds in November, while Toronto seeks to follow suit in the second half of this year.

The province of Ontario is the country’s biggest green borrower with C$3.05 billion of securities outstanding that were sold in five transactions, including the country’s largest -- C$1 billion of seven-year bonds -- sold in January.

CPPIB invests on behalf of the Canada Pension Plan. The C$356.1 billion pension fund, which boasts the highest credit score at the three largest rating firms, started issuing debt in 2015. It has sold debt in the loonie, U.S. dollar and the euro.

• In terms of real estate, Jim told me 40 percent of greenhouse gases come from buildings so it's a major contributor to climate change.
• HOOPP focuses on best environmental standards and takes energy efficiency in its real estate holdings very seriously. Why? Simply put, it adds to the bottom line and makes great sense from a fiduciary and environmental standpoint.
• He gave me the example of One York Street, a joint project of Menkes Developments and HOOPP, which is their headquarters now. He said it achieved LEED Platinum certification, earning 89 points, the highest score ever awarded to a Toronto building and is the most energy efficient building in Canada.
• Interestingly, this energy efficiency is good for HOOPP because operating costs were slashed by 60 percent, allowing them to lock in quality tenants for longer at lower leases. Tenants like Sun Life enjoy lower leases but also lower their carbon footprint which is what shareholders want. 
• Jim told me the building is incredible and the quality of the air is unlike any other building where the vents are on the ceiling and air is "drawn down and sucked right back up" which leads to "stale air and people getting sleepy in the afternoon" (no, it's not just fatigue, the air quality in your building is terrible). At One York, "the vents are on the floor and each area can dial it up or down." 
• That's great for a new building which HOOPP built from scratch with its partner but what about older buildings in HOOPP"s real estate portfolio? Jim told me they're working with property managers to make them more efficient by focusing on three areas: 1) reducing energy consumption, 2) reducing water consumption and 3) reducing solid waste and recycling more.
• That's what HOOPP's seventh annual LEAP Awards were all about last night. Property managers were invited to give their best ideas on making properties more sustainable and energy efficient.

The federal government’s financial adviser has raised the possibility of the Canada Pension Plan Investment Board becoming involved in the Trans Mountain pipeline project but there’s been no political pressure applied, CPPIB chief executive Mark Machin told a parliamentary committee Monday.

The Toronto-based fund manager and its peers will likely take a look at the stalled Trans Mountain project because there are a limited number of investment opportunities of its magnitude, but CPPIB has yet to begin a formal analysis or receive any confidential information, Machin told Commons finance committee.’

His testimony came less than two weeks after the government announced it would buy the project for $4.5 billion from Kinder Morgan, to ensure the pipeline will be completed, with the intent of selling it at a profit in time.

Machin insisted, in answer to a question by Conservative MP Pierre Poilievre, that there had been no contact between CPPIB and Finance Minister Bill Morneau or any other member of the Liberal government.

But Machin said that CPPIB has been approached by Greenhill & Co., a small investment bank that has been hired to advise the government on selling the Trans Mountain project.

“I believe they’ve approached every — a lot of — funds domestically and internationally,” Machin said.

“At this stage, we haven’t done any analysis. We’re still evaluating the situation. Obviously, we have an obligation to investigate and to assess any major investment opportunity that comes along. And to fully understand all of the risks, all of the potential returns and understand the fit for our portfolio as well.”

The issue of political pressure is relevant because the CPPIB was set up in the late 1990s to be an independent manager of funds on behalf of the Canada Pension Plan, an employer and employee-funded retirement system.

As of March 31, when CPPIB’s financial year ended, it managed a fund with $356.1 billion in net assets, up from $316.7 billion at the end of fiscal 2017 and $278.9 billion at the end of fiscal 2016.

Morneau has predicted the Trudeau government will have no difficulty selling the Trans Mountain pipeline expansion project after uncertainty about its future is resolved.

The federal government’s hand was forced by B.C. Premier John Horgan, who is waging a court battle over the federally regulated pipeline, which would carry diluted bitumen from Alberta’s oilsands to a sea port near Vancouver.

Machin told the finance committee that the Canada Pension Plan Investment Board has a mixed track record with pipelines and will use its usual approach when deciding whether to put money into Trans Mountain.

In general, he said, a major factor to consider is regulatory risks — pointing out that CPPIB and its co-investors in a European pipeline were caught by surprise when the Norwegian government made a significant change in the tariff regime — or pricing structure — shortly after the deal closed.

“We’ve been in legal proceedings for a number of years now,” Machin said.

“That is part of the regulatory risk. It’s a really critical part of due diligence to understand regulatory risk for any infrastructure investment.”

The federal government decided to buy Trans Mountain after Houston-based Kinder Morgan threatened to walk away from the pipeline expansion due to political uncertainty, particularly because Horgan’s New Democrat government said it will do everything in its legal power to stop the pipeline because of unresolved environmental concerns.

Machin told the committee that the CPPIB hasn’t made a formal evaluation of Trans Mountain “purely because it’s at an early stage and we haven’t got any confidential information, or any information, to assess the situation yet.”

The Ontario Teachers Pension Plan — another of Canada’s independent retirement fund managers — indicated last week that it had a financial obligation to take a look at the potential of Trans Mountain.

[...] my hunch is the two main Canadian pensions interested in this project are AIMCo and OMERS and they can very well partner up to invest in it. AIMCo is independent of Alberta's government but it must want first dibs on a prized pipeline which will be the economic lifeblood of that province.

OMERS has a lot of experience managing pipelines so it would be a great partner to AIMCo on this deal if they were to buy it (the dollar amount would be too much for either pension to go it alone).

I thought the Caisse would be interested because let's face it, it has a great team in place to take over the construction of this pipeline but given that it wants to reduce its carbon footprint, I'm not sure it wants to get involved (but it's too bad since this is a great project for the Caisse's REM team to consider, minus all the political and regulatory hurdles).

I'm pretty sure CPPIB and OTPP aren't interested in this project, not at this time as there are too many risks. They prefer investing in brownfield projects (CPPIB) and will only invest in greenfield if they have a specialized team in place to help them manage the asset (OTPP).

All this to say, there is a lot of chatter on Canada's pensions investing in the Trans Mountain pipeline deal but I think we need to wait before jumping to any conclusions.

I guarantee you no Canadian pension will invest in this project unless they get the right terms to fulfill their fiduciary duty and achieve the return objective. Moreover, as you can read above, competition is intense because Brookfield Asset Management also expressed an interest and that firm is a global leader in infrastructure.

 "The federal government has to move fast to set up a Crown corporation for this project but to do this, it needs to pay top dollar to attract top people to this project because pipeline project managers are expensive. If the Government starts capping compensation like they do with all Crown corporations, they won't attract the right people and significantly increase construction and operational risks."

CPPIB’s investment is part of Ant’s $14 billion fundraising announced on Friday.

Ant Financial, spun off from Alibaba Group Holding Ltd (BABA) before the e-commerce firm’s 2014 listing, has played a major role in shaping China’s financial technology landscape.

“For the first time in CPPIB’s history we are going to have all of our credit investors in one department,” says Graham. “Credit as an asset class is one of the largest globally and this change is going to provide the opportunity to have all of the experts together to build a global, diversified credit portfolio that maximizes value for CPPIB.”

The shift is crucial to support our strategic mandate to become an increasingly global investor and properly respond to the opening of credit markets in China, India and Latin America.

Graham notes those markets are less developed than credit markets in North America and Europe, and makes viewing credit through a broad lens increasingly important.

“We are going to have a mandate across the credit spectrum from investment grade to non-investment grade, and corporate to asset-backed lending,” he says. “It’s a broad mandate and we are currently developing a go-to-market strategy for new geographies, leveraging the breadth in a deliberate and methodical way.”

Graham adds this new approach to credit investing will differentiate CPPIB from organizations that house credit within regional departments, asset class groups (such as real estate), or separate it based investment grade and non-investment grade.

“When you invest in emerging markets, the lines between these asset classes – or these segments of the asset classes – are very blurred,” he says. “Having all investors within one department allows us to look beyond product labels and focus on the underlying risk/return trade-off.”

Graham says the department will continue to be a fundamental credit investor and ensure CPPIB is focusing on the creditworthiness of each individual investment.

At the end of its 2018 fiscal year, the Public Sector Pension Investment Board posted a net return of 9.8 per cent, representing $13.5 billion in income.

While the result wasn’t as hefty as last year’s 12.8 per cent, the fund beat its benchmark portfolio return of 8.7 per cent. The increase in assets marks a 12.9 per cent jump from the prior fiscal year.

“This is a year we can be proud of,” said Neil Cunningham, president and chief executive officer at PSP Investments, in a press release. “We sustained performance over a year marked by market volatility, which shows clearly that our strategic focus on increased diversification is generating returns.

“Once again, our people highlighted the possible in their active commitment to our shared purpose: to contribute to the financial security of the contributors and beneficiaries who have served Canada throughout their careers.”

PSP Investments saw an 8.3 per cent return from public equities, the largest component of its portfolio at 50.1 per cent. It experienced strong gains for most of the year with increased volatility coming into play largely in the fourth quarter, the release noted.

The fund’s $15 billion of infrastructure investments was also a standout, yielding a 19.3 per cent return, with real estate also posting a particularly strong result of 13.6 per cent. Private equity fared much better than the previous fiscal year when it posted an overall loss of 3.4 per cent. This year, it returned 12.9 per cent, with $19.4 billion under management. The fund attributes the stronger results to valuation gains, primarily in the financial and industrial sectors.

PSP Investments’ private debt portfolio, which returned 8.2 per cent, more than doubled in the 2018 fiscal year, to $8.9 billion from $4.5 billion. Notably, the fund significantly increased its debt allocation in Europe, which now accounts for 24 per cent of its global private debt portfolio, up from eight per cent the previous year.

Natural resources also saw double-digit returns, yielding 11.2 per cent versus its 3.1 per cent benchmark. In the 2018 fiscal year, the fund increased its allocation to agriculture within that segment, which now accounts for $2 billion in assets.

PSP Investments also made a number of appointments in the last fiscal year, including Pierre Gibeault as managing director and head of real estate investments, Simon Marc as managing director and head of private equity, Patrick Samson as managing director and head of infrastructure investments and Marc Drouin as managing director and head of natural resources.

“Our talented, high-performing people and expanded global footprint have allowed us to spot the edge and deliver solid and consistent results,” said Cunningham. “Our vision is to be a leading global institutional investor, a partner of choice to the investment world and an enabler of complex investments.”

PSP Investments, which manages the assets of the C$153 billion ($118.2 billion) Public Sector Pension Investment Board, Ottawa, returned a net 9.8% in the fiscal year ended March 31, above the policy benchmark of 8.7%, a news release said.

The best-performing asset class was infrastructure, which returned a net 19.3% compared to its 12.1% benchmark return, followed by real estate at a net 13.6% return, vs. its 12.3% benchmark return; private equity, 12.9% vs. its 17.6% benchmark; natural resources, 11.2% vs. its 3.1% benchmark; public markets, 8.3% vs. its 7.7% benchmark; and private debt, 8.2% vs. its 2.3% benchmark.

The overall five-year annualized net return was 10.5%, above the policy benchmark's 9.4% return. Its 10-year net annualized return of 7.1% was above the return objective of 5.8%.

As of March 31, the actual allocation was 50.1% public markets, 15.2% real estate, 12.7% private equity, 9.8% infrastructure, 5.8% private debt, 3.2% natural resources, and the rest in cash and cash equivalents.

The boss of Canada’s Public Sector Investment Board has expressed his pride in its annual results which have seen a 12.9% growth in net assets.

PSP Investments ended the fiscal year March 31, 2018 with net assets of $153.0 billion, compared to $135.6 billion the previous fiscal year; a one-year total portfolio net return of 9.8% on its investments; and generated $13.5 billion of net income, net of all PSP costs. This return is significantly greater than the Policy Portfolio benchmark return of 8.7%.

"This is a year we can be proud of," said Neil Cunningham, President and Chief Executive Officer at PSP Investments. "We sustained performance over a year marked by market volatility, which shows clearly that our strategic focus on increased diversification is generating returns."

Where PSP gained the most

The results show that PSP Investments saw gains across its portfolio, smashing benchmarks:

• Public Markets had net assets under management of $76.7 billion, a decrease of $0.5 billion from fiscal year 2017, and generated investment income of $6.3 billion, for a one-year return of 8.3%, compared to a benchmark of 7.7%.
• Real Estate had $23.2 billion in net assets under management, up by $2.6 billion from the previous fiscal year, and generated $2.8 billion in investment income, resulting in a 13.6% one-year return versus 12.3% for the benchmark.
• Private Equity had net assets under management of $19.4 billion, $3.5 billion more than in fiscal year 2017, and generated investment income of $2.1 billion, for a one-year return of 12.9%—versus a 3.4% loss in fiscal year 2017—compared to a benchmark return of 17.6%.
• Infrastructure had $15.0 billion in net assets under management, a $3.9 billion increase from the prior fiscal year, and generated $2.3 billion of investment income, leading to a 19.3% one-year return, relative to the benchmark return of 12.1%.
• Private Debt had net assets under management of $8.9 billion, an increase of $4.5 billion from the prior fiscal year, and generated net investment income of $569 million, resulting in an 8.2% one-year return, compared to a benchmark of 2.3%.
• Natural Resources had net assets under management of $4.8 billion, an increase of $1.1 billion from the previous fiscal year, and generated record investment income of $450 million, for a one-year return of 11.2%, versus the 3.1% benchmark.

Talented people helping vision of leading global investor

"Our talented, high-performing people and expanded global footprint have allowed us to spot the edge and deliver solid and consistent results," Mr. Cunningham said. "Our vision is to be a leading global institutional investor, a partner of choice to the investment world and an enabler of complex investments. We have the knowledge, talent, systems and flexibility to seize global opportunities as they arise."

• One-year total portfolio net return of 9.8% generated $13.5 billion of net income, net of all PSP costs.
• Five-year annualized net return of 10.5% which is 1.1% above the Policy Portfolio benchmark return.
• Ten-year net annualized return of 7.1% generated $23.8 billion of cumulative net investment gains above the return objective of 5.8%.

The Public Sector Pension Investment Board (PSP Investments) announced today that it ended its fiscal year March 31, 2018 with net assets of $153.0 billion, compared to $135.6 billion the previous fiscal year, an increase of 12.9%. The investment manager reported a one-year total portfolio net return of 9.8% on its investments and generated $13.5 billion of net income, net of all PSP costs. This return is significantly greater than the Policy Portfolio benchmark return of 8.7%.

“This is a year we can be proud of,” said Neil Cunningham, President and Chief Executive Officer at PSP Investments. “We sustained performance over a year marked by market volatility, which shows clearly that our strategic focus on increased diversification is generating returns. Once again, our people highlighted the possible in their active commitment to our shared purpose: to contribute to the financial security of the contributors and beneficiaries who have served Canada throughout their careers.”

Net assets increased by $17.4 billion in fiscal year 2018, attributable to net income of $13.5 billion and net contributions of $3.9 billion. All asset classes saw strong returns.

Asset Class Highlights (click on image)

As of March 31, 2018:

Public Markets had net assets under management of $76.7 billion, a decrease of $0.5 billion from fiscal year 2017, and generated investment income of $6.3 billion, for a one-year return of 8.3%, compared to a benchmark of 7.7%. Public Markets continued to generate significant returns in fiscal year 2018, despite increased geopolitical risk, market volatility and rising interest rates, mainly during the fourth quarter. At fiscal 2018 year-end, net assets managed in active strategies totalled $45.8 billion, up from $38.8 billion the previous year, while net assets managed in internal active strategies totalled $31 billion, up from $24.6 billion.

Real Estate had $23.2 billion in net assets under management, up by $2.6 billion from the previous fiscal year, and generated $2.8 billion in investment income, resulting in a 13.6% one-year return versus 12.3% for the benchmark. Fiscal year 2018 was a year of stabilization and consolidation, reflecting the maturity of the Real Estate portfolio. The group achieved strong performance despite an ongoing low-yield environment. During fiscal year 2018, Pierre Gibeault was appointed Managing Director and Head of Real Estate Investments.

Private Equity had net assets under management of $19.4 billion, $3.5 billion more than in fiscal year 2017, and generated investment income of $2.1 billion, for a one-year return of 12.9%—versus a 3.4% loss in fiscal year 2017—compared to a benchmark return of 17.6%. The strong increase in fiscal year 2018 performance was mainly driven by strong valuation gains, notably in the financial and industrial sectors, but was partially offset by underperformance of certain investments. However, investments completed in the last three years, representing $9.9 billion of assets, have generated returns significantly above benchmark. Private Equity deployed a total of $4.4 billion (including $2.3 billion in new direct investments and co-investments) and committed a total of $4.1 billion for future deployment through 17 funds, 11 of which are with new fund partners. During fiscal year 2018, Mr. Simon Marc was appointed Managing Director and Head of Private Equity.

Infrastructure had $15.0 billion in net assets under management, a $3.9 billion increase from the prior fiscal year, and generated $2.3 billion of investment income, leading to a 19.3% one-year return, relative to the benchmark return of 12.1%. The group deployed $3.3 billion in fiscal year 2018, including $2.2 billion in direct investments. During fiscal year 2018, Mr. Patrick Samson was appointed Managing Director and Head of Infrastructure Investments.

Private Debt had net assets under management of $8.9 billion, an increase of $4.5 billion from the prior fiscal year, and generated net investment income of $569 million, resulting in an 8.2% one-year return, compared to a benchmark of 2.3%. The group deployed net $4.3 billion across over 30 transactions, including investments in revolving credit facilities, first and second lien term loans, and secured and unsecured bonds. The group’s London team made great strides toward its long-term portfolio allocation target, with European assets under management accounting for 24% of the global Private Debt portfolio, up from 8% the prior year.

Natural Resources had net assets under management of $4.8 billion, an increase of $1.1 billion from the previous fiscal year, and generated record investment income of $450 million, for a one-year return of 11.2%, versus the 3.1% benchmark. The increase in net assets under management resulted primarily from $864 million in net deployments and $332 million in valuation gains. Income was driven by strong cash flows and valuation gains. The group made significant progress again this year in diversifying its investments into the agriculture sector, which now account for $2 billion of assets under management. During fiscal year 2018, Mr. Marc Drouin was appointed Managing Director and Head of Natural Resources.

Corporate Highlights

• Our Board of Directors appointed Neil Cunningham as President and CEO on February 7, 2018. Prior to this appointment, Mr. Cunningham served as PSP’s Senior Vice President, Global Head of Real Estate and Natural Resources at the organization.
• We launched our Inclusion & Diversity (I&D) Forum and initiated an I&D Council co-chaired by Mr. Cunningham, for whom an active commitment to inclusion and diversity is a top priority.
• We also received an important accolade by being recognized as one of Montréal’s Top Employers.
• This year’s annual report marks the launch of PSP’s new brand, Spot the Edge, which embodies our passion for exploring every angle, across asset classes, markets and industries, to broaden our perspectives and hone in on opportunities.
• We continued to integrate environmental, social and governance factors into our investment decision-making process across asset classes. Significant progress was made on all pillars of our responsible investment strategy. Our second annual Responsible Investment Report can be consulted here.

“Our talented, high-performing people and expanded global footprint have allowed us to spot the edge and deliver solid and consistent results,” Mr. Cunningham said. “Our vision is to be a leading global institutional investor, a partner of choice to the investment world and an enabler of complex investments. We have the knowledge, talent, systems and flexibility to seize global opportunities as they arise.”

For more information on PSP Investments’ fiscal year 2018 performance, please visit our dedicated microsite at www.investpsp.com or download the annual report here.

About PSP Investments

The Public Sector Pension Investment Board (PSP Investments) is one of Canada's largest pension investment managers with $153 billion of net assets as of March 31, 2018. It manages a diversified global portfolio composed of investments in public financial markets, private equity, real estate, infrastructure, natural resources and private debt. Established in 1999, PSP Investments manages net contributions to the pension funds of the federal Public Service, the Canadian Forces, the Royal Canadian Mounted Police and the Reserve Force. Headquartered in Ottawa, PSP Investments has its principal business office in Montréal and offices in New York and London. For more information, visit investpsp.com or follow us on Twitter and LinkedIn.

Policy Portfolio

The Board of Directors approves, and annually reviews, the Statement of Investment Policies, Standards and Procedures (SIP&P), which governs the strategic allocation of assets, known as the Policy Portfolio. This year, the Treasury Board of Canada communicated to PSP a lower 10-year real rate of return target. The Board reviewed and approved adjustments proposed by management, which reduce the pension funding risk, while maintaining the Policy Portfolio’s ability to generate a comfortable return margin above the Reference Portfolio. (See the MD&A on p. 34 for more details.)

Succession planning

With the departure of two directors and the terms of other directors having expired or ending in the near future, the Governance Committee and the Board focused considerable energy in fiscal year 2018 on ensuring that a strong succession planning and director onboarding process is in place for individual directors, as well as committee chairs. The HRCC also supported the organization’s mandate toward top-tier practices in succession planning for management.

The management succession plan was put to the test this year, and it proved successful, in allowing us to appoint Neil as President and CEO.

Climate change

The Board worked closely with the organization’s Responsible Investment team to initiate a review of the portfolio’s exposure to climate change risk and developed tools to ensure those risks are incorporated into PSP’s underwriting and decision-making. This entails developing and implementing investment policies and processes to make the portfolio more resilient to the impacts of climate change, as well as encouraging enhanced disclosure on climate change risks by companies in which PSP invests. Read more about this in our separate 2018 Responsible Investment Report.

During fiscal year 2017, as part of the review of our compensation framework, we reviewed the benchmarks of many asset classes to improve their alignment with their respective investment strategies and market performance. The revised benchmarks came into effect on April 1, 2017 and were used to evaluate our performance for fiscal year 2018.

The benchmarks in the table below were used to measure fiscal year 2018 relative performance for each asset class set out in the SIP&P as well as for the overall Policy Portfolio (click on image).

• Real Estate had $23.2 billion in net assets under management, up by $2.6 billion from the previous fiscal year, and generated $2.8 billion in investment income, resulting in a 13.6% one-year return versus 12.3% for the benchmark.
•  Private Equity had net assets under management of $19.4 billion, $3.5 billion more than in fiscal year 2017, and generated investment income of $2.1 billion, for a one-year return of 12.9%—versus a 3.4% loss in fiscal year 2017—compared to a benchmark return of 17.6%. The strong increase in fiscal year 2018 performance was mainly driven by strong valuation gains, notably in the financial and industrial sectors, but was partially offset by underperformance of certain investments. However, investments completed in the last three years, representing $9.9 billion of assets, have generated returns significantly above benchmark.
• Infrastructure had $15.0 billion in net assets under management, a $3.9 billion increase from the prior fiscal year, and generated $2.3 billion of investment income, leading to a 19.3% one-year return, relative to the benchmark return of 12.1%.  
• Private Debt had net assets under management of $8.9 billion, an increase of $4.5 billion from the prior fiscal year, and generated net investment income of $569 million, resulting in an 8.2% one-year return, compared to a benchmark of 2.3%.
• Natural Resources had net assets under management of $4.8 billion, an increase of $1.1 billion from the previous fiscal year, and generated record investment income of $450 million, for a one-year return of 11.2%, versus the 3.1% benchmark.  

[...] when you're working at a public pension fund, I have an issue with people gaming their benchmark, especially in private markets where things aren't always straightforward when it comes to benchmarks.

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. (Note: In a subsequent discussion, Barb Zvan told me the head of HR and CFO also sit on this committee and for good reasons).

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.

"We also launched our Inclusion & Diversity (I&D) Forum in November and initiated an I&D Council, which I co-chair, alongside Giulia Cirillo, Senior Vice President and Chief Human Resources Officer. The Council focuses on creating awareness of our individual unconscious biases and we established several affinity groups to help foster inclusivity at PSP."

Part of the problem is that “diversity” and “inclusion” are so often lumped together that they’re assumed to be the same thing. But that’s just not the case. In the context of the workplace, diversity equals representation. Without inclusion, however, the crucial connections that attract diverse talent, encourage their participation, foster innovation, and lead to business growth won’t happen. As noted diversity advocate Vernā Myers puts it, “Diversity is being invited to the party. Inclusion is being asked to dance.”

Numerous studies show that diversity alone doesn’t drive inclusion. In fact, without inclusion there’s often a diversity backlash. Our research on sponsorship and multicultural professionals, for example, shows that although 41% of senior-level African-Americans, 20% of senior-level Asians, and 18% of senior-level Hispanics feel obligated to sponsor employees of the same gender or ethnicity as themselves (for Caucasians the number is 7%), they hesitate to take action. Sponsors of color, especially at the top, are hobbled by the perception of giving special treatment to protégés of color and the concern that protégés might not “make the grade.” The result: Just 18% of Asians, 21% of African-Americans, and 25% of Hispanics step up to sponsorship (and 27% of Caucasians).

Another difficulty in solving the issue is data. It’s easy to measure diversity: It’s a simple matter of headcount. But quantifying feelings of inclusion can be dicey. Understanding that narrative along with the numbers is what really draws the picture for companies.

Nathalie Bernier, named CFO of the year, discussed with @LP_LaPresse. https://t.co/MKXVSYQKZF

— InvestPSP (@InvestPSP) June 5, 2018

So proud of the new PSP brand! Congratulations @InvestPSP ! https://t.co/BUJZVFoczF

— Dominique Dionne ARP (@DionneDominique) June 12, 2018

Patrick Samson, Managing Director at PSP Investments discusses potential for growth in the Asian renewables market at the Global Summit #IIGSummit@InvestPSPpic.twitter.com/qw3mOdvW6M

— Infra Investor (@IInews) March 21, 2018

Imagine an institutional money management startup — one seeded with about C$56 billion ($43.6 billion) to invest and a potential client base of as many as 75 public pension funds, endowments and foundations, and other asset pools in Canada’s largest province.

That’s been what Bert Clark has been overseeing as he leads the Investment Management Corp. of Ontario, Toronto, through its formative first year. Created by the Ontario Parliament in 2016, it was launched last July and now manages money for the C$29.4 billion Workplace Safety and Insurance Board and the Ontario Pension Board, which administers the C$26.4 billion Public Service Pension Plan, Toronto. The two asset owners have provided assets and investment staffs to create the foundation for the new firm, which operates independently from the Ontario government.

Mr. Clark’s first order of business since becoming IMCO’s president and CEO in October 2016 was combining the investment management cultures of two somewhat disparate public agencies — a pension plan and workers’ compensation organization.

“I spent my first six months merging, frankly,” Mr. Clark said in an interview at IMCO’s Toronto offices; “merging two organizations with all of the types of challenges that are typical in any merger, regardless of the type. We had two compensation schemes, two different risk systems, employees were in two different benefit programs, we had two different IT systems, we had two different segregated portfolios. And so we had to figure out how to bring all those people and capabilities into one organization. Effectively, what we were negotiating was a joint venture agreement to establish IMCO between WSIB and OPB.”

With that well underway, Mr. Clark now can direct IMCO’s attention to its prescribed goal of managing assets — not for the large Toronto-based provincial plans like the C$189.5 billion Ontario Teachers’ Pension Plan, Toronto, but for the 75 pension plans, endowments and other public institutions in Ontario, each with assets in the hundreds of millions of dollars, that are targeted by IMCO as prospective clients, Mr. Clark said.

“We completed what I would call Phase I of the project, which was merge the two organizations,” Mr. Clark said.

The second and third phases, which in some cases are happening at the same time, are now underway with a goal of bringing on external clients sometime in 2019.

“Phase II is to take what we inherited and turn it into an institutional asset manager capable of taking on more clients,” Mr. Clark said. “That’s no small task because what we inherited was investment capabilities from two organizations, but not the full suite of capabilities you would expect from an asset manager. Phase III is enhancing our investment capabilities. We want to provide a better platform, but to go beyond that, to have great portfolio construction capabilities that offer more asset classes than (asset owner clients) have today. There’s a big appetite for infrastructure, for example ... also to provide great risk reporting. That’s going to take a few years, to be honest.”

IMCO was modeled after government-created public money managers like the C$298.5 billion Caisse de Depot et Placement du Quebec, Montreal; C$135.5 billion British Columbia Investment Management Corp., Victoria; and the C$103.7 billion Alberta Investment Management Corp., Edmonton. But unlike those organizations, which are mandated to manage assets for all public asset owners in their provinces, membership among asset owners in the Ontario corporation is voluntary, Mr. Clark said. So IMCO executives have to learn how to market the organization.

“For example, (WSIB and OPB) didn’t have a head of client service. They had no external clients; they were internal investment teams. But if you’re going to solicit clients, you better have someone to interact with clients. They didn’t have a standardized way of reporting to clients. Why would they? They had internal reporting documentation, which looks quite different from what you’d need to construct for clients. So we had to build up that capability. ... We needed to develop products for clients. We didn’t have any products; we had two segregated portfolios. We had to take what we got and turn that into a full set of products. So that’s Phase II, which we’re in right now.”

IMCO clients will control their own asset allocation, similar to the model in Alberta, British Columbia and Quebec, and like them, IMCO will provide advice on any allocation questions. “They can’t delegate 100% discretion to us,” Mr. Clark said, “but it’s important to use our investment expertise to provide advice on allocations, risk tolerance, time horizons.”

Ultimately, IMCO will offer 15 strategies “that clients can assemble the way that suits their particular investment beliefs and liabilities,” Mr. Clark said. “It’s actually anything but a one-size-fits-all platform. We’re trying to construct a set of products they can assemble in a variety of permutations and combinations. ... We’re trying to see what range of products you could offer a client, sit down with them and meet almost everyone’s liabilities.”

Currently IMCO has eight asset-class strategies that came from WSIB and OPB: public equities, fixed income and money market, real estate, diversified markets, infrastructure, absolute return, private equity and private debt. Neil Murphy, IMCO spokesman, said the seven asset classes that will be part of the new product suite are still being formed but will “evolve” from those that currently exist.

In alternative investments, Mr. Clark said IMCO won’t necessarily have a disadvantage in generating returns or in competing for deals with the large public plans in Ontario that have been internally managing private markets, infrastructure and real estate for years. “The alternative asset classes are less ‘alternative’ today than they were 15 to 20 years ago,” Mr. Clark said. “They’ve become pretty accepted as parts of a typical portfolio. Twenty-five years ago, what was cutting edge at (Ontario) Teachers, to get involved in infrastructure, private equity, real estate in a direct way, is no longer a distinguishing investment strategy. All the large Canadian institutions are doing it and doing it directly. I think it’s still worth us being in those asset classes, but nobody should expect too much ifferentiation in returns for merely being in those asset classes.”

He said IMCO will set itself apart from the other provincial public plans on alternatives by creating its own specializations.

“It’s not enough to just say, ‘I’m going to be doing infrastructure, I’m going to be doing it internally.’ You have to say, ‘I’m going to be doing infrastructure, I’m going to be doing it internally, and I’ve got some differentiating expertise,’” he said. “We’re comfortable with construction risk in greenfield infrastructure, and we’ve developed an expertise in that regard. That makes you different from everybody else. We will show up if we can bring something distinctive to ownership of that asset class or that particular investment. ... That’s one of the advantages of showing up 25 years after everyone else ... Our organization doesn’t reflect the strategies of 10, 15 years ago that may be less powerful now.”

Looking for a reason why the market's been so bumpy this year? Blame Trump. Looking for a reason why the market has held up so well this year? Blame Trump.

There's been a overriding paradox this year for investors: President Donald Trump has been both a blessing and a curse, goosing stocks through tax cuts and vexing the market with a seemingly endless stream of gut-churning headlines.

"We don't recall a President who has been simultaneously so bullish and bearish for stocks," Ed Yardeni, head of Yardeni Research, told clients in a note earlier this week. "That might explain why the S&P 500 has been zigging and zagging since the start of this year."

Actually, the market's done pretty well for itself lately.

After a wickedly volatile first quarter that saw major averages foray into correction territory, stocks have bounced back nicely. The S&P 500 is now up 4 percent for the year, thanks to a nearly 8 percent jump since early April, and the Dow industrials have posted a 1.8 percent increase.

Tech stocks continue to lead the market, with the Nasdaq surging 12.4 percent.

Yardeni, an economist and market strategist, said actions and policies specific to Trump can be tied to the market's ups and downs. He cited a J.P. Morgan report that looked at market behavior and determined that tariff threats by the administration had held stocks back by 4.5 percent since March, resulting in a $1.25 trillion slice in market cap.

"I guess we can blame Trump for that loss thanks to his protectionist saber-rattling. On the other hand, he deserves credit for enacting a HUGE corporate tax cut at the end of last year," Yardeni wrote.

Republicans pushed the largest tax cut in U.S. history through Congress in December, a $1.5 trillion reduction that Yardeni said lowered taxes by 36 percent for nonfinancial corporations in the first quarter.

"We think the market is telling us that the signal is earnings that have been supercharged by the tax cut, while the noise is protectionist saber-rattling," he added. "That's been great for cyclical and growth stocks."

In fact, Yardeni said the Federal Reserve and its interest rate hikes have rattled the market more than Trump.

The central bank enacted its second interest rate increase of 2018 on Wednesday and indicated that two more quarter-point increases are on the way before the end of the year. In addition, the Fed is tightening monetary policy further through the reduction in bond holdings on its balance sheet.

However, the market looked to be headed for a loss Friday after Trump announced tariffs on Chinese technology imports that would amount to about $50 billion.

Overall, though, Trump has fared better than most of his predecessors at this point in his term.

Earlier this month, he observed his 500th day in office with the best Dow performance of any president since George H.W. Bush in 1989-90, and sixth-best among the 20 presidents since the turn of the 20th century, according to LPL Research.

Investors remain skittish, though, and have pulled $60.3 billion out of funds that focus on U.S. stocks, according to Investment Company Institute data through April.

Final point on #ECB: #Draghi , the master of monetary policy craftsmanship, has managed to announce end of QE in a way such that equities bounce, fixed income rallies (incl peripheries) & EUR drops = he has loosened financial conditions by withdrawing accommodation. 👍

— Joumanna Bercetche (@CNBCJou) June 14, 2018

There is no imminent threat of an EM debt crisis. While EM international bonds outstanding are indeed at historic highs, expressed as a share of GDP, the growth of issuance is primarily from the private sector, the latter dominated by China. For ex-China EM economies, the most recent growth has come from government issuers, with Saudi Arabia, Qatar and the UAE accounting for much of it.

As a general rule, history suggests that debt crises result from a loss of momentum of the denominator of the typical debt ratios. In other words, a deterioration in the overall ability of an economy to sustain debt and its servicing. A growth of the numerator, for example as a result of rising interest rates, is typically not the trigger for crisis, except in extreme cases.

Even if the current synchronized global economic expansion were to slow down, the debt fundamentals of many EM economies are far superior to what prevailed prior to previous EM debt crises. There will be a case to be made for impending crises in some vulnerable EM economies, but absent a 2008-style global credit crunch it is hard to see any meaningful overall threat to EM debt on a 6-12 month investment horizon.

Our macro-driven model of expected industrial commodity returns (the CRB Raw Industrials Index includes non-exchange traded commodities such as burlap, rubber and lead scrap) has turned persistently negative, triggering the regime to shift to bearish from neutral (top left chart). This has been driven by tight Chinese liquidity conditions and the peak in global growth. The top-right chart shows that our BCFI Index has peaked and turned down, suggesting headwinds for global growth and commodity prices. Slowing EM real money growth (bottom-left chart) will also be a headwind, as is slower Chinese growth indicated by our leading indicators (bottom right chart).

So far this year, commodity markets have held up very well despite rising real yields and the recent rebound in the US dollar. This is likely reflective of late-cycle inflationary dynamics which tend to help commodities outperform as the economic cycle matures going into recessions. However, given the negative signal given by our forecast model and weak China leading indicators, for investors with industrial commodity exposures, it makes sense to buy puts to hedge against industrial-commodity price falls over the next 6 months (click on image to enlarge).

In describing various economic train wrecks these last few weeks, I may have given the wrong impression about trains. I love riding the train on the East Coast or in Europe. They’re usually a safe and efficient way to travel. And I can sit and read and work, plus not deal with airport security. But in this series, I’m concerned about economic train wrecks, of which I foresee many coming before The Big One which I call The Great Reset, where all the debt, all over the world, will have to be “rationalized.” That probably won’t happen until the middle or end of the next decade. We have some time to plan, which is good because it’s all but inevitable now, without massive political will. And I don’t see that anywhere.

Unlike actual trains, we as individuals don’t have the option of choosing a different economy. We’re stuck with the one we have, and it’s barreling forward in a decidedly unsafe manner, on tracks designed and built a century ago. Today, we’ll review yet another way this train will probably veer off the tracks as we discuss the numerous public pension defaults I think are coming.

Last week, I described the massive global debt problem. As you read on, remember promises are a kind of debt, too. Public worker pension plans are massive promises. They don’t always show up on the state and local balance sheets correctly (or directly!), but they have a similar effect. Governments worldwide promised to pay certain workers certain benefits at certain times. That is debt, for all practical purposes.

If it’s debt, who are the lenders? The workers. They extended “credit” with their labor. The agreed-upon pension benefits are the interest they rightly expect to receive for lending years of their lives. Some were perhaps unwise loans (particularly from the taxpayers’ perspective), but they’re not illegitimate. As with any other debt, the borrower is obligated to pay. What if the borrower simply can’t repay? Then the choices narrow to default and bankruptcy.

Today’s letter is chapter 6 in my Train Wreck series. If you’re just joining us, here are links to help you catch up.

• Credit-Driven Train Crash (May 11)
• Train Crash Preview (May 18)
• High Yield Train Wreck (May 25)
• The Italian Trigger (June 1)
• Debt Clock Ticking (June 8)

As you will see below, the pension crisis alone has catastrophic potential damage, let alone all the other debt problems we’re discussing in this series. You are sadly mistaken if you think it will end in anything other than a train wreck. The only questions are how serious the damage will be, and who will pick up the bill.

Demographics and Destiny

It’s been a busy news year, but one under-the-radar story was a wave of public school teacher strikes around the US. It started in West Virginia and spread to Kentucky, Oklahoma, Arizona, and elsewhere. Pensions have been an issue in all of them.

An interesting aspect of this is that many younger teachers, who are a long way from retirement age, are very engaged in preserving their long-term futures. This disproves the belief that Millennial-generation Americans think only of the present. From one perspective, it’s nice to see, but they are unfortunately right to worry. Demographic and economic reality says they won’t get anything like the benefits they see current retirees receiving. And it’s not just teachers. The same is true for police, firefighters, and all other public-sector workers.

Thinking through this challenge, I’m struck by how many of our economic problems result from the steady aging of the world’s population. We are right now living through a combination unprecedented in human history.

• Birth rates have plunged to near or below replacement level, and
• Average life spans have increased to 80 and beyond.

Neither of these happened naturally. The first followed improvements in artificial birth control, and the second came from better nutrition and health care. Each is beneficial in its own way, but together they have serious consequences.

This happened quickly, as historic changes go. Here is the US fertility rate going back to 1960.

As you can see, in just 16 years (1960–1976), fertility in the US dropped from 3.65 births per woman to only 1.76. It’s gone sideways since then. This appears to be a permanent change. It’s even more pronounced in some other countries, but no one has figured out a way to reverse it.

Again, I’m not saying this is bad. I’m happy young women were freed to have careers if they wished. I’m also aware (though I disagree) that some think the planet has too many people anyway. If that’s your worry, then congratulations, because new-human production is set to fall pretty much everywhere, although at varying rates.

Breaking down the US population by age, here’s how it looked in 2015.

Think of this as a python swallowing a pig. Those wider bars in the 50–54 and 55–59 zones are Baby Boomers who are moving upward and not dying as early as previous generations did. Meanwhile, birth rates remain low, so as time progresses, the top of the pyramid will get wider and the bottom narrower. (You can watch a good animation of the process here.)


This is the base challenge: How can a shrinking group of working-age people support a growing number of retirement-age people? The easy and quick illustration to this question is to talk about the number of workers supporting each Social Security recipient. In 1940, it was 160. By 1950 it was 16.5. By 1960 it was 5.1. I think you can see a trend here. As the chart below shows, it will be 2.3 by 2030.

Similarly, states and local governments are asking current young workers to support those already in the pension system. The math is the same, though numbers vary from area to area. How can one worker support two or three retirees while still working and trying to raise a family with mortgage payments, food, healthcare, etc.? Obviously, they can’t, at least not forever. But no one wants to admit that, so we just ignore reality. We keep thinking that at some point in the future, taxpayers will pick up the difference. And nowhere is it more evident than in public pensions.

In a future letter, I will present some good news to go with this bad news. Several new studies will clearly demonstrate new treatments to significantly extend the health span of those currently over age 50 by an additional 10 or 15 years, and the same or more for future generations. It’s not yet the fountain of youth, but maybe the fountain of middle-age. (Right now, middle-age sounds pretty good to me.)

But wait, those who get longer lifespans will still get Social Security and pensions. That data isn’t in the unfunded projections we will discuss in a moment. So, whatever I say here will be significantly worse in five years.

Let me tell you, that’s a high order problem. Do you think I want to volunteer to die so that Social Security can be properly funded? Are we in a Soylent Green world? This will be a very serious question by the middle of the next decade.

Triple Threat

We have discussed the pension problem before in this letter—at least a half-dozen times. Most recently, I issued a rather dire Pension Storm Warning last September. I said in that letter that I expect more cities to go bankrupt, as Detroit did, not because they want to, but because they have no choice. You can’t get blood from a rock, which is what will be left after the top taxpayers move away and those who stay vote to not raise taxes.

This means city and school district retirees will take major haircuts on expected pension benefits. The citizens that vote not to pay the committed debt will be fed up with paying more taxes because they will be at the end of their tax rope. I am not arguing that is fair, but it is already happening and will happen more.

Let me say this again because it’s critical. The federal government can (but shouldn’t) run perpetual deficits because it controls the currency. It also has a mostly captive tax base. People can migrate within the US, but escaping the IRS completely is a lot harder (another letter for another day). States don’t have those two advantages. They have tighter credit limits and their taxpayers can freely move to other states.

Many elected officials and civil servants seem not to grasp those differences. They want something that can’t be done, except in Washington, DC. I think this has probably meant slower response by those who might be able to help. No one wants to admit they screwed up.

In theory, state pensions are stand-alone entities that collect contributions, invest them for growth, and then disburse benefits. Very simple. But in many places, all three of those components aren’t working.

• Employers (governments) and/or workers haven’t contributed enough.
• Investment returns have badly lagged the assumed levels.
• Expenses are more than expected because they were often set too high in the first place, and workers lived longer.

Any real solution will have to solve all three challenges—difficult even if the political will exists. A few states are making tough choices, but most are not. This is not going to end well for taxpayers or retirees in those places.

Worse, it isn’t just a long-term problem. Some public pension systems will be in deep trouble when the next recession hits, which I think will happen in the next two years at most. Almost everyone involved is in deep denial about this. They think a miracle will save them, apparently. I don’t rule out anything, but I think bankruptcy and/or default is the more likely outcome in many cases.

Assumed Disaster

The good news is we’re starting to get data that might shake people out of their denial. A new Harvard study funded by Pew Charitable Trusts uses “stress test” analysis, similar to what the Federal Reserve does for large banks, to see how plans in ten selected states would behave in adverse conditions (hat tip to Eugene Berman of Cox Partners for showing me this study).

The Harvard scholars looked at two economic scenarios, neither of which is as stressful as I expect the next downturn to be. But relative to what pension trustees and legislators assume now, they’re devastating.

Scenario 1 assumes fixed 5% investment returns for the next 30 years. Most plans now assume returns between 7% and 8%, so this is at least two percentage points lower. Over three decades, that makes a drastic difference.

States are a larger and different problem because, under our federal system, they can’t go bankrupt. Lenders perversely see this as positive because it removes one potential default avenue. They forget that a state’s credit is only as good as its tax base, and the tax base is mobile.

Scenario 2 assumes an “asset shock” involving a 20% loss in year one, followed by a three-year recovery and then a 5% equity return for years five through year 30. So, no more recessions for the following 25 years. Exactly what fantasy world are we in?

Their models also include two plan funding assumptions. In the first, they assume states will offset market losses with higher funding. (Fat chance of that in most places. Seriously, where are Illinois, Kentucky, or others going to get the money?). The second assumes legislatures will limit contribution increases so they don’t have to cut other spending.

Admittedly, these models are just that—models. Like central banks models, they don’t capture every possible factor and can be completely wrong. They are somewhat useful because they at least show policymakers something besides fairytales and unicorns. Whether they really help or not remains to be seen.

Crunching the numbers, the Pew study found the New Jersey and Kentucky state pension systems have the highest insolvency risk. Both were fully-funded as recently as the year 2000 but are now at only 31% of where they should be.

Other states in shaky conditions include Illinois, Connecticut, Colorado, Hawaii, Pennsylvania, Minnesota, Rhode Island, and South Carolina. If you are a current or retired employee of one of those states, I highly suggest you have a backup retirement plan. If you aren’t a state worker but simply live in one of those states, plan on higher taxes in the next decade.

But that’s not all. Even if you are in one of the (few) states with stable pension plans, you’re still a federal taxpayer, and that’s who I think will end up bearing much of this debt. And as noted above, it is debt. The Pew study describes it as such in this chart showing state and local pension debt as a share of GDP.

For a few halcyon years in the late 1990s, pension debt was negative, with many plans overfunded. The early-2000s recession killed that happy situation. Then the Great Recession nailed the coffin shut. Now it is above 8% of GDP and has barely started to recover from the big 2008 jump.

Again, this is only state and local worker pensions. It doesn’t include federal or military retirees, or Social Security, or private sector pensions and 401Ks, and certainly not the millions of Americans with no retirement savings at all. All these people think someone owes them something. In many cases, they’re right. But what happens when the assets aren’t there?

The stock market boom helped everyone, right? Nope. States' pension funds have nearly $4 trillion of stock investments, but somehow haven't benefited from soaring stock prices.

A new report by the American Legislative Exchange Council (ALEC) shows why this is true. It notes that the unfunded liabilities of state and local pension plans jumped $433 billion in the last year to more than $6 trillion. That is nearly $50,000 for every household in America. The ALEC report is far more alarming than the report from Harvard. They believe that the underfunding is more than 67%.

There are several problems with this. First, there simply isn’t $6 trillion in any budget to properly fund state and local government pensions. Maybe a few can do it, but certainly not in the aggregate.

Second, we all know about the miracle of compound interest. But in this case, that miracle is a curse. When you compute unfunded liabilities, you assume a rate of return on the current assets, then come back to a net present value, so to speak, of how much it takes to properly fund the pension.

Any underfunded amount that isn’t immediately filled will begin to compound. By that I mean, if you assume a 6% discount rate (significantly less than most pensions assume), then the underfunded amount will rise 6% a year.

This means in six years, without the $6 trillion being somehow restored (magic beans?), pension underfunding will be at $8.4 trillion or thereabouts, even if nothing else goes wrong.

That gap can narrow if states and local governments (plus workers) begin contributing more, but it stretches credulity to say it can get fixed without some pain, either for beneficiaries or taxpayers or both.

I noted last week in Debt Clock Ticking that the total US debt-to-GDP ratio is now well over 300%. That’s government, corporate, financial, and household debt combined. What’s another 8% or 10%? In one sense, not much, but it aggravates the problem.

If you take the almost $22 trillion of federal debt, well over $3 trillion of state and local debt, and add in the $6 trillion debt of underfunded pensions, you find that the US governments from the top to bottom owe over $30 trillion, which is well over 150% of GDP. Technically, we have blown right past the Italian debt bubble. And that’s not even including unfunded Social Security and healthcare benefits, which some estimates have well over $100 trillion. Where is all that going to come from?

Connecticut, the state with the highest per-capita wealth, is only 51.9% funded according to the Wall Street Journal. The ALEC study mentioned above would rate it much worse. Your level of underfunding all depends on what you think your future returns will be, and almost none of the projections assume recessions.

The level of underfunding will rise dramatically during the next recession. Total US government debt from top to bottom will be more than $40 trillion only a few years after the start of the next recession. Again, not including unfunded liabilities.

I wrote last year that state and local pensions are The Crisis We Can’t Muddle Through. That’s still what I think. I’m glad officials are starting to wake up to the problem they and their predecessors created. There are things they can do to help, but I think we are beyond the point where we can solve this without serious pain on many innocent people. Like the doctor says before he cuts you, “This is going to hurt.”

We’ll stop there for now. Let me end by noting this is not simply a US problem. Most developed countries have their own pension crises, particularly the southern Eurozone tier like Italy and Greece. We’ll look deeper at those next week.

This is not going to be the end of the world. We’ll figure out ways to get through it as a culture and a country. The rest of the world will, too, but it may not be much fun. Just ask Greece.

1. The global jobs crisis: High structural unemployment, especially youth unemployment, and less and less good paying jobs with benefits.
2. Demographic time bomb: A rapidly aging population means a lot more older people with little savings spending less.
3. The global pension crisis: As more and more people retire in poverty, they will spend less to stimulate economic activity. Moreover, the shift out of defined-benefit plans to defined-contribution plans is exacerbating pension poverty and is deflationary. Read more about this in my comments on the $400 trillion pension time bomb and the pension storm cometh. Any way you slice it, the global pension crisis is deflationary and bond friendly.
4. Excessive private and public debt: Rising government and consumer debt levels are constraining public finances and consumer spending.
5. Rising inequality: Hedge fund gurus cannot appreciate this because they live in an alternate universe, but widespread and rising inequality is deflationary as it constrains aggregate demand. The pension crisis will exacerbate inequality and keep a lid on inflationary pressures for a very long time.
6. Globalization: Capital is free to move around the world in search of better opportunties but labor isn't. Offshoring manufacturing and service sector jobs to countries with lower wages increases corporate profits but exacerbates inequality.
7. Technological shifts: Think about Amazon, Uber, Priceline, AI, robotics, and other technological shifts that lower prices and destroy more jobs than they create. On study found that 800 million people might be out of a job by 2030 because of automation.

1. Adopt world-class governance which separates public pensions from governments completely, have them overseen by an independent and qualified board and managed by industry experts who are paid to deliver long-term excess returns investing across public and private markets all over the world. Most of this can be done internally, saving a bundle on fees.
2. Adopt a shared risk model which ensures intergenerational equity and shares the risk properly between active and retired members. This way, when pensions run into trouble, it's not just active members paying more in contributions but also retired members that receive less benefits (typically, a small adjustment in their cost-of-living adjustment, they'll go a brief period without full inflation portection until the plan's funded status is fully restored).

Why is CPPIB issuing green bonds? It has over $356 billion under management and doesn't need the money so why is it issuing green bonds?

Cynics will claim it's just a green gimmick, another case of Canadian pensions cranking up the leverage to boost their returns and executive compensation.

Now, let's all take a deep breath in and out. I'll explain to you exactly why CPPIB wisely chose to issue green bonds.

First, it has nothing to do with leverage. CPPIB will invest $3 billion out of a total $356 billion so leverage isn't the reason behind issuing green bonds.

Second, it has everything to do with efficient use of capital. When a corporation issues a bond, it uses that money to buy back shares, invest in capital equipment or make a strategic acquisition, among other things.

When a pension issues a bond, any bond, it incurs liabilities and needs to invest that money wisely to earn a higher rate of return.

In the US, rating agencies are targeting underfunded public pensions and many of these state and local governments with chronically underfunded pensions are responding by kicking the can down the road, issuing pension bonds to invest and try to make up their shortfall.

It works like this. US state or local governments emit $100 million in pension obligation bonds, pay out 4.5% (assuming rates don't rise a lot) to investors and their public pensions use the proceeds to invest in stocks, corporate bonds, private equity funds and hedge funds to try to earn more than than that 4.5% being paid out (typically targeting a 7.5 or 8% bogey) to try to close the gap between assets and liabilities to improve its funded status.

And because a lot of the US state and local governments emitting pension obligation bonds are fiscally weak, their credit rating isn't very good so they need to pay an extra premium to investors to entice them to buy these pension bonds.

It's nuts when you think about it because they're taking credit risk (their own balance sheet can significantly deteriorate) and market risk (if interest rates rise or assets get clobbered), hoping they will invest wisely to earn more than what they're paying out to bondholders. This is why experts warn to beware of pension obligation bonds.

Are you with me so far? Great, because unlike US public pensions, Canada's large public pensions operate at arm's length from the government, enjoy a AAA credit rating because they're fully funded or close to it, they have world class governance, and are very transparent.

Their strong balance sheet and exceptional long-term track record allows them to emit bonds, any bonds, at a competitive rate as they receive a AAA rating, and then they can use those proceeds to target global investments across public and private assets all over the world.

So, issuing green bonds is nothing new, it's something old that only targets green investments, but the media reports make it sound like CPPIB is doing something way out of the ordinary.

It isn't. It's doing what it has done all along, what all of Canada's large pensions are doing, using their great balance sheet and long-term track record to emit bonds as rates are still at historic lows and use those proceeds to invest across global public and private markets to earn a better rate of return.

And they're not jacking up the leverage, at least CPPIB isn't relative to its overall portfolio. It simply boils down to efficient use of capital. That's it, that's all.

Private equity was a big theme at CalPERS' investment committee meeting on Monday.

The $356.5 billion California Public Employees' Retirement System, Sacramento, adopted a new investment policy statement that includes lowering the benchmark return for its private equity portfolio. The committee also discussed a proposal to change its private equity investment structure that includes creating an outside corporation to make direct investments, and it reviewed the first draft of a new private equity investment policy.

Chief Investment Officer Theodore Eliopoulos kicked off the meeting by stressing the importance of private equity to the system's total portfolio.

Private equity has had the highest return of any asset class and that is expected to continue, Mr. Eliopoulos said. He said the private equity portfolio has added $11 billion over public equities. Private equity also expands the investible universe and has exhibited the most growth in the capital markets, he said.

"There's no obvious public markets substitute for the private equity portfolio," he said.

This is important because CalPERS is 71% funded and has an expected rate of return of 7%, which is "relatively high" and could be difficult to achieve, especially with a lower interest-rate environment, Mr. Eliopoulos said.

"Private equity is the only asset class projected to provide more than 7% return over the next 10 years," he said.

CalPERS' new investment policy for the entire plan lowers the private equity benchmark to FTSE Global All-Cap index plus 150 basis points, lagged by a quarter, from a custom benchmark of 67% FTSE U.S. Total Market index and 33% FTSE All-World ex-U.S. index plus 300 basis points, also lagged one quarter. The new policy also requires prudent person opinions by an outside firm for private equity co-investments and customized separate accounts.

During the discussion of its new private equity structure, Mr. Eliopoulos noted that CalPERS would have to commit about $10 billion to $13 billion a year to get to and maintain a 10% private equity allocation. Currently, the private equity target allocation is 8% plus or minus 4 percentage points, with a 7.7% actual allocation.

"This strategy reflects our conclusion that CalPERS needs to substantially add to our current business model and to our internal resources to achieve our objective of a substantial and successful private equity portfolio over time," he said.

The structure has four pillars: the partnership model; emerging managers; and two strategies that would be run by a separate corporation, CalPERS Direct — private equity and venture capital. CalPERS' investment staff will now begin researching industry best practices regarding the makeup of both the independent advisory boards for the private equity and venture capital direct investment strategies and the management teams for CalPERS Direct.

CalPERS executives would like to invest more capital in its emerging private equity manager fund-of-funds program and add co-investments with the managers, Mr. Eliopoulos said. CalPERS currently has $350 million in two private equity emerging manager funds-of-funds portfolios.

During the discussion on the new private equity structure, Ashby Monk, executive and research director at Stanford University's Global Projects Center, told the committee it was not the only asset owner considering establishing an "arms-length" entity to invest in private equity.

Investors are stuck with private equity, even if they don't like the alignment of interest or the fees, because it is likely to produce better returns than the public markets, Mr. Monk said.

"So, you need it but the challenge is that everybody else has realized they need it too," resulting in a flood of money into the asset class, Mr. Monk said. "We need to be innovative," he said.

A few committee members noted that time is of the essence and that CalPERS needed to create a new structure soon or it would be left behind.

"The fact that it's not going to get better where we are today ... we have a lot of choices in how we design this, how we construct it," said Bill Slaton, board member. "I don't think we have a lot of choice doing it. I think we'll be compelled by the marketplace to do it."

Mr. Monk agreed. "You're not alone," he said. "You guys are on a journey I can think of probably 20 or 25 plans like you right now are saying, 'how are we going to do this?'"

CalPERS' investment committee also had a first look at a new private equity investment policy proposal that removed direct investments in private equity firms as a transaction type. The current policy includes direct investments "including independently sourced investments." However, during the investment committee meeting, Sarah Corr, interim head of CalPERS' private equity program, explained that "direct investments" referred to investments in private equity general partnerships.

The only direct investments CalPERS has made in private equity are stakes in general partnerships, said Megan White, spokeswoman.

CalPERS invested in private equity firms only a few times on an opportunistic basis and hadn't taken a general partnership stake since 2007, she told the investment committee. In that year, CalPERS took minority stakes in Apollo Global Management and Silver Lake. CalPERS had also taken a minority stake Carlyle Group in 2001.

In an interview, Ms. Corr said the new private equity investment policy, if adopted, would remove the strategy as a simplification measure. The new policy also expresses staff's authority to make investments without board approval in dollar terms from percentage of the total private equity assets.

The policy would also remove the requirement that staff obtain board approval for private equity funds of managers that are not at least second quartile. However, CalPERS staff would need to obtain a prudent person opinion for commitments to funds of managers that are not at least second quartile.

The private equity policy would also lower staff's authority to make commitments to top-quartile investments without investment committee approval, while increasing that authority for second-quartile funds. The managing investment director authority to commit to top-quartile funds without investment committee approval would be reduced to $500 million from 4% of the private equity portfolio, and the CIO's limit would be reduced to $1 billion from 8%. But the managing investment director's authority to invest in second-quartile funds would be increased to $500 million from 0.75% of the portfolio and the CIO's authority would increase to $1 billion from 1.5%.

Impact investing

Separately, CalPERS staff and Pacific Community Ventures, a impact investing consultant, gave the final report for its $2.1 billion California private equity investment initiative, a program it has been winding down since 2013, Mr. Eliopoulos noted. The only portion of the program that will be kept are co-investments, which will be part of CalPERS' new private equity structure, he said. CalPERS is winding down the program to which it committed $1 billion since its 2001 inception in order to move "side programs" into the main private equity investment program.

The program which was established to invest private equity in traditionally underserved markets, primarily but not exclusively in California, and has been successful in investing in underserved markets and in women and minority-owned businesses, he said. CalPERS will support women- and minority-owned businesses as an ancillary benefit of its emerging manager program. Staff is studying whether investing in emerging managers also has an impact on investing in underserved areas, Mr. Eliopoulos said.

Board diversity

Also, the investment committee plans to enhance its definition of what it means to have a successful board diversity program so that staff can file shareholder proposals and vote against directors at U.S. companies that lack diversity. The so-called "key performance indicators" would change to require all public companies in which CalPERS invests have a level of board diversity that reflects each company's business, workforce, customer base and society in general. Currently, the key performance indicator showing success is that the companies in which CalPERS invests has "a dimension of board diversity."

"I think many of us on the board and staff are concerned about how long it's taking to improve board diversity, particularly in the U.S., when we see it could benefit performance," said Beth Richtman, managing investment director of the sustainable investment program.

At the July 16 off-site meeting, staff plans to provide a session on innovations in board diversity, including technology and new practices. In response to committee member questions, Simiso Nzima, investment director, global equity and head of corporate governance, told the committee that staff is talking to a number of institutional investors about mandatory diversity data disclosure, but that building coalitions of investors takes a long time.

"Our approach really is multipronged and we don't want to wait to build the coalition," Mr. Nzima told the committee. "We want to be able to start moving in that direction."

Background

In relation to the announcement of CalPERS Direct, the new strategic model for private equity, this item focuses on the next steps regarding the implementation of this direct investment vehicle with independent board governance. After more than a year of planning and discussion, the Investment Office is ready to move into the next phase of development. CalPERS’ Investment Office staff will now begin its research into industry best practices regarding the makeup of both the independent advisory boards and the management teams.

Analysis

In order to leverage the strength of our portfolio and increase scalability and long–term sustainability, the proposed plan for CalPERS Direct involves the creation of two separate funds. The first would be focused on late-stage investment in technology, life sciences and healthcare, and the second on long-term investments in established companies. CalPERS Direct would be governed by a separate independent Board made up of members from subsidiary Boards and other independent Board members, to advise on allocation. The proposed timeline calls for CalPERS Direct to launch in the first half of 2019, following final approval by the Board.

Last week, highly respected Sacramento columnist Dan Walters also wrote about the whiff of corruption coming from CalPERS’ private equity restructuring scheme. Even for those like Walters who don’t know much about private equity, there is too much that is obviously wrong here, from CalPERS not dropping or at least suspending its plans now that its cheerleader in chief is quitting, to CalPERS branding and too many other claims being obviously demonstrably false, to the scheme going firmly against the positive steps other large limited partners are taking, that of building staff skills and bringing more deal-makgin and management in house.

The only two explanations are utter incompetence or rank corruption in the form of Ted Eliopoulos trying to curry favor with BlackRock and other influential players in order to bolster his future employment prospects. And before allies of Eliopoulos in and outside CalPERS act outraged, this suspicion is widespread among the journalists and limited partner community. You are only shooting the messenger.

The more and more CalPERS sticks to this plan in the face of deservedly critical press, the more it looks like dirty dealing. And with CEO Marcie Frost having amassed decision-making authority in her office, she will have nowhere to hide if this scheme blows up on her watch, as we fully expect it will.

Clearly, these are good times for private equity titans. They are raising multibillions for their megafunds and most of that money is coming from global pensions and sovereign wealth funds.

Given the amount of money pouring into private equity, it's not surprising to see PE giants increasingly focused on taking public companies private. And there is no doubt that private companies have better alignment of interests with their shareholders who typically focus on long-term added value.

But increasingly playing in public markets raises concerns too. In particular, as Javier Espinoza of the Financial Times reports, Valuations for private and public companies are narrowing:

Valuations for private and public companies are narrowing, data by the Boston Consulting Group show, prompting concerns that investors could be overpaying for privately held assets (click on image).

The narrowing of the gap has been driven partly by private equity investors paying record multiples for assets as they come under pressure to deploy capital, according to industry analysts.

This could eventually lead to investors finding better value and more liquidity in publicly traded companies if economic conditions were to change dramatically, these observers warned.

“Buyout funds have historically valued private companies based on their historical averages,” said the private equity head of a multibillion fund in London. “But private equity investors have raised a lot of capital and to get deals done they are having to pay full price. Many are starting to ignore their traditional metrics.”

The person added: “It’s like 2006 and 2007 all over again.”

Yield-starved investors have been under growing pressure to deploy their capital in a low-interest rates environment. As a result, demand for private equity has risen in recent years, which in return has led buyers to pay record multiples for assets.

In 2017, investors paid on average 12.5 times multiples for private companies compared with 9.5 times multiples a year earlier. This compares with 16.8 times multiples paid for public companies last year versus 19.5 times multiples a year earlier, the data showed.

Industry observers also said that a narrowing of the gap would lead some to reassess their exposure to private equity. “If you want to re-calibrate your portfolio, you can take instant action in the public markets. While you can’t with private equity exposures. You can try and sell your stake in the secondary market but at huge discounts.”

However, Antoon Schneider, senior partner and managing director at the BCG, said that investors were still paying less on average for private companies than for listed companies.

“Private equity investors are not paying more than if they bought shares in the stock exchange and they hopefully get superior governance and better returns,” he said. “The private equity boom is still less than the stock market overall.”

Again, it's confusing but as private equity funds get bigger and bigger, they are forced to take public companies private in order to deploy the capital, so I'm not shocked to see valuations are narrowing between public and private companies.

Jim Coulter, the billionaire co-founder of the giant private equity firm TPG, was in a Portland suburb with one of his largest clients when he got some tough questions.

The hot-button issue: a lack of diversity at the buyout firm.

The unexpected scene unfolded on June 6 at the Oregon Investment Council meeting -- and was recorded and posted on its website. The exchange offers a rare glimpse at how big investment firms are facing pressure from some institutional investors to change their white-male dominated culture.

About 30 minutes into the almost three-hour meeting, John Russell, the vice chairman of the council, asked the group to look at what amounted to Exhibit A: photos of the firm’s leaders in its flagship buyout unit, TPG Capital.

“When I first looked at that, it was stunning to me,” Russell said. A March TPG marketing document shows only 2 women among the 37 executives of TPG Capital. One of them is a partner.

“It isn’t that people of different ages, genders and ethnicity are better managers," Russell said to Coulter. "It is just that they have a view of the world that is broader. And companies can get into trouble without that diversity.”

Coulter responded that his firm needs to do better, particularly with women. “Our racial diversity is high relative to the industry,” he said at the meeting, referring to firm-wide numbers. “Our gender diversity with about 12 to 15 percent partners women is on average, but not nearly high enough in my view and it is something that we in the industry are working on."

Pension Pressure

Oregon isn’t the only state taking action following an onslaught of sexual harassment claims against executives in media, entertainment and finance.

The Los Angeles County Employees Retirement Association last year began asking private equity firms about their gender mix, sexual harassment claims and preventative measures, according to a person familiar with the matter. The Institutional Limited Partners Association, a trade group, plans to give questions to investors by September to use during due diligence about the gender and ethnic makeup by seniority of firms, policies promoting diversity and if anyone left due to sexual harassment.

"As awful as what these women went through in having to share their experience, it did provide a wake up call to the industry,” said Emily Mendell, who heads ILPA’s diversity effort. “Limited partners need to be part of the solution to harassment and diversity. Clearly this is a long-term game. Things are not going to change overnight.”

The private equity industry is run almost entirely by white men. Four of them -- Coulter, co-CEO Jon Winkelried, Chief Investment Officer Jonathan Coslet and co-founder David Bonderman -- lead TPG, according to the document viewed by Bloomberg. Women run or co-run other businesses, including a publicly-traded REIT, fundraising, compliance and capital markets at the firm, which manages $82 billion and is based in San Francisco and Fort Worth.

TPG, which has a diversity and inclusion committee headed by Winkelried, enhanced its health and family benefits for women and LGBTQ employees, and made recruiting more robust, the firm said in a statement. In the last two years, TPG has promoted five women to partner firm-wide, or 28 percent of the total.

Bonderman’s Remark

“The need for greater diversity and inclusion must be addressed throughout the financial industry. TPG is no exception,” said spokesperson Erika White. “We are proud of the progress we have made so far, but there is much more work to be done.”

At the June meeting with Coulter, Oregon’s Russell warned of the risks to companies that lack diversity, calling out Bonderman. Last year, amid the sexual-harassment controversy at Uber Technologies Inc., Bonderman made a sexist remark about female directors and then promptly resigned his board seat at the company.

“Your co-chair Bonderman was credited with part of the behavior that basically crippled the brand," said Russell, an office building owner in Portland with an MBA from Harvard. “And I would attribute that in part to lack of diversity.”

Coulter told the Oregon official that he was correct to raise the Uber incident.

“David made an undefendable comment,” he said. “He immediately apologized and immediately resigned from the board. I am pleased with how he responded in the aftermath even though I am embarrassed by the comment.”

Vote on TPG

Even as some institutional investors turn their focus to diversity, there’s no indication they will use money as leverage and withhold their backing of private equity funds. That could be costly. Buyout firms have been producing robust returns, helping them raise a record amount of capital last year.

After Coulter left the Oregon meeting, which covered TPG’s investment approach and market outlook, the council voted 4-1 to invest $500 million of the state’s pension plan in the firm’s buyout fund and health care pool.

The vote extended Oregon’s relationship with TPG, which goes back more than 20 years. In a statement to Bloomberg, John D. Skjervem, the chief investment officer of Oregon’s Treasury, applauded “TPG’s commitment to diversity and inclusion improvements.”

The no vote was cast by Russell. He said in an interview that while diversity was a concern, his dissenting vote was driven more by TPG’s wide-ranging investments.

Even though OIC sets the investment strategy for $102 billion in assets, including retirement savings, managed by the state treasury, Russell doesn’t think it has much influence when acting alone.

“The truth is, as big as Oregon is, we are just an asterisk in the whole scheme,” he said. “Until pension funds get together en masse, we won’t have much of an effect.”

Lauren Bonner says quitting wasn't an option.

Bonner is head of talent analytics at hedge fund Point72, a job that gives her access to data like compensation and college grade point averages for individuals hired by the firm. But as she tells it, that data unveiled a gross injustice — one that, inspired by the broader #MeToo movement, encouraged her to take action.

In February, Bonner filed a gender-bias lawsuit against Connecticut-based Point72, though she continues to go to work at the firm's Manhattan office every day.

"I certainly tried to make change internally," Bonner told CNBC in her first television interview. "I just couldn't let it go. I couldn't walk away from the problem. It's too important. It was too blatant, and it's been going on for way too long. I just couldn't help but fight it."

In her lawsuit, filed in New York federal court, Bonner accuses Point72, as well as its founder, the well-known hedge-fund manager Steven Cohen, and its now-former president Douglas Haynes of sexism. Bonner said they violated equal-pay laws, engaged in gender discrimination and retaliated against her by denying a promotion after she reported her superior for harassment.

In a statement to CNBC, Point72 said, "Contrary to Ms. Bonner's assertions, this lawsuit is replete with allegations that are false or based on unsubstantiated hearsay and that she never brought to the attention of Firm management."

Bonner continues to go to work at Point72, a situation she described as, "awkward but also not that bad." She said previously she would come to work "demoralized," but now she feels "a little bit more positive" about what she's doing.

Does Wall Street have an institutional bias?

Bonner's claim intertwines stories of harassment, data on pay disparity and a lack of diversity among the senior ranks at the firm, as well as the obstacles she faced in climbing the ladder.

She said that all of these issues are some form of discrimination against women.

"What I saw over time, looking through the data, was that there was an institutional bias that was so entrenched that it just made it pretty impossible for women to advance economically or professionally," she said.

In her claim, Bonner said that of the 125 portfolio managers that Point72 employs, all but one are men. She said there is only one woman among 32 managing directors. Bonner also points to last year's new hires, of whom, she said, only 21 percent were women; none was brought in as portfolio manager or managing director, she said. One new director was a woman, while 14 were men, she said.

"I see things like female candidates coming out of college have to have GPAs and SATs that are 20 percent to 25 percent higher than their male peers to get the exact same job," Bonner said in the interview.

"I absolutely believe it's due to an inherent bias against women," said Jeanne Christensen, a partner at Wigdor LLP, the law firm representing Bonner in her claim. "It just seems very suspect that you would have an extremely successful company with not one woman at the top."

In the claim, Bonner compared her own compensation with the pay of specific male colleagues. She had been seeking a promotion to the director level from associate director but was denied. She said she believes her inability to move up at Point72 (and narrow the pay gap) was because she reported one of the members of the promotion committee to human resources for alleged harassment. She said he retaliated against her by not granting her the title of director.

'Too aggressive' for a promotion

Bonner had only been at Point72 for about 18 months when she filed the lawsuit but said her short tenure was not a factor in the promotion committee's decision.

"It couldn't be experience because men with lesser and worse experience came in at a higher level than I did — off the bat," Bonner said. "It's also hard to imagine that it has anything to do with performance because I got the highest possible performance reviews."

Bonner said she was told she was "too aggressive to be promoted."

"You certainly don't build a cutting-edge technology platform by being a hothouse petunia, so I certainly had to be assertive to get things done," she said. "It's confusing to be labeled with that word, aggressive, when it's a culture of performance, and men are specifically told to be more aggressive and to break more china."

Bonner alleges that men with less experience and fewer responsibilities were coming into Point72 at the director level, which ranks above associate director. She said her compensation was as low as 35 cents on the dollar that these men made. Bonner says that she hasn't seen instances of women making more than men who were doing the same job at Point72.

"I don't think this is a question of nuance," she said.

A spokesperson for Point72 said the firm "was already addressing the underrepresentation of women and minorities — a reality across the finance industry — with a series of initiatives designed to recruit and support them before Ms. Bonner was hired. In fact, she was involved with some of those initiatives."

"But instead of working with us constructively to advance our goals of diversity and inclusion — and after only 18 months of employment at the Firm — Ms. Bonner demanded $13 million, and sued when that demand was rejected."

A representative for Bonner declined to comment on the $13 million figure.

An internal review of the firm's culture

Point72 is seeking to move the case from court to arbitration, where the merits of it would be argued out of the public eye. That decision is up to a judge, who has yet to rule on the firm's request.

Regardless of the forum, Bonner will find herself up against a defendant who is known for his dogged battles through the court system. Cohen's former hedge fund, SAC Capital, paid a record $1.8 billion fine to the government to settle charges of insider trading brought against the firm in 2013.

Cohen himself was charged in a civil case by the Securities and Exchange Commission with failure to supervise his employees and was banned from managing outside capital as part of a settlement. He did not admit or deny wrongdoing, and the ban was lifted earlier this year.

Also this year, Point72 hired the law firm WilmerHale to conduct an internal review into the firm's culture. Cohen announced several changes in April following the review, including expanded parental leave and the creation of "Chief Inclusion and Engagement Officer."

"We conducted an internal review for Point72 because Steve Cohen wanted to ensure that his firm was living up to its stated values," said WilmerHale's Jamie Gorelick, who led the review. "He fully embraced changes that we suggested in a way that is rare for a corporate leader. I think that the firm's culture is already stronger."

The firm has previously said that the review was not in response to Bonner's lawsuit. Haynes as well as Michael Butler, head of human resources, departed the firm between March and April. Haynes couldn't be reached for comment.

In an email to CNBC, Butler said he decided to retire after four years as Point72's head of human capital and will act as a consultant to the firm until the fall. "I am extremely proud of the transformational work we did with our Human Capital team during my tenure, finding new ways to source, select, develop, reward and retain our employees. We delivered on our Mission to create the greatest opportunities to the industry's brightest talent. "

Bonner said she doesn't know if the departures were a result of the suit, only to say "They left shortly after I filed."

"The real win I hope for is an intolerance of bad behavior at the firm," Bonner said. "And ultimately, of course, I hope for gender parity and equal pay."

When asked whether her job has changed at all since she filed the lawsuit, Bonner said, "My role is the same, but I'm a little less busy than I used to be."

Bonner, who has previously worked at the largest hedge fund in the world, Bridgewater Associates, conceded that sexism is an "industry-wide issue," but added that it's "particularly acute at Point72."

But so far no other women have publicly signed onto her lawsuit or filed a similar one against Point72. And few have come forward to call out any type of systematic bias on Wall Street.

"There's a reason more stories haven't come out, and it's not for lack of stories," Bonner said. "They haven't come out because of this culture of this small boys club that you really have to know other people to get jobs."

There are some other high profile gender bias cases on Wall Street. In March, a federal judge cleared the way for a class action lawsuit against Goldman Sachs. Four women who are former employees sued the bank in 2010 over allegations of systemic gender bias, including discrimination in pay and job promotion. Goldman has asked the court of appeals to review the decision.

As for what hedge funds and other financial institutions can and should be doing to make the environment better for women, Bonner said it's as simple as awareness by leadership.

"Choose to be intolerant of bad behavior," she said. "It may be uncomfortable to call someone out. But that's what actually changes a culture. And I would say for leaders at funds to actually embrace intolerance of poor behavior, would actually go a long way."

The European Commission is about to create a private pension fund, worth €2.1trillion - justifying their decision by pointing to the increasingly large and more elderly European Union population.

This arrangement, which was absent from the European Commission president's list of official top 10 priorities in 2015, will impact on some 240 million savers.

The PEPP (Pan-European Personal Pension Product) will be a private, portable, pension product across EU member states.

It follows an idea launched by the US financial services corporate giant BlackRock, the world's largest asset fund manager that built some two-thirds of its $6trn empire on pensions.

Headed by Larry Fink, BlackRock back in 2015 proposed the creation of a "cross-border personal pension fund".

BlackRock wrote, in a paper, that the EU should be "reviewing demand for, feasibility and key features of a cross-border personal pension vehicle as a means of empowering consumers to save more effectively for their retirement needs."

At that time, there was nothing similar in European law. Just over a year later, the commission started working on it.

The commission estimated that the EU's internal pension funds market could triple in value by 2030: from €700bn today, to €2.1 trillion.

These numbers transformed the PEPP into one of the commission's most ambitious projects.

Now the commission's proposal is on the table, pending approval from the European Parliament and the Council of the EU, representing member states.

But one member of the parliament's committee on economic and monetary affairs, Martin Schirdewan of the European United Left (GUE), is highly critical of PEPP.

"At the heart of this proposal are not concerns about pensioners' incomes, but only the possibility of opening up new opportunities for business for the financial industry", he said.

Result of lobbying?

There is no shortage of evidence that this was the top priority of BlackRock's lobby agenda in Brussels.

BlackRock president Robert Kapito talked about capitalising on European retirees' money in 2015. His company arranged more meetings with commission members than any of its competitors.

Since a mandatory register of meetings was put in place in 2014, BlackRock is recorded as meeting commission officials more than 30 times.

Larry Fink, BlackRock's CEO, again raised their European private pension fund idea in January 2017.

Speaking at a ceremony at the Frankfurt Stock Exchange, Fink seized the occasion to criticise an "over-reliance on state pensions" and used the demographic argument to justify the need for a private pension scheme.

He was not shy to say that people are living longer lives means that they can "work many more years to pay for their reforms", as he claimed that "strengthening the capital market and pension systems will be vital to Europe's economic future."

Months later, the commission's vice-president for the euro and social dialogue, Latvia's Valdis Dombrovskis, evoked the same anxieties when introducing PEPP at a European Pensions Conference, echoing Fink's Frankfurt comments.

"Europe is facing an unprecedented demographic challenge. Over the next 50 years the proportion of the working-age population is expected to double ... The so-called pension gap will increase the pressure on public finances," he said.

Additionally, Fink's conclusion in Frankfurt was that "retirement systems around the world have failed to prepare workers for the future". Dombrovskis' June speech argued the same point: state funding of pension schemes is something to review in the future.

"The pan-European Personal Pension Product is an important milestone towards completing the Capital Markets Union", Dombrovskis said in his June 2017 speech.

"Today we are proposing to lay the foundations for a single European private pensions market. We are presenting a new voluntary scheme to save for retirement, a Pan-European Personal Pensions Product, or PEPP," he announced.

Dombrovskis argument is in line with the EU's general policies. The European Semester and EU's country-specific recommendations tend to invite member states to make "structural reforms" in their pension schemes.

Its 2017 recommendations also targeted countries like Germany, Poland and Italy.

BlackRock discussed the PEPP further with the responsible directorate-general, for financial stability, financial services and capital markets union (FISMA) at least once, in October 2017. They also met with general director Olivier Guersent and Jan Ceyssens from the European Commission.

The commission told Investigate Europe that "FISMA had similar meetings with dozens of other PEPP stakeholders, which is normal, as we have tried to hear a wide range of stakeholders when drafting legislation. We also opened a public consultation to prepare the proposal, as usual, in which BlackRock was one of many entities to respond."

This idea - advocated by Blackrock since 2015 - had made it to the stage of a public consultation at EU level in the space of less than four years.

The suspicion that BlackRock's lobby has a special weight in Brussels was put to Guillaume Prache, director of Better Finance, the European Federation of Investors and Users of Financial Services.

"It appears that in 2017 BlackRock met several times with European commissioners while we did not have a single meeting with the commissioner responsible for financial services," Prache explained.

Resaver

This criticism from BlackRock's European rival comes after the American giant was also chosen to manage the wealth of Europe's first cross-border private fund, an NGO called Resaver.

Resaver is different from PEPP because it targets only professionals like university researchers and scientists. It is based on contributions from employers (universities, laboratories, companies).

The PEPP will be a kind of retirement savings plan (PRP), based on individual savings that, for the first time, will have pan-European rules, tax benefits and common treatment.

Assigning BlackRock to manage Resaver's funds disappointed European fund managers. Resaver is the work of Portuguese Research and Innovation commissioner Carlos Moedas and is funded at €4m by taxpayers via Horizon2020, the biggest EU research and innovation programme.

"It is somewhat surprising that the first public experience with a pan-European pension scheme has been granted to a US company when there are large financial asset managers in Europe," says Prache. "It is a sign of the success and efficiency of its lobby".

A European Commission product, Resaver includes pensions from the Budapest Central University, the Elettra Synchrotron of Trieste, the Italian Institute of Technology, the Fondazione Edmund Mach, the Vienna Technical University and the Association of Universities of the Netherlands, among others.

When Blackrock signed the contract with Resaver in Budapest, its director Tony Stenning tagged the new European pension scheme as a "one-time evolution", adding that "it will not be the last step" for Europe's pension market growth.

BlackRock's British hirings

This last sentence was, in some ways, premonitory.

Stenning was speaking in October 2015, many months before the plan for the creation of PEPP was known. But at that time BlackRock had other means of knowing in detail the evolution of related European decisions.

In 2015, months before gaining managerial powers over Resaver, BlackRock had hired the British civil servant, Rupert Harrison, as its new "head of macro-strategy", after convincing him to leave his job as chief of staff serving under the UK's chancellor of the exchequer, George Osborne.

Harrison had been the chief architect of the 'pension revolution', a grand project designed by David Cameron's Conservative-led coalition government.

This "revolution" - a termed also used by Osborne – open the doors to a market to which BlackRock, or, for that matter, other pension market managers, had not had access before.

After he stopped being chancellor in 2016, Osborne accepted a payment of £34,109.14 from BlackRock Inc, for a speech he gave in November 2016, covering a declared hour of work, plus travel and accommodation.

Osborne then joined BlackRock later, in 2017 after PEPP was launched. By then, he had participated in decisions affecting BlackRock's industry as the UK's finance minister.

Osborne took this part-time corporate job - that pays an annual salary of £650,000 for four days a month - after new prime minister Theresa May preferred that someone else ran the Treasury. Osborne now also edits the London Evening Standard, in addition to several other roles.

Investigate Europe asked BlackRock why they had hired both Harrison and Osborne. They referred to a statement issued to the Financial Times at the time of the hiring of Osborne, in which Fink said Osborne offered a "unique and valuable perspective on the issues affecting the world."

It added: "Understanding local market, policy, regulatory, technology, business and investment dynamics is integral to serving our clients and navigating our business. That is why BlackRock works with various senior advisers and strategists who bring a range of experiences in business, finance, academia and the public sector. We look for people who can offer our clients and investors a unique and valuable perspective on the issues that are shaping our world."

It offered no specific comment on Harrison.

In Britain, the US company has won public tenders to manage pensions connected to investment for county councils, the National Health Service, and public property funds. And this while the company holds a portfolio of real estate itself in the UK.

The US giant investor's business strategy has the power to influence competition rules and their impact in Europe. With its trillions of dollars, BlackRock buys significant parts of the largest companies in the world.

About two-thirds of BlackRock's financial muscle comes from pensions. After managing the majority of American pension funds, BlackRock has become a decisive shareholder in almost all key sectors in Europe: industry, banking, services, agri-food.

If this stakeholder couples with the influence of €2.1trillion held as European private pensions, who can tell what weight this company will have at the negotiation tables where Europe's economy is decided?

"BlackRock is a reflection of the retreat of the social state," says Daniela Gabor, a professor of economics at West of England University.

Investigate Europe asked BlackRock for an interview and submitted a long list of specific questions, including whether - since privatisation of pensions schemes in Europe was a divisive issue - they had taken this into account in their approach.

BlackRock declined the offer of an interview or to answer this specific question.

Warning signs in today's tech sector are reminiscent of the dotcom boom of the late 1990s that eventually went bust, market veteran Jim Paulsen told CNBC on Friday.

The current "character and attitude of the marketplace" are similar to the belief then that "tech can't lose," said the chief investment strategist at The Leuthold Group.

"What I find interesting, is that there's been significant narrowing of participation in the S&P 500 as these FANG stocks have really taken over," Paulsen said on "Squawk on the Street."

In 2013, Jim Cramer, host of CNBC's "Mad Money," popularized the term FANG, which stands for shares of Facebook, Amazon, Netflix, and Google, now part of Alphabet. More recently, another "A" was added to FAANG, representing Apple, and there's been talk about how to incorporate an "M" for Microsoft.

Excluding tech stocks, the rest of the S&P has consistently, since 2013, been underperforming, compared with the overall market, Paulsen said.

"You could argue the contemporary fascination with technology stocks has just completed an entire dotcom cycle," Paulsen wrote in a note to clients. "That is, for five years, tech has dominated the S&P marketplace which is surprisingly close to how long tech dominated during the dotcom run in the 1990s."

"I just wonder if it might end similarly," Paulsen told CNBC Friday. "Not to the same magnitude, but similarly."

The "dotcom bubble" from about 1995 to 2000, was a time of rapid growth in the equity market fueled by internet company investments. The bottom fell out in March 2000, which saw the Nasdaq, a index of with lots of tech stocks, lose nearly 80 percent of its value by October 2002.

Larry Haverty, managing director at LIH Investment Advisors, said there are "a lot of warning signs" in the market right now, such as increased regulatory scrutiny in the tech sector.

"Eventually the law of large numbers is going to get [the FANG stocks]," Haverty said on "Squawk on the Street.""With Amazon, I think the demon is antitrust."

But Paulsen pointed out a clear distinction between today's technology sector and the 1990s is the Russell 2000. Within the small-cap index, he said, tech stocks are matching overall market performance, "rather than significantly outperforming it."

He added, "Unlike the dotcom in the late 90s, where both small-cap and large-cap stocks were far outperforming the average stock, that's not happening in the small cap universe."

If investors want to maintain a technology weight in their portfolios, Paulsen said, "Do it in small- and mid-cap stocks as opposed to the popular FAANG names."

A new research note warns that too many investors are stuck in a losing trade reminiscent of the dot-com era.

The Leuthold Group's Jim Paulsen is behind the ominous call.

"More and more of the leadership stocks have been the more aggressive, high beta stocks and a lot of the defensive names have been left for dead. They've diminished as far as their size of the overall [S&P 500] index," the firm's chief investment strategist said Monday on CNBC's "Trading Nation."

Paulsen hasn't seen that phenomenon since the late 1990s when excitement surrounding dot-com stocks hit a fever pitch.

"I don't think it is nearly as severe as it was back then, but the culture is the same. The character is the same where everyone is going into the same, very narrow number of popular names," he said. "Really nobody is investing new moneys into the rest of the S&P."

He included a chart that shows a sharp decline in the number of people investing in S&P 500 defensive names since the bull market began in 2009 — noting that defensiveness is at a record low.

According to Paulsen, many investors are too exposed to trendy areas of the market such as big tech FANG, otherwise known as Facebook, Amazon, Netflix and Google parent Alphabet.

"You wonder if we do hit an air pocket, if we would break below those February lows sometime this year, who do you think is going to sell? It's probably going to be those popular names because that's all anyone has recently bought," he said.

Paulsen, who estimates there's a 50-50 chance see a 15 percent sell-off this year, is urging investors who are overweight big tech to take some profits.

"Maybe to pat yourself on the back, congratulate yourself for a great investment," Paulsen said. "Maybe buy a beat-up consumer staple or utility here or pharma stock today that no one is taking a look at, but sells at a much better value."

Technology stocks have gone vertical both in absolute terms and relative to the broad market. Our view has been that this trend will lead to a rotation as other market leaders, such as energy, financials and global growth plays, emerge. Meanwhile, interest-rate sensitive defensive sectors like consumer staples, utilities, REITs and telecoms are overdue for a bounce.

This rotation makes sense, given relative valuations and our expectations of a bull market in commodities. However, the timing is far from clear. The odds are rising that a technology mania will develop on the order of the late 1990s bubble.

Claridge Israel, an investment firm founded by Stephen Bronfman and the Quebec Deposit and Investment Fund, is investing US$30 million ($38.7 million) in Cyberbit Ltd., a cybersecurity company based in Ra’anana, Israel.

Cyberbit, a subsidiary of the high-tech company Elbit Systems Ltd., was founded in 2015. It is described as a leading provider of cybersecurity training and simulations.

With this major new funding, Cyberbit will expand its sales and marketing, primarily in North America, boost product development and enhance customer and partner support, according to an announcement released on June 4.

Claridge Israel, which is based in Tel Aviv, was created in 2015, as a partnership between Claridge Inc., the private investment firm headed by Bronfman, and the Caisse, the Crown corporation that managers numerous public pension funds and insurance programs in Quebec, with the aim of finding business opportunities in Israel.

Oded Tal, the managing partner of Claridge Israel, will join Cyberbit’s board of directors.

The Caisse is one of the largest institutional investors in North America, with net assets of $298.5 billion.

Cyberbit is a pioneer in the use of hyper-realistic simulations to train cybersecurity experts. The company says there is a shortage of skilled people around the world who are able to manage cybersecurity threats. By 2021, it says that Cybersecurity Ventures predicted that 3.5 million jobs in the field will be unfilled, while the number and complexity of cyber attacks only grow .

“Elbit Systems sees the cybersecurity field as a growth engine,” stated Bezhalel Machlis, the company’s president and CEO.

Claridge Israel managing director Rami Hadar said that “Cyberbit’s growth in just three years has been remarkable. This growth is driven by a unique product portfolio that addresses several of the most pressing industry problems, a solid go-to-market strategy and a highly capable team that is executing successfully and creating a leadership position in several markets.”

Meanwhile, the Jerusalem Post reported that Israel Aerospace Industries (IAI) has teamed up with a Quebec-based company to produce surveillance drones for the Royal Canadian Air Force.

IAI and L3 MAS, which is located in Mirabel, Que., will make the Artemis Unmanned Aerial System (UAS), a medium-altitude, long-endurance system, based on IAI’s most advanced unmanned reconnaissance aircraft, the Heron TP.

“The Artemis UAS is uniquely positioned to assist Canada in preserving its national security and sovereignty interests at home and abroad,” according to an IAI press release on June 3.

“As the prime contractor, mission systems integrator, and ISS provider, L3 MAS looks forward to breaking new ground in Canada’s defense and aviation sectors with IAI’s Artemis UAS,” L3 MAS vice-president and general manager Jacques Comtois stated.

Cybersecurity is often terrifying, to the point where major media stories have not desensitized us to its risks. Equifax, Yahoo!, WannaCry, NotPetya and more attacks have all becomes terms common in the security lexicon, characterizing the mass and variety of risks that every organization faces large and small. While the perpetrators and method of execution for each attack may differ, both in major and minor ways, the methods to prevent or address them are fairly similar across industries, including with pension funds.

For instance, while the aforementioned attacks are all large-scale breaches or ransomware attacks spread through zero-day exploits (more on those later), over 90% of attacks start with a phishing email. Email and other channels are perfect fodder for social engineering attacks, which focus on attacking people rather than systems, manipulating them into sharing information.

That point being made, it’s better to consider a summary of cyber risks and what pension funds can do to address them before considering how organizations should prioritize their security decision-making. In general, because of the nature of pension fund organization – generally having a large number of members but a small number of employees handling a large amount of data and money for said members – there are certain kind of attacks or risks to which they can be most susceptible. These generally come in the form of social engineering attacks, but a large amount of risk is also present in the general likelihood of loss or mishandling of data and the need to quickly address instances where such breaches do occur.

What are the main cyber security risks pension funds face?

There are five primary risks that pension funds face in maintaining their cyber security.

• Loss or mishandling of member data (especially protected data)
• Loss, mishandling or espionage of data through social engineering attacks
• Loss of funds or data due to social engineering attacks or cyber-enabled fraud
• Accidental publication or sharing of protected or proprietary data
• Malicious publication or sharing of protected or proprietary data by a bad actor

The loss or mishandling of data is a common concern for any business, but it is particularly critical to address for organizations that rely on trust and a good reputation. There are cases where this is malicious or out of a grudge, but without sufficient accountability any employee can either collaborate with fraudsters or commit a fraud themselves. This risk doesn’t apply only to money handled by pension funds, but also the data which funds hold for their members, as data in itself can have tremendous value to fraudsters and other bad actors.

Beyond a fraud or data risk in which an employee consciously participates, the attacks in which employees are unwitting accomplices pose the greatest risk to an organization and are also far more common. This could be executing by spoofing a colleague’s email address in requesting funds or member information or compromising trusted accounts and jumping in on existing conversations. Access to and management of this information could be excessively high in situations where an encrypted email service isn’t being used for protected data, while impersonation attacks could also carry malware or spyware that compromises communications and data stored on an employee’s devices – both on desktops and laptops or on mobile. This is especially risky if a fund employs a BYOD (Bring Your Own Device) policy, where an employee’s personal activity could compromise organizational data or allow attackers to glean critical information – a fairly common tactic in cultivating a successful fraud.

While broadly the threats above usually involve some degree of intention, either by a malicious actor or employee, risk is also present in employee inattention. This applies wherever data is accidentally shared, either on a one-to-one basis or published in a publicly accessible channel like a website or compromised piece of software. In fully managing your cyber security risk, limiting the potential for basic accidents is also crucial.

Cybersecurity solutions that Pension Funds can prioritize

Incidentally, as there are five primary risks that pension funds face, there are five primary solutions that they can also use to manage most of the risk they face in attacks
Protection against malware

• Protection against social engineering attacks
• The ability to encrypt transmission of protected data
• Data-Loss Prevention technology to prevent accidental or intentional release of information
• User education, training, awareness and authentication procedures that prevent loss or compromise of data or funds

The “Holy Trinity” of basic protection for your organization contains a good Firewall, a good anti-virus and an effective email filter. While rudimentary versions of these will protect against 90+% of viruses, spam and more conventional threats, today’s most dangerous attacks often leverage new iterations of malware or advanced social engineering techniques which require unique solutions that either use a varying combination of machine-learning, advanced threat intelligence and more to prevent against specific instances of attacks in an up-to-the-minute manner.

For instance, with a virus or piece of ransomware, certain identifying characteristics may be programmatically changes as they’re delivered, preventing a traditional anti-virus database from identifying them and containing them before infecting a device. The same tendency towards clever fraud can also be seen in email attacks, where a malicious URL may only have hostile content hosted after delivery, evading a traditional spam filter but failing to bypass a filter that features URL rewriting or some other form of Time-of-Click protection.

Encrypting email transmissions and incorporating Data-Loss Prevention techniques are otherwise useful for preventing both intentional and accidental loss of data by employees. Email encryption permits users to deploy a secure platform on top of an email system, containing the presence of data to only specified addressees and locations, minimizing the possibility of said data being compromised. Data-Loss Prevention, on the other hand, can be used to identify the movement of data, defining and blocking pre-defined or protected terms from leaving an organization, or simply encrypting it as it leaves. Enterprise DLP solutions will monitor and block all unauthorized data transmission, whether it’s through cloud apps, devices, storage channels, emails or web communications. Often prohibitively expensive, solutions like email filters can incorporate DLP specifically for email without the added risk, managing much of the risk, but not all of it.

Finally, while the user is the main source of risk for many of today’s attacks, the best way to turn the tables is to strengthen them as a “last line of defense”. This requires basic education on what not to do when presented with suspicious materials or requests, but examples of these requirements can be as basic as:

• Not inserting found USB drives into their devices
• Checking email headers for accurate email addresses (compared to addresses that could be used by imposters)
• Double-checking unusual requests for funds or data via email with a phone call
• Updating their device software and security tools as updates are released, ensuring security-related patches and improvements are always present
• Listening to the advice of IT specialists, consultants and administrators when it comes to security (even if they do lecture from time to time)

Teaching patience and observational skill to users is a critical aspect of ensuring your organization is secure, and can be put in a constructive, conscientious framework, rather than being treated as a chore. Great examples are now present of tools that educate and inform users, rather than berating them for making mistakes. Wombat is one among many, but solutions aren’t always required, as tips and resources can be found that simplify things for your users. This quiz from Pew Research is a simpler way to get started

Addressing a data breach

No system is perfect, and while most pension funds will not deploy broad or unique cloud systems which require some of the latest threat monitoring and management techniques, the solutions referenced above should be sufficient to stop the threats that are faced by relatively small-staffed financial organizations.

That being said, the primary risk or requirement incumbent upon a pension fund following any successful cyber-attack or fraud is disclosure. State laws in the United States usually place a limit of three days passing after a data breach for it to be disclosed, whether the loss or compromise of data constitutes a material or physical risk to customers or if any protected data is unaccounted for. Data protection requirements are also increasingly stringent in Europe and Canada, meaning that the ability to address a breach after its occurred is just as important as preventing one. In advising on a breach, organizations are expected to notify authorities and the public within the time period legally required by their jurisdiction, specifying what protected data may have been lost and what risks this could pose to those who’ve lost their data. This allows those who’s data is at risk to take action that further mitigates any negative impacts of a breach, while also limiting the liability of an organization that’s suffered a breach.

Addressing this risk effectively comes down to accountability. The EU’s GDPR requires the appointment of a “data protection officer” and the concomitant categorization of all data stored by an organization and its partners. This can be as simple as appointing an employee to devise and maintain an excel spreadsheet that simply lists whose data is stored where and for what purpose, which offers a resource that can then guide where vulnerabilities are present and where disclosures must be made. While most non-EU organizations might not necessarily want to follow GDPR if they aren’t compelled to, this model of internal accountability is actually relatively useful for any organization, even if they aren’t compelled to implement it by law.

Defining success with your cybersecurity strategy can be difficult – primarily because the absence of a data breach or successful attack doesn’t mean you’re adequately protected. However, trying to get the best value out of solutions, address common and fast-growing threats, and building conscientious employee behaviour are all the necessary elements most organizations need to confront the unexpected.

The OPSEU Pension Trust is setting out a climate change action plan, including eight areas of focus that aim to make the pension fund more resilient and agile in taking on the problem.

“Climate change is one of the most significant challenges facing us today,” said Hugh O’Reilly, president and chief executive officer at the OPTrust, in a news release. “As investors in so many sectors around the world, we need to better understand its impact so we can protect our members’ interests.”

“We don’t yet have the data or tools we need to determine whether, and if so to what extent, climate change poses a risk to our members’ pensions. We are committing to build climate change risk into our investment approach, starting now.

The areas for action, which the OPTrust plans to implement over the next five years, include:

• Continuing to drive for better disclosure of the information investors need to price carbon risk;
• Collaborating with peers, regulators and companies in which it’s invested to achieve meaningful change;
• Continuing to build awareness and alignment among investment professionals through education;
• Defining a clear baseline to measure the plan’s exposure to industries and geographies that are at higher risk for climate change impacts;
• Integrating an approach that considers the impact of climate risk on the fund and in its portfolio construction;
• Focusing on achieving greater disclosure within its portfolio of companies and incorporating climate change-related metrics in the evaluation of new investments;
• Driving for improved performance on environmental, social and governance issues and advocating for certainty in the regulatory environment; and
• Continuing to publicly report its efforts in managing climate change risk.

Published earlier this year, the OPTrust released a report in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures, covering issues around governance, risk management, strategy and metrics and targets. The news release noted that the pension fund’s climate change action plan builds on these commitments and aims to lead to a better understanding of the risks and opportunities that climate change poses to its investments.

“The transition to a carbon-neutral economy will be increasingly disruptive,” said O’Reilly. “As investors and as responsible stewards of our members’ capital, we have to be prepared to face these challenges. This is still near the beginning, but it is a critical step forward.”

Climate change is having profound impacts, and markets need to respond. It is vital for pension plans to measure the impact and manage risk, according to the Climate Change Action Plan issued today by OPTrust.

"Climate change is one of the most significant challenges facing us today. As investors in so many sectors around the world, we need to better understand its impact so we can protect our members’ interests,” said Hugh O’Reilly, OPTrust President and CEO.

“We don’t yet have the data or tools we need to determine whether, and if so to what extent, climate change poses a risk to our members’ pensions,” O’Reilly added. “We are committing to build climate change risk into our investment approach, starting now.”

The Climate Change Action Plan contains eight areas for action that will make OPTrust more resilient and agile to meet the investment challenge. Among others, the areas for action include defining a clear baseline to measure the pension plan’s exposure, considering climate risk factors when assessing investments, and pushing for increased disclosure of climate change-related information from portfolio companies.

With its 2017 Funded Status Report, issued earlier this year, OPTrust became one of the first pension plans to report in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The TCFD recommends disclosure in four areas: governance, risk management, strategy, and metrics and targets. The Climate Change Action Plan builds on these commitments, and will lead to a better understanding of the risks and opportunities climate change poses to our investments.

“The transition to a carbon-neutral economy will be increasingly disruptive,” O’Reilly said. “As investors and as responsible stewards of our members’ capital, we have to be prepared to face these challenges. This is still near the beginning, but it is a critical step forward.”

OPTrust's Climate Change Action Plan, along with the 2017 Responsible Investing Report and the responses to the TCFD recommendations included in the 2017 Funded Status Report, are all available at optrust.com.

About OPTrust

With net assets of over $20 billion, OPTrust invests and manages one of Canada's largest pension funds and administers the OPSEU Pension Plan, a defined benefit plan with over 92,000 members and retirees. OPTrust was established to give plan members and the Government of Ontario an equal voice in the administration of the Plan and the investment of its assets through joint trusteeship. OPTrust is governed by a 10-member Board of Trustees, five of whom are appointed by OPSEU and five by the Government of Ontario.

Hugh explained to me that OPTrust is taking climate change and responsible investing based on environmental, social and governance (ESG) factors very seriously and this was an effort to really drill down and holistically assess OPTrust's approach to responsible investing, a first of its kind in Canada to my knowledge.

Hugh began by stressing that this isn't about "divesting" from the fossil fuel industry. (OPTrust doesn't believe in divestments except for tobacco where it butted out for good and for good reasons. Instead, OPTrust believes in engagement along with its peers to force companies to take climate change seriously).

...

I also agree with Hugh O'Reilly's philosophy that the best way to impact change is by investing in the very industries we are concerned about, whether it's oil and gas, big pharmaceuticals or tobacco and firearms.

What else did Hugh O'Reilly tell me? The focus on OPTrust is on funded status, not shooting the lights out in terms of returns. In fact, compensation of senior executives is focused on funded status and a portion of every employees bonus is related to this too. Hugh and Jim Keohane even wrote an op-ed on the need to place funded status front and center at all pensions.

This assessment on climate change doesn't change that focus, it emboldens them to be better in terms of responsible investing in order to better align their interests with those of their beneficiaries over the long run. Again, it's more complicated than simply divesting out this or that industry which is why I urge you to take the time to read the position paper here and the accompanying Mercer report here.

If you have a public pension in B.C., your retirement savings are likely fuelling the climate change crisis.

The pensions of over half a million British Columbians are administered by the British Columbia Investment Management Corporation (BCI), formerly known as the bcIMC. It’s the fourth-largest pension fund manager in Canada and controls one of the province’s largest pools of wealth, totalling $135.5 billion.

In 2016, Canada signed the Paris Agreement, acknowledging that global warming must not exceed two degrees Celsius above pre-industrial levels and further committing to work toward a 1.5 degree C limit. As one of the province’s largest financial managers, BCI’s investment decisions are critical for the urgent and sustained emission reductions that both targets require.

BCI’s holdings include investments in some of the world’s largest oil and gas companies.

To determine how it is responding to the climate crisis, our just-released report, Canada’s Fossil-Fuelled Pensions: The Case of the British Columbia Investment Management Corporation, asks: is BCI investing funds in ways that support the shift to a two degree Celsius global warming limit?

Unfortunately, the answer is no. We found that instead of curbing investments to align with the two degree limit, BCI promotes the status quo on carbon-heavy investments.

For example, BCI investments in Kinder Morgan rose to $65.3 million in 2017, nearly doubling its $36.7 million 2016 investment. Since 2016, BCI has over $3 billion invested in the top 200 publicly traded fossil fuel reserve holders. It is invested in 74 per cent of the oil and gas companies with the largest fossil fuel reserves and 30 per cent of the biggest reserve-holding coal producers.

BCI doesn’t believe these investments are a problem. It claims that its ability to be an “active owner” through shareholder engagement will create more lasting change in their investee corporations than if they withdrew or “divested” their money on ethical grounds.

We investigated BCI’s engagement strategies, including its shareholder voting history and collaboration with third-party organizations promoting responsible investment. We found that when it comes to climate action, BCI’s “active ownership” falls short.

Shareholder voting, also known as “proxy voting”, is one of BCI’s key responsible investment strategies, but in the context of climate change, is it effective? We found that companies often ignore climate-related shareholder resolutions and their eventual responses can be minimal at best. Exxon — which BCI’s holds an ownership stake in — claims that its business model “face(s) little risk” from climate change despite its commitment to blow past the two degree limit.

This is obviously an inadequate response to the scale and urgency of the climate crisis. By acknowledging the serious threats that climate changes poses, but only using shareholder engagement to address it, BCI is an obstacle to the transition away from fossil fuels which the two degree limit demands.

Not taking climate change seriously in its investment decisions not only breaches BCI’s claim to “responsible” investment on ethical grounds, it also threatens the financial stability of B.C. pensions.

A recent study published in Nature and Climate Change shows that falling prices in renewables and low-carbon technology means the demand for fossil fuel investments will drop before 2035, leaving companies with trillions in assets that cannot be sold. Last year the World Bank announced it would end financial support for oil and gas companies by 2019 and financial institutions around the world are following suit. Banking giants HSBC, BNP Paribas and ING recently announced they would end financing for greenfield oilsands projects, coal power plants and Arctic drilling projects.

If BCI committed to divestment from fossil fuels, it would join a host of institutions like churches, pension funds and state-owned investment funds that have pledged to fully or partially divest. Globally, over $6 trillion of investments have been declared fossil fuel free.

We have started moving towards a post-carbon world. Our report shows, however, that BCI is stuck in the 20th century of fossil-fuelled investment. As one of the province’s most powerful financial institutions, and the manager of most public pensions in B.C., we can’t afford to suffer the impacts of its choices.

It has been a long time —the early 1990s in fact— since a White House tried to influence Federal Reserve policy the way Trump economic advisor Larry Kudlow did on Friday.

In an interview with Fox Business Network, Kudlow jawboned the Fed, saying: “My hope is that the Fed, under its new management, understands that more people working and faster economic growth do not cause inflation.”

“My hope is that they understand that and that they will move very slowly,” he added.

It was the senior advisers to President George Bush, particularly Treasury Secretary Nicholas Brady, who pushed the Fed to cut rates at a faster pace in the run-up to the recession that lasted from July 1990 until March 1991.

In fact, Bush blamed former Fed Chairman Alan Greenspan for his defeat to Bill Clinton in 1992.

Financial markets were roiled by Brady’s warnings, said Lewis Alexander, chief economist at Nomura.

“The sense that the Fed was being criticized by the administration undermined the market’s confidence in the Fed’s ability to anchor inflation expectations,” Alexander said. This was reflected in higher interest rates.

In light of this experience, Robert Rubin, Clinton’s Treasury secretary, instituted the practice that administration officials should not comment of Fed policy.

This gentlemen’s agreement lasted, on the whole, through the George W. Bush and Obama administrations.

To be fair, most of this period Fed interest-rate policy during this period was trying to support economic growth, not take away the punch bowl.

The Fed is now attempting to slow the economy down with steady rate hikes but has said it will move at a gradual pace.

Robert Brusca, chief economist at FAO Economics, said Kudlow has probably notices that Fed Chairman Jerome Powell “has moved a little bit more to the side of the hawks than Yellen.”

Powell has signaled the Fed will continue to hike rates at a once-per-quarter pace, despite warnings from doves at the central bank that the market is signalling caution.

In particular, the yield curve has been flattening, with the spread between 2-year notes  and 10-year notes at the lowest level since 2007.

The curve is a line that plots yields across all debt maturities. It typically slopes upward. A flatter curve can signal concern about the outlook. An inverted curve is an accurate predictor of recessions.

Powell and other Fed officials have said that times are different and the yield curve may not be the signal it once was.

But St. Louis Fed President James Bullard on Thursday said he didn’t know why the Fed wanted to “test this theory” by continuing to push short-term rates higher.

Brusca said Kudlow was trying to “guide the Fed’s eyes” to the yield curve signal.

“I’m sure Larry was trying to send smoke signals. He’s trying to explain it to them,” Brusca said.

The debt load for U.S. corporations has reached a record $6.3 trillion, according to S&P Global.

The good news is U.S. companies also have a record $2.1 trillion in cash to service that debt.

The bad news is most of that cash is in the hands of a few giant companies.

And the riskiest borrowers are more leveraged than they were even during the financial crisis, according to S&P's analysis, which looked at 2017 year-end balance sheets for non-financial corporations.

On first glance, total debt has risen roughly $2.7 trillion over the past five years, with cash as a percentage of debt hovering around 33 percent for U.S. companies, flat compared to 2016. But removing the top 25 cash holders from the equation paints a grimmer picture.

Speculative-grade borrowers, for example, reached a new record-low cash-to-debt ratio of just 12 percent in 2017, below the 14 percent reported in 2008 during the crisis.

“These borrowers have $8 of debt for every $1 of cash,” wrote Andrew Chang, primary credit analyst at S&P Global. “We note these borrowers, many sponsor-owned, borrowed significant amounts under extremely favourable terms in a benign credit market to finance their buyouts at an ever-increasing purchase multiple without effectively improving their liquidity profiles.”

The trend persists even among highly rated borrowers: More than 450 investment-grade companies not among the top 1 percent of cash-rich issuers have cash-to-debt ratios more similar to those of speculative issuers, hovering around 21 percent.

This could lead to trouble for the economy as interest rates rise. The Federal Reserve, which has already hiked rates twice so far this year, has indicated that further increases may be needed to keep the economy in check later in 2018. It has also actively reduced the amount of purchases it is making in the Treasury and mortgage markets.

“Is the strategy one of relying on the Phillips curve and trying to preempt inflation, or is the strategy one of trying to let the economy grow as much as possible and respond to inflation problems as they arise,” Summers said in an interview Wednesday on Bloomberg Television. “I would very much favor the second.”

“The dangers are still much more on the side of too much slowdown than they are of too much inflation,” said Summers, a Harvard University economist and former White House adviser in President Barack Obama’s administration. “We still haven’t really solidly hit the 2 percent inflation target so I’m not seriously concerned about the Fed pursuing too easy a policy. If anything, the dangers are the Fed will pursue too tight of a policy.”

Pension funds are taking aim at private equity firms for exploiting a financial sleight of hand that can make even mediocre investments look brilliant.

Discontent has been simmering for a couple of years, but now the California Public Employees’ Retirement System and others are more forcefully pressing their case. The dispute centers on a common -- and legal -- practice: To make an investment, private equity funds are increasingly borrowing against clients’ commitments, then asking for the cash later.

This strategy packs a powerful, if obscure, punch: goosing the reported return on investment. How? It shortens the time that a customer’s actual money is deployed. That changes the math that private equity firms use to calculate their results. Consultant Cambridge Associates figures the approach can inflate a fund’s return by as much as 3 percentage points a year.

Private equity firms say the retirement pools benefit from holding onto their cash longer. They are “pursuing this in droves, like a Black Friday shopping mob,” Andrea Auerbach, head of global private investments research at Cambridge Associates, wrote in a blog post last month.

Earlier: Buyout Firms Are Magically -- and Legally -- Pumping Up Returns

In contracts over the last year, Calpers, the largest U.S. public pension fund, has tried, so far without success, to eliminate these kinds of loans, known as subscription credit lines, according to people briefed on its concerns who requested anonymity to discuss private conversations. At Calpers, private equity funds reported an average 12.1 percent annual return over the past five years, the most of any major asset class in the fund, which manages about $350 billion on behalf of 1.9 million public employees, retirees and their families.

APG Group NV, which manages 469 billion euros ($548 billion) on behalf of government and education employees in the Netherlands, is opposed to the growing and what it considers excessive use of the loans by private equity firms, according to people with knowledge of its concerns. Low interest rates are encouraging more private equity firms to borrow aggressively and extend the terms of the loans, these people said.

Some of the biggest private-equity firms, including Apollo Global Management LLC, Ares Management LP, Carlyle Group LP and KKR & Co., have disclosed in securities filings that they use these credit lines, without indicating their precise impact on investment performance. Ares and KKR said their reported returns would generally have been lower without the loans, though they didn’t say by how much.

“KKR provides very specific and detailed information on the use of credit facilities and what the IRR is -- both with and without them -- in our quarterly transparency reports to fund investors,” said spokeswoman Kristi Huller.

Apollo and Carlyle declined to comment, and others either didn’t respond or referred to their filings.

TPG, co-founded by billionaires David Bonderman and Jim Coulter, appears to have been among the most transparent. By using a credit line, TPG was able to boost the “net internal rate of return” on its 2015 buyout fund to 22 percent from 15 percent, as of the end of last year, according to a March fund document viewed by Bloomberg News. TPG declined to comment.

Tough Comparisons

Juicing returns with borrowed money makes it harder for pension funds and other institutions to compare the actual investment skills of private equity funds, according to Oliver Gottschalg, an associate professor at French business school HEC Paris.

“You can have a situation where even after 10 years, a fund is reporting an overstated level of returns,” Gottschalg said. “In more than 15 percent of cases, this could put them into a different performance quartile.”

For their part, private equity groups say such borrowing is merely a short-term tool that helps firms invest money between so-called “capital calls,’’ when institutional investors are required to follow up their commitments with cash. By using credit lines, firms can react quickly and invest in new deals, providing a “win-win” for both institutional investors and the private equity firms, says Jason Mulvihill, general counsel of the American Investment Council, a Washington group that represents private equity firms.

Some customers, such as Karl Polen, chief investment officer of Arizona State Retirement System, agree. He calls the loans an efficient way to manage cash, as long as they’re repaid every three to six months and aren’t used simply to increase returns. The Wyoming Retirement System sees the credit lines as mostly beneficial as well, and appreciates the way they can minimize multiple calls for capital, said a person familiar with the pension.

‘Bad Rap’

“They are getting a bit of a bad rap,” said Zachary Barnett, a partner at law firm Mayer Brown who represents banks that make loans to private equity funds. “Investors are only on the hook for the money they already promised the fund, which would be the case with or without a credit facility.”

Representatives from Wyoming and APG declined to comment. Calpers spokeswoman Megan White declined to comment beyond saying the pension giant backs guidelines from the Institutional Limited Partners Association, which represents private equity fund customers, that call for limited use of borrowing and enhanced disclosure.

Still, even some within the private equity world acknowledge their own risk in investing with borrowed money. What happens if the customer can’t actually come up with the cash later? Oaktree Capital Group LLC, one of the largest alternative asset managers, is developing guidelines it expects to help mitigate those risks, which could arise during a financial crisis.

Hidden Risk

“It’s mostly during crises that weaknesses are exposed,” Howard Marks, co-chairman of Oaktree, wrote last year in a memo to clients.

For now, it’s unclear whether the pension funds will be able to change this practice. Private equity firms, which took in a record $453 billion last year, are being flooded with money and can basically dictate their terms. Customers are then forced to make decisions with incomplete information on a fund’s performance, said Jennifer Choi, managing director of industry affairs for the private-equity customer group.

Private equity funds “are telling you what the terms of trade are to participate,” Ashby Monk, a researcher on pension and sovereign wealth fund design at Stanford University’s Global Projects Center, told the Calpers board in Sacramento last month. “They are using scarcity. They’re using side letters. They’re using more tricks than I could probably fit into a 20-minute conversation.”

The Public Sector Pension Investment Board is joining a consortium of investors to purchase the holding company that owns the majority share of Italian pharmaceuticals group Recordati.

The consortium, which includes global private markets firm StepStone and private equity company CVC Capital Partners, is purchasing Finanziaria Industriale Mobiliare ed Immobiliare, which owns 51.8 per cent of Recordati, for a value of about $4.6 billion.

“I believe that this is great outcome for the company and its employees who will benefit greatly from having CVC as a partner,” said Andrea Recordati, chief executive officer of the company, in a press release.

“In the process of finding the best partner to take Recordati forward, it was important to find a party that would allow Recordati to remain independent, with continuity for management and employees, and accelerate its growth strategy as a leading global consolidator in the pharmaceutical industry.”

The company has an impressive rare diseases business, according to Cathrin Petty, head of health care for Europe, the Middle East and Africa at CVC, in the release. “Recordati has always been a very carefully managed, international pharma company with a broad platform of products and a strong geographical footprint in primary care.”

A consortium led by European private equity firm CVC Capital Partners has agreed to acquire a 51.8 percent interest in Recordati SpA, a Milan, Italy-based developer, maker and marketer of pharmaceuticals.

The consortium, which includes Canadian pension fund manager Public Sector Pension Investment Board (PSP Investments), will buy the majority of the company from Recordati family financial holding FIMEI. The deal is valued at about 3 billion euros (US$3.5 billion).

The acquisition is expected to close in the fourth quarter.

PRESS RELEASE

CVC Fund VII Acquires Controlling Stake in Recordati S.p.A.

June 29, 2018

CVC is pleased to announce that a consortium of funds (the “Consortium”) led by CVC Fund VII has agreed to buy the holding company that owns a majority interest in Recordati.

Chairman Alberto Recordati said “Today is an important moment in the further development of the company my grandfather founded over 90 years ago. We have found in CVC a partner who shares our vision, values and passion for the company, its employees and its role in developing and distributing healthcare around the world.”

Andrea Recordati, CEO, said “I believe that this is great outcome for the company and its employees who will benefit greatly from having CVC as a partner. In the process of finding the best partner to take Recordati forward, it was important to find a party that would allow Recordati to remain independent, with continuity for management and employees, and accelerate its growth strategy as a leading global consolidator in the pharmaceutical industry. I am very pleased to be working alongside CVC in accelerating Recordati’s global expansion. I am personally reinvesting alongside the Consortium as I believe in and support Recordati.”

Giampiero Mazza, Head of CVC Italy, said “We are honoured to be chosen by the Recordati family who have put great trust in us to continue in their role as the majority shareholder of their company. We have a great admiration for the business which we have known for over many years since Giovanni Recordati was CEO. We are excited by the opportunity to support this excellent management team, led by Andrea Recordati who we have asked to remain as CEO and who carries on the company’s legacy and provides the continuity of the business and its strategy alongside Fritz Squindo, Recordati’s Managing Director and CFO.“

Cathrin Petty, Head of EMEA Healthcare at CVC, added “Recordati has always been a very carefully managed, international pharma company with a broad platform of products and a strong geographical footprint in primary care. Over the last decade Recordati has built up a very attractive rare disease business which we look forward to expanding in addition to the core business. We hope that through our expertise and global healthcare network we will help accelerate this growth across orphan and specialty care to build a global leader in the industry.”

The transaction is structured as a fully financed acquisition by the Consortium of the family’s holding company FIMEI S.p.A for an Enterprise Value of €3.03bn. FIMEI owns 51.8% of Recordati S.p.A., implying a 100% equity value for Recordati S.p.A. of €5.86bn, equivalent to €28.00 per share.

The members of the Recordati family will receive part of the consideration in the form of a deferred and subordinated long-term debt security in the amount of €750 million. Furthermore, Andrea Recordati in his capacity as CEO will invest alongside the Consortium.

Closing of the FIMEI purchase is anticipated to take place in the last quarter of 2018 and is subject only to mandatory competition approvals. Following closing, in accordance with CONSOB rules, the Consortium will make a mandatory tender offer (“MTO”) to the remaining minority shareholders. The Consortium’s current expectation is that Recordati will remain a publicly listed company. The Recordati family requested, and the Consortium has agreed, to provide other shareholders with a full cash offer at €28.00 per share, which implies a higher economic value than the cash and deferred payment made to the Recordati family. The offer of the full price in cash to the minority shareholders in the MTO is subject to the absence of a material market correction prior to closing of the FIMEI transaction (defined as a decrease in the FTSE MIB index of more than 20%). In such an event, the Consortium intends to lower the cash offer price in the MTO, in consultation and agreement with CONSOB, to a price equivalent to the actual consideration paid to the Recordati family (taking into account the present value of the deferred payment).

Leopoldo Zambeletti and Rothschild are acting as financial advisor to CVC. Gattai, Minoli, Agostinelli & Partners together with White & Case LLP are acting as legal advisors to CVC. Facchini, Rossi are acting as tax advisor to CVC. Committed financing for the transaction is being provided by Deutsche Bank, Credit Suisse, Jefferies and Unicredit.

The Consortium led by CVC Fund VII includes PSP Investments and StepStone.

Swedish private equity firm EQT and Canadian pension fund manager PSP Investments have entered into exclusive discussions to acquire Azelis SA, a Belgian distributor of specialty chemicals and food ingredients. No financial terms were released for the deal, which is expected to close in Q4 2018. The seller is U.K. private equity firm Apax Partners, which acquired the business in 2015. Established in 2001 through a merger, Azelis serves more than 43,000 customers globally. PSP Managing Director and Head of Private Equity Simon Marc said the company is a leader in an “attractive market that has strong consolidation prospects.”

PRESS RELEASE

EQT granted exclusivity to acquire Azelis, a global distributor of specialty chemicals and food ingredients

June 19, 2018

EQT VIII, with PSP Investments as co-investor, is in exclusive discussions to acquire Azelis, a leading distributor of specialty chemicals and food ingredients with a global presence in more than 40 countries.

Azelis provides a diverse range of products and innovative services to more than 43,000 customers and 2,000 principals.

EQT VIII to support Azelis’ continued growth by leveraging EQT’s experience with buy-and-build strategies, digital capabilities and global network of industrial advisors

The EQT VIII fund (“EQT” or “EQT VIII”), in partnership with the Public Sector Pension Investment Board (“PSP Investments”) as co-investor, has been granted exclusivity to finalize the discussions to acquire Azelis (“Azelis” or “the company”) from funds advised by Apax Partners.

Azelis was established in 2001 through the merger of Novorchem (Italy) and Arnaud (France). It has since followed an active acquisition strategy to create a leading specialty chemical distribution network in Europe. Today, Azelis supports more than 43,000 customers who benefit from its application know-how and technical support and have access to a wide product portfolio from more than 2,000 specialty raw materials producers. The company has 1,800 employees and sales of around EUR 1.8 billion.

EQT will support Azelis’ continued development by providing access to both operational and financial resources and by leveraging EQT’s expertise with buy-and-build strategies. In addition, EQT will provide digital capabilities and grant the company access to a global network of industrial advisors. Azelis’ current management team, under the leadership of Dr. Hans-Joachim Müller, will continue to lead the organization.

“Azelis holds a leading position in the attractive specialty chemical distribution space,” said Bert Janssens, Partner at EQT Partners, Investment Advisor to EQT VIII. “We have been impressed by how Azelis’ management team transformed the business from a predominantly European operator to a leading global platform. EQT looks forward to working with Hans-Joachim and his team on their continued growth journey.”

“We are constantly strengthening our capabilities to serve our key suppliers (“principals”) and our diverse base of customers,” said Dr. Hans-Joachim Müller, CEO of Azelis. “We are grateful for Apax’s support over the past three years and are excited to continue our journey together with EQT.”

EQT draws on comprehensive expertise and competence in business services. Since 1994, EQT has invested in many companies within the services sector. “EQT applies a long-term, responsible and sustainable development approach, relying on a consistent industrial logic,” explained Kristiaan Nieuwenburg, Partner at EQT Partners, Investment Advisor to EQT VIII. “Azelis will benefit from this growth-focused investment philosophy, as well as our sector expertise.”

“Strong relationships with leading private equity firms are at the core of our investment strategy, and we are excited to partner with EQT for the acquisition of Azelis,” said Simon Marc, Managing Director and Head of Private Equity at PSP Investments. “Azelis is a global leader in an attractive market that has strong consolidation prospects. We are very pleased to back Azelis and its world-class management team in their next stage of growth.”

The transaction is subject to regulatory approvals and the necessary consultation with employee representatives being conducted, and is expected to close in the fourth quarter of 2018. The parties have agreed not to disclose the transaction value.

Public Sector Pension Investment Board, Canada’s fourth largest pension system, is seeing the benefits of a three-year strategy that changed the way it invests in private equity and infrastructure, in part by doing more direct deals.

PSP Investments last week issued its report for fiscal 2018, ended in March, which shows PE deployments of $4.4 billion last year. Of the total, more than half went to co-sponsorships and co-investments.

Dealmaking was mostly in the United States and Europe, engaging such companies as ceramic-products supplier CeramTec, medical-lab-services operator Cerba, and early-childhood educator Learning Care.

The activity marks a third year of unprecedented PE outlays, totalling $9.9 billion since 2015.

The portfolio finished the year with $19.4 billion in assets, up 22 percent from fiscal 2017. Direct deals account for 51 percent of assets, up from 40 percent three years earlier.

PSP was just as active in the infrastructure space in fiscal 2018, deploying $3.3 billion, two-thirds of it on a direct basis. Portfolio assets increased to $15 billion, up 35 percent from a year ago.

Combined PE and infrastructure assets, standing at $34.4 billion, are double what they were in 2015, when both asset classes were under-allocated.

As PE Hub Canadareported last month, it was then PSP decided to overhaul its private-markets operation by ramping up both internal resources and external relationships.

Guthrie Stewart, senior vice president and global head of private investments, who spearheaded the initiative, told PE Hub Canada PSP has met its objective.

“PSP’s revamped strategy has been all about building scale and generating returns,” Stewart said. “We’ve achieved that.”

PE investments realized a one-year return of 12.9 percent in fiscal 2018, the report shows. While this is shy of the portfolio’s 17.6 percent benchmark, it improves on fiscal 2017’s 3.4 percent loss, which PSP attributed to legacy assets.

Stewart said enhanced performance owes to investing over the past three years, which generated a return “above 20 percent.” Direct deals have been a key driver, accounting for a return in the “mid-20s,” he added.

The infrastructure portfolio realized a one-year return of 19.3 percent, beating its 12.1 percent benchmark.

PSP, which manages the retirement savings of federal public employees, including defence forces and the Royal Canadian Mounted Police, earned an overall one-year return of 9.8 percent in fiscal 2018. That helped lift total net assets to $153 billion from a previous $135.6 billion.

PSP’s private-markets operation is now at a “cruising speed of investing $4 billion to $5 billion per year,” Stewart said. That’s a “good position to be in,” he noted, as it allows PSP to be “highly selective in our priorities.”

It perhaps also shows good timing, considering increased market frothiness and high leverage levels.

In this environment, PSP plans to hold dry powder so it can “pounce” on compelling opportunities as they emerge, especially in the event of a downturn, Stewart said.

U.S. companies are funneling extra money into their pension funds to take advantage of temporary tax savings, moves that are helping suppress yields on long-term Treasurys.

S&P 500 companies are contributing to pension plans this year at a pace expected to nearly match 2017’s level, which at $63 billion was the most since 2003, according to Goldman Sachs Asset Management. Last year’s contributions were spurred in part by companies anticipating changes in the U.S. tax-code overhaul.

That and continued contributions this year have been a boon for the Treasury market because pension funds tend to invest in long-dated bonds to match their long-term liabilities. The yield on the 30-year bond has been falling recently, closing at 2.953%% on Thursday, down from a recent peak of 3.245% in mid-May.

Analysts are pinning the drop in yields—which happens as prices rise—partly on demand from pension funds. Long-term rates have remained low and U.S. inflation has picked up this year. Inflation poses a risk to bonds, and especially longer-dated ones, because it erodes the purchasing power of fixed-interest and principal payments.

Long-term yields are “very low because people are still putting money into Treasurys,” said Torsten Slok, an economist at Deutsche Bank . The difference between yields on 30- and 10-year Treasury debt has shrunk to about 0.13 percentage point this week from about 0.33 percentage point at the start of this year.

Voluntary contributions to pension funds, which already were brisk last year, have taken off recently thanks to the passage of the tax overhaul. This introduced a window for companies with underfunded plans to make additional contributions and garner a tax benefit, analysts say.

Firms that contribute through mid-September of this year can receive deductions based on the old 35% corporate tax rate, rather than the new 21% rate. A company that contributes $1 million to an underfunded pension plan could have $350,000 in tax savings before the deadline, but would have savings of just $210,000 after September.

Those making discretionary pension contributions include Verizon Communications Inc., which added $1 billion to its pension plan in the first three months of the year, a large enough sum that the telecom giant won’t have to make mandatory contributions for eight years, the company said in April. A Verizon spokesman said the tax benefit was a factor in the contribution.

PepsiCo Inc. said in April that it made a discretionary contribution of $1.4 billion. Deere & Co. and United Parcel Service Inc. both have cited the tax law as the reason for increasing their voluntary pension contributions.

“You will probably see more do it over the next few months,” said Michael Moran, a pension strategist for Goldman Sachs Asset Management.

One sign that pensions have a lot of fresh money to pour into U.S. government debt is strong demand for what are called stripped long-term Treasurys. These securities are created when bond dealers cleave a bond into separate interest-only and principal-only instruments.

Pension funds often purchase the principal-only instruments, which are akin to zero-coupon bonds. The funds purchase the debt at a deep discount, forgo regular interest payments and instead receive the debt’s full face value at maturity. This gives pension plans funds when a liability is coming due and provides them with more financial flexibility in the meantime.

The amount of stripped long-term Treasury bonds rose 9.4% in the first five months of 2018, putting them on track to grow at more than twice the pace of the previous year, according to data from BMO Capital Markets. That would mark the fastest growth since 2010.

Pension-fund purchases of both principal-only stripped long-term Treasurys and Treasury debt have played a key role in keeping long-term yields low, analysts said. And pension funds’ debt appetite may grow in coming months as companies that have been waiting for higher rates make their move before the tax window closes, said Richard Sega, chief investment officer at Conning, who manages money for insurance companies and pension funds.

After that, though, pension funds could have a reduced appetite for longer-dated Treasurys. Combined with a quicker pace of government-debt issuance due to growing deficits, this could help to push yields higher, said Deutsche Bank’s Mr. Slok.

Demographic shifts toward an older workforce, though, could lead companies to continue increasing pension-fund contributions. Meanwhile, companies and governments in developed economies outside the U.S. will face similar demographic challenges, which also would lead to more Treasury buying, Mr. Sega said. “This is a long-term global trend,” he said.

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