The June jobs report brought with it almost universally good news, unless you're a worker looking for a substantially fatter paycheck.

Wage gains remain positive but muted, growing at 2.7 percent annually, or pretty much the same level as the previous three months and below Wall Street expectations. That's despite the supposed benefits of a tightening labor market, and a tax cut that was supposed to push average hourly earnings over the 3 percent barrier.

Job gains —213,000 in all for nonfarm payrolls— were spread across the board but the positions are paying only a bit more due to a variety of factors that are keeping gains just above inflation.

"You're creating jobs in good areas where you're creating careers — manufacturing, business services, health care construction, those are places you want to see the jobs created. But the conundrum of wages continues," said JJ Kinahan, chief market strategist at TD Ameritrade. "How are we not getting higher wages? A lot of that has to do with the fact that at lower end of the scale you're seeing people being replaced by machines. There are jobs, but there's a lot of lateral movement."

Indeed, there were 6.7 million job openings as of the most recent count and 6.6 million that the Bureau of Labor Statistics considers unemployed.

That should be creating more substantial wage pressures. Yet the jobs market keeps showing each month that there's more slack than economists are figuring and thus more room for employers to keep pay increases modest.

In June specifically, the entrance of 601,000 workers either back into the labor force or entering for the first time helped overall job gains while keeping wages lower. The growth of the labor force participation rate accounted for an increase in the unemployment rate to 4 percent from 3.8 percent, a statistical change that actually showed more vibrant conditions.

"While the wage growth rate didn’t increase this month, having it hold steady is a good sign," said Cathy Barrera, chief economist at ZipRecruiter, an online employment marketplace. "The increased labor force participation could create slack in the labor market if there isn’t enough demand for those workers. In this case, wage growth may be dampened. That the rate did not decline further indicates that these workers are alleviating a shortage rather than creating slack."

Moreover, Barrera said a surge in youth and those without college educations into the labor market also is holding back wage pressures.

From a market perspective, investors care about wages because the impact inflation which in turn can influence interest rates.

Federal Reserve officials have joined other economists in expressing concern over the so-called skills gap in the marketplace, the dynamic that is causing jobs to go unfilled and wage pressures to be muted because employers are struggling to find workers with the right qualifications.

On the other side of that equation, though, are workers who say that if companies paid more there would be a greater response from potential employees.

The Fed's job is to decide whether conditions remain conducive to plans to increase rates two more times this year, or to wait for more signs of wage inflation. Central bank officials generally believe Fed policy works on a lag, meaning that they don't need to wait until it's too late before moving.

"While this is unquestionably a positive report, it won’t make the Fed’s job any easier, said Ron Temple, head of U.S. equities and co-head of Multi-Asset at Lazard Asset Management. "The doves will focus on workers rejoining the labor force and on muted wage growth. The hawks will zero in on the fact that the US has added 215,000 jobs per month in 2018, nine years into the growth cycle.”

The issue about modest wage gains ultimately could begin to change longer-run expectations, a danger the Fed is trying to avoid. Economists believe that inflation can be a self-fulfilling cycle in either direction, and the prolonged period of low pressures has caught the attention of policymakers.

"They’re worried we’re breaking down some of the mechanisms that used to be at work in the wage inflation dynamic," said Diane Swonk, chief economist at Grant Thornton. "In Japan, the idea is that with deflation and very low inflation, no one expected raises and they began to erode wages. Part of the stagflation is that they actually lost living standards."

"Historic worker shortage"https://t.co/NUTEqkKOQq

— Neel Kashkari (@neelkashkari) July 4, 2018

Fury has erupted in Pennsylvania over huge fees paid by the Quaker state’s two largest public pension funds to investment managers on Wall Street.

Joseph Torsella, state treasurer, has accused Pennsylvania Public School Employees’ Retirement System (PSERS) and Pennsylvania State Employees’ Retirement System (SERS) of wasting $5.5bn paid as fees to Wall Street investment managers whose funds performed poorly.

The dispute follows similar rows in Maryland and California, where pension officials were forced to admit their failure over decades to disclose multimillion-dollar payments to private equity managers.

Unfunded pension liabilities across US state and local governments now exceed $6tn.

“The pension crisis is national,” said Jeff Hooke, a senior finance lecturer at Johns Hopkins University’s Carey business school.

Mr Torsella’s claim brings into question the secrecy surrounding private equity contracts. It also highlights the issue of whether it is appropriate for public pension schemes to use costly investment managers when the outlook for returns is deteriorating.

He said both PSERS and SERS would have achieved better returns at a lower cost by following a simple passive index-tracking strategy.

“We have paid Wall Street handsomely for mediocre returns. Lavish fees [ . . .] represent not just a waste of money but an abuse of the trust of the people,” said Mr Torsella.

A review has begun into the management of the funds, which also aims to find $3bn savings over 30 years. It will also examine investment performance and fees paid.

Mr Torsella estimated that PSERS could have avoided $3.9bn in fees if it had followed a simple equity-bond global index strategy. It would also have delivered better returns in seven of the past 10 years.

The smaller SERS could have saved $1.6bn in fees. An index-tracking strategy would have outperformed the pension fund’s investment portfolio in six of the past 10 years.

“The numbers clearly show that one simple low-cost passive strategy would have performed far better and saved a fortune,” said Mr Torsella. The treasurer has also called for both pension funds to abandon the use of placement agents — middlemen who facilitate introductions to investment managers in return for a fee.

The review body will present its findings to the state governor before the end of the year.

PSERS oversees assets of $53.5bn on behalf of more than 600,000 members. It says in its annual report that it paid $474m in “investment expenses” in the year to June 2017.

Alternative investments, including private equity, private debt and venture capital, account for 15.2 per cent of the system’s assets but 21.7 per cent of fees paid.

PSERS said it was “one of the most transparent” of the large US public pension funds because it disclosed data on management fees paid to private equity managers. Its annual report makes no mention, however, of performance fees, known as carried interest, paid to private equity managers.

The pension fund said: “PSERS has recently begun to collect performance-fee data for private markets (private equity, private debt and real estate) but it is not available yet.”

SERS oversees assets of more than $29bn on behalf of 239,000 members. It paid out $135m in 2017 in investment expenses, including fees to managers. About $70m in fees was paid to 147 private equity managers in 2016, the latest year for which data are available. Private equity accounts for 16 per cent of SERS’ assets but more than 40 per cent of the fees paid to investment managers.

SERS also does not disclose performance fees paid to private equity managers. It said the fund continually looked for savings. “We look forward to any new viable ideas that the Review Commission may bring forward,” said a spokesman.

The tension in Pennsylvania echoes issues in California, home to the two largest US public pension plans.

In 2015 these were forced to admit that they had no record of $7.5bn performance fees paid to private equity managers over more than 20 years.

After investing in a new reporting system, the California Public Employees’ Retirement System (Calpers), revealed in 2015 that it had paid $3.4bn in carried interest to private equity managers over 25 years. Calpers also admitted that the estimate was incomplete. Nine managers refused to provide historical data and Calpers was also unable to recover details of carried interest paid to private equity funds that had already matured.

The revelations prompted John Chiang, California state treasurer, to sponsor legislation requiring public pension funds to disclose management fees, fee offsets, fund expenses and carried interest paid to private equity and hedge fund managers.

The California State Teachers’ Retirement System (Calstrs), the second-largest public pension scheme, is yet to disclose the information on fees demanded by Mr Chiang.

Officials such as Mr Chiang and Mr Torsella have led efforts to improve transparency.

The National Association of State Treasurers, a body representing officials from 47 US states, made a call in 2016 for pension funds to report all private equity fees and expenses so that scheme members could fully understand the cost of investments.

Maryland’s $49bn state pension scheme was forced to admit in May that it had paid $87.4m in previously undisclosed performance fees to its private equity managers for the year to December 2016.

The Maryland Public Policy Institute, a think-tank, estimated that the state pension lost nearly $9bn income over 10 years after paying higher-than-average investment fees to Wall Street managers and in exchange for lower-than-average returns.

Mr Hooke, said pension fund executives were too easily seduced by the active management promises sold by Wall Street professionals.

Closing the $6tn funding gap could require tax increases or cuts in pension benefits unless improvements are made in the performance of public pension funds.

“It is time to fix America’s broken state and municipal pension system so workers and taxpayers receive a fair deal,” said Mr Hooke.

1. World-class governance: Allows Canada's pensions to hire top talent across public and private markets and pay them properly. This is why over 70% of the assets are typically managed internally, lowering fees and costs, adding meaningful alpha over benchmark index returns over the long run.
2. A shared-risk model: This means when pensions run into trouble and there is a deficit, the risk of the plan is shared which in turn means higher contributions, lower benefits or both. Pension plans in Canada with a shared-risk model have adopted conditional inflation protection to partially of fully remove cost-of-living-adjustments for a period until the plan's funded status is fully restored again.

In a major shift, historically conservative Japanese institutions are significantly increasing their investments in hedge funds, private equity, private debt, infrastructure, and other unlisted asset classes.

The average Japanese corporate pension fund now has a 17 percent allocation to alternative investments, up from 11 percent in 2013, according to J.P. Morgan Asset Management’s annual survey.

Furthermore, six in ten pension funds said they plan to increase their alternative investments next year. The asset manager interviewed staff members at 120 corporate defined benefit pensions between March and mid-June 2018 for its 11th annual survey. The study covers fiscal years 2016 and 2017 as well as allocators’ plans for the future.

Domestic bond allocations fell to 21.7 percent on average, the lowest level since JPMAM began been tracking the market. The move out of bonds coincides with the Bank of Japan’s policy of keeping interest rates negative to spur economic growth. The policy has hurt its institutional investors who tended to invest heavily in sovereign bonds. To offset disappearing bond yield, pension investors are hoping alternatives such as infrastructure and real estate can help them meet their return targets.

“Japanese corporate defined benefit pension plans remain under pressure to generate returns sufficient to fund their obligations and are gradually unshackling themselves from a long tradition of highly conservative investing,” institutional sales head Yoichiro Nitta said in a statement.

“The challenge will continue as anticipated bond and equity returns remain subdued, the Bank of Japan sticks with ultra-loose monetary policy to coax inflation, the U.S. economy is late cycle, and Japan’s GDP forecast is unclear,” he continued.

JPMAM also found that Japanese institutional investors are using absolute return/unconstrained fixed income, multi-asset strategies, and private debt funds to help manage volatility.

Twenty percent of Japanese institutions have nixed domestic bond and equity buckets and instead now use global versions of each as they continue to diversify outside their home market of Japan. “Within these newly condensed buckets, exposure to domestic assets is generally falling at the expense of greater allocation to foreign assets,” the announcement said.

Although Japanese pensions are moving further into alternatives, many of them still have concerns. Common hurdles include communicating how the investments work to boards and other stakeholders; whether low liquidity assets have been flooded with capital and are in a bubble; and understanding where risk lies.

“Defined benefit pension fund managers are racking their brains to explain complicated instruments and upgrade their portfolio management,” the JPMAM report stated.

Appetite among Japanese pension funds for alternative investments has hit a new peak at the same time as bond allocations have sunk to a record low, according to a survey by JPMorgan Asset Management.

Pension funds in Japan, historically regarded as some of the world’s most conservative investors, have been forced to make radical changes to boost returns as a result of the extreme measures taken by the Japanese government to stimulate economic growth and inflation.

JPMorgan surveyed 123 Japanese corporate pension funds and found that the average allocation to alternative investments reached a record 17.1 per cent in March, up from 11.4 per cent over the past five years.

Exposure to Japanese government bonds dropped to 21.7 per cent, the lowest in the 11-year history of JPMorgan’s survey.

Japanese policymakers have deliberately held interest rates at ultra-low levels since 1999 in an effort to boost economic activity. The benchmark 10-year government bond yields just 2 basis points.

Expected returns among corporate pension funds have fallen over the past decade from about 3.5 to 2.6 per cent, reflecting the downward pressure on domestic interest rates.

“Japanese corporate pension funds remain under significant pressure to generate sufficient returns to fund their obligations and are gradually unshackling themselves from their long tradition of highly conservative investing. Alternatives have now truly become a mainstream asset class for Japanese pension funds,” said Akira Kunikyo, an investment specialist in JPMorgan AM’s Japan institutional business.

Katsunori Kitakura, lead strategist at SuMi Trust, the $475bn Tokyo-based asset manager, said that difficulties in forecasting the future performance of alternative investments raised concerns over whether these illiquid assets would deliver the returns required.

“It may be too late to take any countermeasures if a pension fund realises that its illiquid alternatives may not achieve their expected returns,” said Mr Kitakura, adding that risk monitoring and governance were vital considerations. “We have seen pension funds invest in alternative products in the past without conducting the appropriate due diligence and setting up risk monitoring facilities.”

JPMorgan’s survey showed that just under 60 per cent of corporate pension funds intended to raise their exposure to alternatives over the next year.

“We expect to see investors continue to ‘push the envelope’ on alternatives to boost returns and increase portfolio resilience,” said Mr Kunikyo.

In April 2017, Japan’s Government Pension Investment Fund invited proposals from alternative investment managers to handle private equity, infrastructure and real estate allocations via funds of funds. The number and size of new mandates has not been disclosed by the GPIF, which holds a fraction of its assets in alternatives.

Japan’s Government Pension Investment Fund returned 6.9 percent, or 10.1 trillion yen ($91 billion), in the year ended March 31, with assets totaling 156.4 trillion yen, it said in Tokyo on Friday. Domestic stocks were the fund’s best-performing investment, adding 5.5 trillion yen, followed by a 3.5 trillion yen increase in overseas shares. Domestic bonds gained 362 billion yen, while overseas debt rose 674 billion yen.

Six quarters of gains boosted assets to a record at the end of 2017. The GPIF incurred losses during the first three months of this year as investor sentiment turned from optimism over U.S. tax cuts to fears of a trade war. A global equity rout and plunge in Treasuries in its final fiscal quarter kept the fund from beating a record 12 percent annual gain set three years ago.

“The environment is favorable for stock investments for the time being as the global economy remains solid and inflation is benign,” said Naoki Fujiwara, chief fund manager for Shinkin Asset Management Co. in Tokyo. “Yet, from a long-term perspective, the ratio of risk assets in its portfolio may be too much.”

The GPIF doubled stock holdings and cut bonds as part of a strategy revamp in 2014 with the assumption that rising prices would erode the spending power of Japan’s low-yielding debt. Since then, the shift has helped the fund generate a positive return for three out the past four fiscal years.

“Domestic and overseas stocks rose largely supported by a robust economic environment and solid corporate earnings, in addition to” political stabilization in Europe and expectations over an economic boost from a U.S. tax cut, GPIF President Norihiro Takahashi said in a statement Friday. “However, toward the end of the fiscal year, domestic and overseas stocks narrowed their gains on uncertainties over U.S. trade policy, while the yen strengthened against the dollar.”

Trade friction between the U.S. and China has become a big issue when assessing the investment environment, Takahashi said at a press conference in Tokyo. In addition, he said the fund is cautious about investing in Japanese bonds with a maturity less than 10 years because of negative yields.

Japan’s Government Pension Investment Fund (GPIF) has recorded a return of 5.25% (in US dollars) on its ¥196.8bn (€1.51bn) core infrastructure portfolio in the 12 months ending 31 March 2018.

It is the first time that the ¥156.4trn pension fund has disclosed details about its alternative investments in its annual investment report.

According to the report, the infrastructure portfolio includes investments in the Port of Melbourne in Australia, and Birmingham Airport, Bristol Airport and Thames Water in the UK.

GPIF said its infrastructure investments were located mostly in the UK (57%), Australia and Sweden (both 15%), Spain (10%) and Finland (3%).

The pension fund first invested in infrastructure in 2014 when it become a co-investor in the Global Strategic Investment Alliance (GSIA) with Canadian pension fund OMERS and the Development Bank of Japan (DBJ).

It also invests globally in infrastructure funds through multi-managers DBJ Asset Management, StepStone Infrastructure & Real Assets and Pantheon.

GPIF’s real estate exposure is smaller at ¥8.1bn, according to the report. The pension fund plans to increase this through domestic and global multi-manager mandates.

Late last year it appointed Mitsubishi UFJ Trust as its domestic real estate multi-manager, and has yet to announce its global real estate multi-manager.

GPIF’s plans to invest in core real estate to generate long-term, stable income.

Norihiro Takahashi, GPIF’s president, said the pension fund’s overall portfolio returned 6.9% for the fiscal year.

He attributed the performance to a strong global economy, which had buoyed global stock markets, but warned of uncertainties now created by trade tensions between the world’s largest trading nations.

Bank of Canada Governor Stephen Poloz brushed aside concerns about trade wars and pressed ahead with a fresh interest rate increase as inflation hovers at its highest in seven years.

The Ottawa-based central bank raised its overnight benchmark rate by a quarter point to 1.5 percent on Wednesday, the second hike this year and fourth over the past 12 months. The statement didn’t introduce any new “dovish” language, with officials only reiterating that rates will need to rise further, albeit gradually, to keep price pressures in check.

The move signals policy makers are determined to bring rates back to normal levels, and are confident in the Canadian economy’s ability to cope with both higher borrowing costs and the mounting trade tensions. It also suggests the benefits to Canada of strong U.S. growth -- by fueling exports and business investment -- are outweighing the costs and uncertainty imposed by Donald Trump’s trade policies.

“The Bank of Canada decided today that the things we know look bright, and this outweighs the concern we have over the potentially bad outcomes of the things we do not. In other words, the known knowns outweigh the known unknowns,” said Jeremy Kronick, associate director of research at C.D. Howe Institute.

Wednesday’s move was fully priced in by markets. Investors have also been anticipating additional hikes every six months or so until the benchmark rate settles around 2 or 2.25 percent by the end of 2019 -- in line with the central bank’s gradualist guidance.

‘Hypothetical Scenarios’

The Canadian dollar advanced immediately after the statement was released, gaining as much as 0.4 percent, before easing back and trading down 0.2 percent at C$1.31389 per U.S. dollar at 11:41 a.m. in Toronto trading. The currency is down 1.8 percent over the past year, despite rising oil prices.

In his opening statement at a press conference after the decision, Poloz said he understands there is concern about escalation of trade tensions and acknowledged there was speculation he would hold as a result. But the governor said policy can’t be made “on the basis of hypothetical scenarios.”

Monetary policy, meanwhile, is not suited to counter all the negative effects of protectionist measures, and the effect on inflation is “two-sided,” he said. For example, a slowing economy, higher tariffs and a weakening currency could add price pressures.

“The implications for interest rates of an escalation in trade actions would depend on the circumstances,” Poloz said.

In its statement and accompanying monetary policy report, the central bank described an economy running close to capacity where higher oil prices, a weaker Canadian dollar and stronger-than- expected business investment is fully offsetting the negative effect of trade uncertainty. Exporters, meanwhile, are doing even better than previously estimated because of buoyant foreign demand.

The Bank of Canada forecast growth will average 2 percent over the next three years, unchanged from its last estimate in April and still slightly higher than what officials believe is the economy’s long-term sustainable pace. The latest growth forecasts incorporate negative adjustments that capture greater trade uncertainty.

The central bank also raised its estimates for inflation, but expressed confidence it would settle back to 2 percent after temporary factors drove the rate above target.

“Governing Council expects that higher interest rates will be warranted to keep inflation near target and will continue to take a gradual approach, guided by incoming data,” the bank said.

Exports, Investment

In another positive development, officials highlighted that the composition of growth is shifting away from consumption to exports and business investment -- implying they believe the expansion is more sustainable.

The increase in borrowing costs also puts the Bank Canada more in sync with the Federal Reserve and investors are now expecting the northern nation to keep track with rate hikes south of the border over the next year. The Bank of Canada has been lagging the Fed’s rate increases since oil prices collapsed in 2015 -- marking a rare divergence given how closely Canada’s economy is linked to the U.S.

Rate normalization is a delicate task for Poloz. With inflation already above the central bank’s 2 percent target and heading higher, and with financial conditions still very loose, the central bank chief needs to keep wage and price pressures in check. At the same time, moving too soon and too fast could inadvertently trigger a downturn at a time when the economy is awash in risk. And the Bank of Canada would be wary of getting ahead of the Federal Reserve should slowing global growth impact the hiking path in the U.S.

Gradualism remains the order of the day however, and the Bank of Canada repeated most of the list of concerns and unknowns it has said is keeping it from an even faster normalization -- in addition to trade. Officials reiterated, for example, how the economy has become more sensitive to higher interest rates given high debt levels, which would mitigate any impulses to hike. They also believe there remains excess capacity in the labor market, with the Bank of Canada estimating that underlying wage pressures are at 2.3 percent, less than what would be expected in a jobs market that had no slack.

Policy makers are also anticipating that higher business investment will generate new capacity as companies invest to meet sales, a process the central bank has said it has an “obligation” to nurture with stimulative borrowing costs. Because business investment in the first quarter was more robust than expected, the central bank slightly increased its estimate for potential output growth in 2019 and 2020.

The Bank of Canada has decided to raise its benchmark interest rate to 1.5 per cent.

The bank's rate, known as the overnight rate, is the interest that retail banks have to pay for short term loans, but it affects what that consumers pay to those banks for things like mortgages, lines of credit and savings accounts.

Every six weeks, the bank meets to decide on what its interest rate will be, based on what it sees happening in the economy. This time, the bank has decided to raise its rate by 25 basis points — 0.25 percentage points — to 1.5 per cent. It's the fourth time the central bank has raised its rate since last summer.

The bank's next decision on interest rates is expected on Sept. 5.

The central bank tends to cut its rate when it wants to stimulate the economy and raise it when it wants to keep a lid on inflation.

The move was exactly what economists who monitor the bank were expecting, as a recent slate of numbers from Statistics Canada suggest the economy is expanding, the job market is doing well, and inflation is inching higher.

In its decision to hike, the bank noted in a statement that the housing market is stabilizing, commodities such as oil are starting to rally, and businesses are starting to spend again. From the bank's point of view, those are all good signs for the economy.

But the bank also said it is keeping an eye on tariff disputes, specifically those on Canadian steel and aluminum. On the whole, the bank doesn't think the impact will be too harsh.

"Although there will be difficult adjustments for some industries and their workers, the effect of these measures on Canadian growth and inflation is expected to be modest," the bank said.

But that's not to suggest the bank isn't concerned by what's happening on the trade front.

In the statement, the bank said the mere possibility of increased protectionism is "the most important threat to global prospects," and in his comments accompanying the decision on Wednesday, Bank governor Stephen Poloz said trade tensions were "the biggest issue" on the minds of policymakers in recent weeks.

In its accompanying monetary policy report, the bank gauged the impact of those tariffs and concluded that it expects Canadian exports to shrink by 0.6 per cent at the end of 2018 because of them. Imports will take a similar hit. In real terms, that's $3.6 billion less going out, and $3.9 billion less coming in, and it will nudge up consumer prices in the process.

Poloz was quick to add that those projections are only based on trade developments that have already happened. They don't factor in the possibility of worse ones, such as U.S. President Donald Trump's threat to put a 25 per cent tariff on Canadian made cars.

"We felt it appropriate to set aside this risk and make policy on the basis of what has been announced," Poloz said.

Toronto Dominion Bank economist Brian DePratto was among those expecting a hike, given the underlying strength in the job market.

"We're in exactly the sort of situation that traditionally warrants rising borrowing costs. Of course, beyond the fundamentals, the current economic environment is hardly normal," he said.

He expects the bank to keep moving cautiously, hiking its benchmark rate any time it can without harming the economy too much, while keeping a close eye on trade issues.

"We still look for more hikes, but think a gradual pace of one hike roughly every two quarters still makes the most sense," he said. "NAFTA resolution and/or receding trade threats would certainly lay the ground work for an additional hike this year, but we won't hold our breath."

The Bank of Canada raised interest rates July 11 because Stephen Poloz’s tale about how the economy would recover from the Great Recession finally is coming true.

Most everyone assumed the central bank would lift the benchmark rate a quarter point to 1.50 per cent. The few who didn’t thought policy makers would be spooked by what President Donald Trump has in store for global trade. On the eve of the interest-rate announcement, the U.S. escalated its trade war with China, scheduling tens of billions in additional tariffs.

Canada also is on Trump’s hit list. The central bank now reckons the combination of U.S. duties on Canadian lumber, newsprint, aluminum, and steel — and the chilling effect of trade uncertainty on investment — will subtract two thirds of a per cent from gross domestic product by 2020, an increase from its previous estimate in April.

That’s the equivalent of about $12 billion, so it’s not nothing.

But the bigger story in the Bank of Canada’s new Monetary Policy Report is that most companies are responding to their order books rather than the headlines in the business pages. Policy makers significantly upgraded their outlooks for business investment and exports, offsetting weaker household consumption.

“Canada’s economy continues to operate close to its capacity and the composition of growth is shifting,” the Bank of Canada said in its policy statement. “Exports are being buoyed by strong global demand and higher commodity prices. Business investment is growing in response to solid demand growth and capacity pressures, although trade tensions are weighing on investment in some sectors.”

That shift has been a long time coming. Poloz predicted it would happen soon after he became governor in 2013. But exports and investment faltered, forcing the central bank to keep interest rates low. That encouraged households to keep spending — and adding to their debts.

It’s somewhat surprising that the long-awaited rotation to exports and business investment is happening amid a trade war. The reason also relates to Trump: his tax cuts are stoking a surge in U.S. demand that is proving a magnet for Canadian exports.

The improvement in investment and exports was so strong that the Bank of Canada was forced to raise the pace at which it thinks the economy can grow without triggering inflation. The new potential growth rate for 2018 is 1.8 per cent; the figure for 2019 and 2020 is 1.9 per cent.

All things equal, the revision suggests the central bank will be less pressed to raise interest rates in the future. The central bank aims to keep inflation advancing at an annual rate of about 2 per cent, which it thinks it is on track to achieve over the next couple of years, although it said inflation may jump temporarily due to a combination of higher gasoline prices, increased minimum wages, tariffs and a weaker currency.

Stronger exports and investment also will offset weaker spending by Canada’s debt-saddled households.

The Bank of Canada predicted GDP will increase 2 per cent this year.

That’s the same as its last estimate, but that growth now is being driven by different engines. Consumption will account for 1.3 percentage points of that growth, less than expected earlier this year. Business investment will account for 0.7 percentage point of the GDP increase, and exports 0.5 percentage point, the central bank estimates. Both are big increases from the April outlook.

The threat of increased protectionism means it would be folly to predict a fairy-tale ending. Still, the story being written on the ground in the Canadian economy appears to be different than than the one you’ve been reading about in recent months.

Canada most certainly isn't Greece but we are are very similar in terms of troubling debt trends going on here and people who think they are entitled to live in a nice house, drive not one but two expensive cars, buy expensive furniture and take great trips twice a year.

It's surreal and nothing but a big, fat chimera. When it implodes, it will destroy many Canadian households for years.

Now, the key here is not what is going on in Canada, the key is what is going on in the rest of the world. The US economy is slowing at a time when the deflation hurricane is about to hit our most important trading partner.

My last comment on deflation headed straight for the US is probably one of the most important macro comments I've written and it has serious implications for the global economy and Canada in particular.

Importantly, when the global deflationary shock hits the US, Canada is literally toast. Finito, caputo, thank you for playing this game Mr. Trudeau, you will be ushered out of office so fast, your head will be spinning.

Last month, we sent a special bulletin to members announcing important updates on the Comprehensive Plan Review, including revised timelines. In this latest edition, we’re sharing the results of the June Sponsors Corporation (SC) Board meeting, including the Plan change proposals and next steps.

Highlights

• Despite recent gains, the OMERS Plan remains financially vulnerable to longer-term pressures beyond our immediate control
• Extensive modelling shows that the cost of the Plan will continue to increase over time – substantially under some circumstances
• Possible Plan options are being considered to help stabilize Plan costs, reduce long-term funding risk, and introduce an important level of equity across generations
• Changes (if any) are unlikely to take effect before January 1, 2021
• No impact on pension benefits accrued (earned) before the effective date of any change
• No impact on current retirees or members who retire before the effective date
• SAVE THE DATE: Member webcasts starting next month on August 14 and 16
• New e-alerts: Sign up to get notifications on all the latest updates
• New SC Facebook page – coming soon

The case for change

Change is seldom easy, but it is often necessary – in the best interests of our members. Despite recent investment success, the OMERS Plan remains financially vulnerable to longer-term pressures. Consider the facts:

• The Plan has not yet recovered fully from the 2008 financial crisis. As at December 31, 2017, the Plan was 94% funded and had a deficit of more than $5 billion on a smoothed basis.
• We have the highest discount rate among our peer plans, which means that we are allocating more risk to future generations.
• Investment markets are challenging in 2018, and OMERS is not immune to investment market pressures. The Plan needs to generate about $6 billion in investment earnings each year just to maintain its funding at current levels.
• In 2017, the Plan collected $4 billion in contributions from members and employers, and paid out $4 billion in pensions. Going forward, the Plan will pay out more than it collects, creating a negative cash flow.
• Enhancements to the Canada Pension Plan (CPP) will increase both benefit and contribution levels for OMERS members and employers, beginning in 2019.
• Like all major pension plans, we also face a number of financial realities that are beyond our immediate control. These include a steadily maturing plan, longer life expectancy, changing demographic and workplace trends, and an increasingly uncertain economic environment.

Collectively, these factors will increase the cost of the Plan over time – substantially under some circumstances. This means higher contributions for members and employers, reduced benefits, or some combination of the two.

That’s where the Comprehensive Plan Review comes in. The primary objective is simply to ensure that the OMERS Plan remains sustainable, meaningful and affordable for generations to come. It’s about protecting the Plan’s long-term future – and the essential benefits it provides.

Summary of proposed Plan options

Following an intense eight-month review – including regular discussions with sponsors and other stakeholders – the SC Board has identified the following potential Plan options for further consideration and consultation:

1. Replace guaranteed indexing with conditional indexing for future pensions
2. Integrate the pension formula with the new “Year’s Additional Maximum Pensionable Earnings” (YAMPE), introduced as part of the enhanced Canada Pension Plan (CPP)
3. Update the criteria for early retirement subsidies
4. Eliminate the current 35-year cap for credited service
5. Make participation for non-full-time employees mandatory, with possible opt-out
6. Allow paramedics to negotiate NRA 60 participation

Click any of the links above to learn more about each of the proposed Plan options.

Key things to consider

As you consider the options, there are a few essential things to keep in mind:

• No changes have been confirmed at this point. The SC Board will vote on final changes in November, following broader consultation. As always, Plan changes require a two-thirds affirmative vote by the SC Board, and are unlikely to take effect before January 1, 2021.
• If the SC Board approves any of the proposed options in November, the approved changes will apply only to benefits accrued (earned) after the effective date of the change. The current rules will apply to all benefits earned before the effective date.
• Any changes will have no impact on current retirees or members who retire before the effective date. In no case will benefits earned before the effective date be reduced.

As always, we encourage you to review these materials carefully. If you have any questions, check out our Frequently Asked Questions. If you have a question you can’t find an answer to, send an email to contact@omerssc.com.

SAVE THE DATE: Upcoming webcasts

Between now and the SC Board meeting in November, we will be hosting a series of informational webcasts on the proposed Plan options. The first two sessions will be on August 14 and 16.

This is your opportunity to hear about the Comprehensive Plan Review first-hand. Sign-up details will be posted on our website later this month.

While registration may be limited, there will be a number of webcasts happening over the next few months, and more opportunities to sign up for a future session. As always, you can continue to share your thoughts and questions by sending an email to contact@omerssc.com.

Keeping you informed

The SC website is your central information source for regular updates on the Comprehensive Plan Review. This site will be updated with our latest resources, including videos, newsletters and answers to member questions. Please visit www.omerssc.com and check back from time to time for the latest news.

*New* Sign up for e-alerts

If you’d like to get an email notification on updates we post on the site, sign up for e-alerts by clicking here.

So who is right, the Canadian Union of Public Employees union or the CEO of OMERS's Sponsors Corporation when it comes to conditional inflation protection?

Let me unequivocally, emphatically state that Paul Harrietha is spot on and it's about time CUPE stop demanding guaranteed inflation protection and allow OMERS to adopt conditional inflation protection.

The two best pension plans in the country, Ontario Teachers' and HOOPP, both adopted conditional inflation protection.

Go read my comment on making OTPP young again where I stated:

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.

As of now, only two large Canadian pension plans offer guaranteed as opposed to conditional inflation protection, OMERS and OPTrust.

OPTrust is fully funded but to address the challenges it has ahead to maintain guaranteed inflation protection without burdening current workers, it's looking at an innovative new pension initiative which will launch a new defined benefit plan for employers in the broader public sector, charitable and not-for-profit industries.

In other words, it's looking to increase assets under management to maintain guaranteed inflation protection for retired members of the plan.

The problem with this approach is they have to sell it to new members, which isn't easy, and even if they're successful, it might not be the most efficient way to address the problem of intergenerational equity.

A much simpler approach is just to adopt conditional inflation protection and explain to plan members because the ratio of active to retired members has shifted to almost one for one, it only makes sense that when the plan runs into problems, retired members bear some of the risk too and accept their cost-of-living adjustments (indexing) will be adjusted lower in periods where the plan runs into deficits.

This cut in benefits won't be material, it won't be felt, and it will only last until the plan's funded status is restored to fully funded status.

Unions hate conditional inflation protection but I really don't understand why. Yes, OMERS is doing well, had an exceptional year last year and posted solid gains over the last four years but so what?

You cannot expect a plan's funded status to rely solely on its investment gains. You absolutely need to adopt a shared-risk model to ensure the plan's long-term sustainability.

I've said it before and I will say it again, the key to a successful pension plan is great governance and adopting a shared-risk model which spreads the risk across active and retired members.

Hiking the contribution rate puts pressure on active members but as more and more people retire, shouldn't they too bear some of the risk if the plan runs into trouble?

"The OMERS pension plan is in good shape financially and will ensure a dignified retirement for the hundreds of thousands of Ontarians who've paid into it throughout their working careers," said Thomas. "We don't see any good reason to scale back the size of peoples' pensions or to increase the amount that people pay in. We'll fight any proposal to do either."

Neel Kashkari, President of the Minneapolis Fed, wrote a new essay on the flattening yield curve:

This time is different. I consider those the four most dangerous words in economics.

Today, policymakers are paying increased attention to the so-called flattening yield curve — the difference in yields between long-term and short-term Treasury bonds. For the past 50 years, an inverted yield curve, where short rates are higher than long rates, has been an excellent predictor of a U.S. recession. In fact, during this half-century period, each time the yield curve has inverted, a recession has followed. Over the past two-and-a-half years, as the Federal Reserve has raised short-term interest rates, the yield curve has flattened dramatically, with the difference between 10-year and two-year Treasuries down from 134 basis points in December 2016 to 25 basis points today, a 10-year low.

Is the flattening yield curve telling us a recession is around the corner?

Some say, “No. This time is different,” and that the flattening yield curve is not a concern. The truth is we don’t know for sure. But we do know the bond market is telling us that inflation expectations appear well-anchored, the economy is not showing signs of overheating and rates are already close to neutral. This suggests that there is little reason to raise rates much further, invert the yield curve, put the brakes on the economy and risk that it does, in fact, trigger a recession.

If inflation expectations or real growth prospects pick up, the Fed can always raise rates then.

The primary reason some policymakers argue that this time is different is because the “term premium” is low today, and so they argue that comparisons to past yield curve inversions are misplaced. If the term premium were at its historical average, these policymakers say, the yield curve would be steeper and an inversion would be further off. This is the same argument some policymakers made in late 2006 to explain why they didn’t worry about the then-inverted yield curve. We now know the Great Recession followed that inversion.

So what is the term premium?

It is the extra returns investors often demand to hold a long-term bond versus a series of short-term bonds. While we’ve given it a technical-sounding name, the truth is we don’t fully understand it. It’s just a residual of the various factors embedded in market prices that we can’t explain.

Why is the term premium low?

Maybe because the Fed’s expanded balance sheet is holding it down. Maybe investors are nervous about trade tensions and are buying Treasuries to hedge those risks. Maybe there is an excess of savings around the world. We don’t know. If I said this time is different because the residual is low, would you be willing to risk a recession on that hunch without clear evidence that inflation expectations are rising above target? I sure wouldn’t.

In the past year, Congress has enacted both a major increase in spending and a large tax cut, and the Federal Reserve has begun winding down its balance sheet. All of these factors increase the supply of Treasury bonds that the private markets must hold. For example, the private sector’s holdings of Treasury securities with remaining maturity of at least 10 years has increased at a rate of $14.2 billion per month so far in 2018 versus a rate of $7.5 billion per month in 2014.

This additional supply should be putting downward pressure on Treasury prices, driving yields up. Yet the 10-year yield has increased remarkably little, to 2.83 percent today. The fact that the 10-year yield is, so far, staying around 3 percent suggests that monetary policy, with a federal funds rate of 1.75 percent to 2.0 percent, is near neutral today. If the markets were expecting higher inflation or stronger real economic growth, that should be showing up as higher long-term bond yields.

If the Fed continues raising rates, we risk not only inverting the yield curve, but also moving to a contractionary policy stance and putting the brakes on the economy, which the markets are indicating is at this point unnecessary.

Deciphering the many signals from financial markets is not an exact science. But declarations that “this time is different” should be a warning that history might be about to repeat itself.

It's Monday, I wasn't in the mood to blog today until I read this gem from Neel Kashkari on my Twitter feed.

Admittedly, Kaskari is an unapologetic dove and he won't be a voting member of the Fed until 2020. By that time, the US recession will be entrenched and if it's really bad, don't be surprised if Trump feels the Bern and loses his bid for reelection.

I'm dead serious, a lot of things can happen over the next two years and if the US economy tanks, it's game over for Trump's reelection bid. He knows it, the Republicans know it and so do the Democrats, many of which are terrified at the prospect of a President Sanders (the US power elite made up of Dems and Republicans are desperately trying to maintain the status quo but Trump and Sanders are trying to shake it up for good).

Anyway, I'm not here to discuss politics, I'm here to focus on the economy and the flattening yield curve.

I began with Kashkari's comment because it's well written, short and to the point. This time isn't different and any pundit, economist or strategist who thinks otherwise is in for a very rude awakening.

On Friday, I explained why it's time to get defensive, noting the following:

The downturn is part of the cumulative effect of Fed rate hikes which is why I keep warning my readers not to ignore the yield curve.

I know, the media will tell you not to fear the flat yield curve and financial websites will tell you the yield curve panic is overdone, but I'm telling you the US and global slowdown is already here and you need to pay very close attention to the yield curve and ignore those who tell you otherwise.

It doesn't mean that markets are going to tank the minute the yield curve inverts, it means risks are rising and allocating risk wisely is going to become harder and harder in an already brutal environment.

And what happened on Monday? Financial shares (XLF) took off as big banks bounced back (click on image):

Let me be very clear here, use any rally in US banks to sell them and go underweight or outright short them.

Look at the daily chart of JP Morgan (JPM) going back one year (click on image)

Some technician is going to tell you it bounced off its 200-day, the MACD is crossing up and it's bullish but the stock is rolling over, incapable of sustaining momentum and making new 52-week highs, so the smart technician is going to tell you what I'm going to tell you: stick a fork in it, it's done.

If you don't believe me, have a look at the 5-year weekly chart of (JPM) which shows you a huge run-up, it’s still bullish as it's above its 50-week moving average but momentum is waning of late and downside risks are mounting as it's as good as it gets for the unstoppable US economy which is unable to generate sustainable wage gains (click on image):

More importantly, a flattening US yield curve doesn't portend well for financials (XLF), undustrials (XLI), energy (XLE) and metal and mining (XME) shares.

These are all cyclical sectors which are leveraged to the US and global economy, so when they roll over, it's typically a bad omen for the economy.

This is why I told you now is a good time to get defensive and focus on more stable sectors like healthcare (XLV), utilities (XLU), consumer staples (XLP), REITs (IYR) and telecoms (IYZ) and hedge that equity risk with good old US long bonds (TLT)

If you don't want to buy sector ETFs, just buy the S&P low volatility index (SPLV) and hedge (up to 50% or more) that equity risk with US long bonds (TLT)

I know I sound ultra bearish and I'm not, but it's worth pointing out we are living the calm before the storm.

What storm? Any storm can come from emerging markets (EEM) to Europe which is still a mess to the US junk bond market (HYG) where some fear a crash is imminent but so far, it's holding on nicely (click on image):

(5) Bond Vigilantes. In other words, the US bond market has become more globalized, and is no longer driven exclusively by the US business cycle and Fed policies. In my book, I discuss the close correlation between the 10-year Treasury bond yield and the growth rate of nominal GDP, on a year-over-year basis (Fig. 13 and Fig. 14). The former has always traded in the same neighborhood as the latter. I call this relationship the “Bond Vigilantes Model.” The challenge is to explain why the two variables aren’t identical at any point in time or for a period of time. Nominal GDP rose 4.7% during the first quarter of 2018 and is likely to be around 5.0% during the second quarter, on a year-over-year basis. Yet the US bond yield is below 3.00%.

During the 1960s and 1970s, bond investors weren’t very vigilant about inflation and consistently purchased bonds at yields below the nominal GDP growth rate. They suffered significant losses. During the 1980s and 1990s, they turned into inflation-fighting Bond Vigilantes, keeping bond yields above nominal GDP growth. Since the Great Recession of 2008, the Wild Bunch has been held in check by the major central banks, which have had near-zero interest-rate policies and massive quantitative easing programs that have swelled their balance sheets with bonds. Meanwhile, powerful structural forces have kept a lid on inflation—all the more reason for the Bond Vigilantes to have relaxed their guard.

As noted above, a global perspective certainly helps to explain why the US bond yield is well below nominal GDP growth. So this time may be different than in the past for the bond market, which has become more globalized and influenced by the monetary policies not only of the Fed but also of the other major central banks.

The Caisse de depot et placement du Quebec pension fund has made a $250-million preferred equity investment in Avison Young, a commercial real estate services firm.

Avison Young says the money will help fund acquisitions and hiring as part of its global expansion, while a portion will also be used to buy back shares held by Parallel49 Equity and others.

The Caisse invested in a newly authorized class of non-voting preferred shares of the firm, though the terms of the transaction were not disclosed.

As part of the deal, the Caisse will be entitled to choose three of the nine members of Avison Young's board of directors.

Avison Young says the deal will help its international expansion as it gives it access to a wide network of expertise, deal flow and market intelligence.

The pension fund says it looks forward to supporting Avison Young's growth, which has already seen it expand to 84 offices across North America and Europe.

Avison Young CEO Mark E. Rose says a $250-million preferred equity investment from the Caisse de dépôt et placement du Québec (CDPQ) provides his growing firm funds to accelerate its expansion plans, leaves decision-making entirely with its senior management group and allows it to remain a “disruptive force” in the industry.

The investment, announced Monday, creates a new class of non-voting Avison Young shares for the CDPQ. A portion of the proceeds will be used by the commercial real estate services firm to purchase outstanding common (voting) stock from its current private equity partner, Parallel49 Equity (formerly Tricor Pacific Capital) as well as other “non-management founders and principals,” the company said.

“The common shares, the (voting shares) of this company 100 per cent are back in the hands of only people who work at Avison Young,” Rose told RENX during an interview Monday following the announcement.

CDPQ will be entitled to designate three members of Avison Young’s nine-member board of directors.

Rose said to have a partner such as CDPQ, “to allow us to keep the culture and the structure we have built as a privately held, principal-led organization is exactly what we were looking for. To have a company with the brand elevation, and the gravitas, and the case to be that partner, and with the belief to the tune of $250 million, we are just beyond excited.”

Acquisitions and talent recruitment

In addition to the share purchases, proceeds will also be used for acquisitions and to help Toronto-based Avison Young recruit additional talent as it continues to execute its strategic plan.

Rose, who has been CEO of Avison Young for almost 10 years, has already managed its growth from $40M in annual revenues to about $650M in revenues. When he joined Avison Young after leaving JLL, the company had 11 offices in Canada. It now has 84 offices across North America and Europe and has expanded into investment management.

In fact, Avison Young bills itself as the world’s fastest growing private and principal-led, global CRE services firm.

Rose said the key to Avison Young’s rapid growth has been its status as a privately held firm.

“It is so important to the company that we have built, especially against a competitive set that’s all public and structured,” he said, speaking of Avison Young’s major competitors. “We set out nine-and-a-half years ago to build something very different and very special. We wanted it to be very disruptive and we wanted it to differentiate itself.

“(As a private company) we believe you can move quicker, you can outsource more, you don’t need to worry about what you are saying to anybody on a quarterly basis. You can spend your time solving the needs of clients because if a client pays us in Years One, Three, Five, Seven and Nine, that’s fine.”

CDPQ large-scale investor

Rose said bringing the CDPQ on board was necessary for another reason. A large-scale investor, the CDPQ can better accommodate Avison Young’s expanding needs. He lauded Parallel49 as “the greatest partner anybody could ask for” as the company expanded both its service lines and geographical reach.

Financial terms of the transaction have not been disclosed.

“Avison Young’s track record and experienced team speak for themselves: through a well-defined and executed business strategy, the company has grown considerably in recent years, particularly by entering international markets with strong potential,” said Stéphane Etroy, executive vice-president and head of private equity at CDPQ, in a prepared statement.

“With its unique corporate culture and its long-term vision, Avison Young is an ideal partner for CDPQ, and we look forward to supporting the company as it continues to grow over the coming years.”

As for where Avison Young intends to grow, Rose didn’t get into specifics but did offer a broad outline.

“More of the same . . .”

“What you are gonna see is more of the same. More North America, because we can. More Europe, because we can. And, you’ll see us in Asia,” he said. “And, by the way, more in investment management. We have an investment management group which we started from scratch and we have every intention of growing that business.”

Armed with the new funding, Rose said Avison Young plans to move quickly on the acquisition front.

“That’s why we’re doing this, and I think you will see many announcements over the next year or year-and-a-half.”

Rose said having Avison Young’s business backed by a major investor like the CDPQ is both gratifying and energizing.

“(For) this next very large leg up in growth, to have confirmation from an entity like the Caisse that this disruptive, differentiated approach is right and they believe in it with us, it just feels very good to all of our partners here at Avison Young.

“We’re going to go have some fun.”

About Caisse de dépôt et placement du Québec

CDPQ is a long-term institutional investor which manages funds primarily for public and parapublic pension and insurance plans. As of Dec. 31, 2017, it held $298.5 billion in net assets. As one of Canada’s leading institutional fund managers, CDPQ invests globally in major financial markets, private equity, infrastructure, real estate and private debt.

About Avison Young

Headquartered in Toronto, Avison Young is a collaborative, global firm owned and operated by its principals. Founded in 1978, the company comprises 2,600 real estate professionals in 84 offices, providing value-added, client-centric investment sales, leasing, advisory, management, financing and mortgage placement services to owners and occupiers of office, retail, industrial, multi-family and hospitality properties.

Caisse de dépôt et placement du Québec (CDPQ) has invested C$250m (€162.2m) in Avison Young to enable the commercial real estate services firm to buy back its shares from a current private equity partner and accelerate its growth plan.

CDPQ, an investor that manages C$298.5bn funds primarily from public and parapublic pension plans, has made the preferred equity investment in Avison Young.

As part of the investment, Avison Young said CDPQ will be entitled to designate three members of Avison Young’s nine-member Board of Directors. The full terms of the transaction were undisclosed.

Avison Young said it will use the proceeds to invest in acquisitions and the recruitment of key professionals, fuelling the company’s ongoing growth of its global footprint and service-line capabilities.

In addition, a portion of the proceeds will be used to repurchase the shares held by the firm’s current private equity partner, Parallel49 Equity, as well as shares of certain other non-management founders and former Principals of Avison Young. As a result, the principals of Avison Young will own 100% of the common shares of the company.

Mark Rose, the chair and CEO of Avison Young, said: “We look forward to a collaborative relationship with CDPQ and its large global network, and benefit from the ability to share expertise, deal flow, market intelligence and resources as we continue to grow our business across the spectrum of commercial real estate services in North America and other key markets globally.

“We are gratified by CDPQ’s support of our growth strategy, which we launched from a base of 11 offices in Canada and expanded to 84 offices across North America and Europe in just under 10 years – and growing revenue more than 15 times during that period.”

Stéphane Etroy, an executive vice-president and head of private equity at CDPQ, said: “Avison Young’s track record and experienced team speak for themselves: through a well defined and executed business strategy, the company has grown considerably in recent years, particularly by entering international markets with strong potential.”

Avison Young is the world’s fastest-growing commercial real estate services firm. Headquartered in Toronto, Canada, Avison Young is a collaborative, global firm owned and operated by its principals. Founded in 1978, the company comprises 2,600 real estate professionals in 84 offices, providing value-added, client-centric investment sales, leasing, advisory, management, financing and mortgage placement services to owners and occupiers of office, retail, industrial, multi-family and hospitality properties.

Formed by the union of Graeme Young & Associates of Alberta (1978) and Avison & Associates of Ontario (1989) and British Columbia (1994), Avison Young was created in 1996 to provide clients with more comprehensive real estate services at the local, national and international level. Over the next decade, new offices opened in Toronto West (1997), Montreal (2002), Winnipeg and Regina (2004), Halifax (2006) and Ottawa (2007). 

In fall 2008, the shareholders merged the operations to create a single national entity: Avison Young (Canada) Inc.As a result, Avison Young became Canada’s largest independently-owned commercial real estate services company.

In early 2009, Avison Young opened its first office outside of Canada in Chicago, followed by new offices in Washington DC, Lethbridge AB, Toronto North (2009); Atlanta, Houston, Tysons VA, Boston, Waterloo Region (2010); Dallas, Los Angeles, Las Vegas (2011); Reno, Suburban Maryland, San Francisco, New York City, Charleston, Pittsburgh, New Jersey, Fort Lauderdale, Boca Raton, Miami, Detroit, Raleigh-Durham, Orange County, Denver (2012); San Diego, Charlotte, Sacramento, West Palm Beach, San Mateo, Long Island, Greenville, Tampa, Philadelphia (2013); Columbus OH, London U.K., Thames Valley U.K., Austin, Fairfield/Westchester, Oakland, Cleveland, Orlando, Frankfurt (2014); Munich, Moncton, Minneapolis, Indianapolis, Duesseldorf, Hamburg, Nashville, Knoxville, Hartford, San Antonio, Mexico City, Memphis (2015); Coventry, Jacksonville, Phoenix, Berlin, St. Louis (2016); Bucharest, Manchester, San Jose/Silicon Valley (2017); Inland Empire (2018).

The company also acquired Toronto-based Darton Property Advisors and Managers in 2008; Virginia-based Appian Realty Advisors, LLC, Atlanta-based Hodges Management and Leasing Company in 2010; Virginia-based Millennium Realty Advisors, LLC, Los Angeles-based Ramsey-Shilling Commercial Real Estate Services, Inc. in 2011; Maryland-based Realty Management Company, Las Vegas-based Landry & Associates, Los Angeles-based Starrpoint Commercial Partners, Inc., New Jersey-based The Walsh Company, LLC, Raleigh, NC-based Thomas Linderman Graham Inc. in 2012; Houston-based Mason Partners, Florida-based WG Compass Realty Companies, Torrance, CA-based R7 Real Estate Inc., Tampa, FL-based Lane Witherspoon & Carswell Commercial Real Estate Advisors, (partnered with) Greenville, SC-based Colonial Commercial, Dallas-based Dillon Corporate Services, Inc., Maryland-based McShea & Company, Inc. in 2013; Atlanta-based The Eidson Group, LLC, Columbus OH-based PSB Realty Advisors, LLC, London U.K.-based Haywards LLP, Austin-based Commercial Texas, LLC, Montreal-based Roy et Tremblay Inc., Sacramento-based Aguer Havelock Associates, Inc., New Jersey-based Kwartler Associates, Orlando-based MCRE, LLC, Miami-based Abood Wood-Fay Real Estate Group, LLC in 2014; Calgary-based Peregrin Inc., Chicago-based Mesa Development, LLC, Philadelphia-based Remington Group, Inc. in 2015; Toronto-based Metrix Realty Group (Ontario) Inc., U.K.-based North Rae Sanders, Phoenix-based The GPE Companies, Calgary-based Linnell Taylor Lipman and Associates Ltd. in 2016; Atlanta-based Hotel Assets Group, LLC, Atlanta-based Rich Real Estate Services, Inc., Rutherford, NJ-based Cresa NJ-North/Central, LLC, Raleigh-based Hunter & Associates, LLC, Manchester U.K.-based WHR Property Consultants LLP in 2017; Vancouver-based Alcor Commercial Realty Inc. in 2018.

In 2018, Avison Young achieved Platinum status with the Canada’s Best Managed Companies program by retaining its Best Managed designation for seven consecutive years. The program is sponsored by Deloitte, CIBC, Canadian Business, Smith School of Business, TMX Group and MacKay CEO Forums.

Today, Avison Young has offices in Toronto (HQ) (2), Atlanta, Austin, Berlin, Boca Raton, Boston, Bucharest, Calgary, Charleston, Charlotte, Chicago (2), Cleveland, Columbus OH, Coventry, Dallas, Denver, Detroit, Duesseldorf, Edmonton, Fairfield/Westchester, Fort Lauderdale, Frankfurt, Greenville, Halifax, Hamburg, Hartford,  Houston, Indianapolis, Inland Empire, Jacksonville, Knoxville, Las Vegas, Lethbridge, London U.K. (2), Long Island, Los Angeles (4), Manchester, Memphis, Mexico City, Miami, Minneapolis, Moncton, Montreal, Munich, Nashville, New Jersey (2), New York City, Oakland, Orange County, Orlando, Ottawa, Philadelphia (2), Phoenix, Pittsburgh, Raleigh-Durham (2), Regina, Reno, Sacramento, San Antonio, San Diego, San Francisco, San Jose/Silicon Valley, San Mateo, St. Louis, Suburban Maryland, Tampa, Thames Valley U.K., Toronto North, Toronto West, Tysons, Vancouver, Washington DC, Waterloo Region, West Palm Beach and Winnipeg. The company's advisory personnel, licensed brokers, commercial property managers, financial analysts, research professionals, marketing specialists and property accountants serve clients ranging from leading multinational investors and occupiers to smaller firms and sole proprietorships.

1. Cushman & Wakefield

With 300 offices in over 70 countries, Cushman & Wakefield is a real force to be reckoned with. C & W is truly a comprehensive company, with brokerage services, leasing, sustainability enhancement, consulting for portfolios or properties, tax management and escrow, and more. Their reputation is equally strong among investors and tenants, and they are definitely here to stay as one of the largest commercial property management companies worldwide.

Link: http://www.cushmanwakefield.com/en/

2. Eastdil Secured

Since the 1960s, Eastdil Secured has been one of the most respected names in real estate investment banking. They have used their expertise in real estate fundamentals to become a leader in commercial real estate for private investors and institutions both. Their range of properties includes hospitality, multifamily, retail, and industrial holdings.

Link: https://www.eastdilsecured.com

3. Simon Property Group

With properties across 37 U.S. states, Asia and Europe, Simon Property Group is the premier name in retail properties and property management. Flagship locations like The Forum Shops at Caesars in Las Vegas, Sawgrass Mills in Sunrise, FL and Woodbury Common Premium Outlets in Central Valley, NY are all proud parts of the Simon family of properties. Simon is a S & P 100 company, formed in 1993, and owns or has part interest in more than 325 properties, including international properties, The Mills, Premium Outlet Centers, community/lifestyle centers, and regional malls.

Link: http://www.simon.com/

4. Colliers International

Based in Canada, Colliers International has a presence in 68 countries and provides services for investors, owners, developers, and tenants in the commercial real estate arena.

Serving the hotel, residential property, mixed-use, retail, and office sectors, Colliers International provides project management, investment services, landlord/tenant representation, asset management, valuation/advisory services, and property management.

With more than 40 years in the business, the firm’s 2015 revenues were over $2.6 billion. In recent years, Colliers International has acquired other commercial real estate firms in Cincinnati, Nashville, New York City, Grand Rapids, MI, Columbus, OH, and other markets.

Link: https://www2.colliers.com/en

5. CBRE Group

Based in Los Angeles, CBRE Group has been around for over a century and is the world’s largest firm specializing in commercial real estate services and investment. Their suite of services includes property management and facilities management for tenants of commercial real estate, appraisal, brokerage, and leasing. In addition, the company’s Global Investors division facilitates real estate investment through investment funds, direct investment, and other vehicles. CBRE Group’s Global Investors division has over $100 billion in assets currently under management. The company currently stands at #214 in Fortune 500 rankings – it has been included in the Fortune 500 every year, beginning in 2008.

Link: https://www.cbre.us

6. JLL

Founded as Jones Lang LaSalle, Inc., JLL’s roots go back to 1783, when it was founded as Jones Lang Wootton. Based in Chicago, JLL has about 70,000 employees and over 230 offices in 80 different countries. In 2014, JLL’s global revenue was $4 billion, with interests in investment, leasing, property management, and development. JLL’s in-depth knowledge of LEED compliance makes them a go-to consultant for energy and sustainability services, including smart building solutions, alternative energy designs, and energy-efficient retrofits for existing properties. JLL’s size and assets are second only to CBRE in the commercial real estate field.

Link: http://www.jll.com/

7. Newmark Knight Frank

Newmark Knight Frank (NKF) is a market leader among commercial real estate advisory firms. NKF is a fully integrated firm with services that include investment, consulting, property management, facilities management, valuation and appraisal, facilities and property management, and tenant/landlord representation. NKF’s portfolio includes industrial and retail properties that include landmarks like 666 Fifth Avenue and 34 W. 34th Street in NYC, The Wrigley Building in Chicago, The Confluence in Denver, and Thomas Place in Boston.

Link: http://www.ngkf.com/

A paper published today by the Institute for Energy Economics and Financial Analysis details the growing rationale for divesting from the fossil fuel industry.

The paper—“The Financial Case for Fossil Fuel Divestment”—is aimed primarily at trustees of investment funds that continue to hold stakes in a sector that is freighted with risk and is not likely to perform nearly as well in the future as it has historically—regardless of whether oil prices rise or fall.

Kathy Hipple, an IEEFA financial analyst and co-author of the report, said fund trustees everywhere have a pressing fiduciary duty to re-examine their investment commitments to fossil fuel holdings.

“Given the sector’s lackluster rewards and daunting risks, responsible investors must ask: ‘Why are we in fossil fuels at all?’” Hipple said. “The sector is ill-prepared for a low-carbon future, based both on idiosyncratic factors affecting individual companies, as well as an industry-wide failure to acknowledge, and prepare for, an energy transition that is gaining momentum and changing the very nature of how energy is produced and consumed.”

This paper describes divestment “as a proper financial response by investment trustees to current market conditions and to the outlook facing the coal, oil and gas sectors.” It concludes that “future returns from the fossil fuel sector will not replicate past performance.”

It details how the global economy is shifting toward less energy-intensive models of growth, how fracking has driven down commodity and energy costs and prices, and how renewable energy and electric vehicles are gaining market share.

And it cautions that fossil fuel companies’ exposure to litigation on climate change and other environmental issues is expanding and notes that campaigns in opposition to fossil fuel industries have become increasingly sophisticated and potent.

Key points from the paper:

• “The fossil fuel sector is shrinking financially, and the rationale for investing in it is untenable. Over the past three and five years, respectively, global stock indexes without fossil fuel holdings have outperformed otherwise identical indexes that include fossil fuel companies. Fossil fuel companies once led the economy and world stock markets. They now lag.”
• “A cumulative set of risks undermines the viability of the fossil fuel sector. Climate change is hardly the only challenge facing the fossil fuel industry. The broader factors bedevilling balance sheets stem from political conflicts between producer nations, competition, innovation, and attendant cultural change. These risks can be grouped into a few broad categories, such as “pure” financial risk; technology and innovation risk; government regulation/oversight/policy risk, and litigation risk.”
• “Objections to the divestment thesis rely upon a series of assumptions unrelated to actual fossil fuel investment performance. Detractors raise a number of objections to divestment, mostly on financial grounds, arguing that it would cause institutional funds to lose money or that it would undermine their ability to meet their investment objectives, thus ultimately harming their social mandates. Such claims form a dangerous basis for forward-looking investment and are a breach of fiduciary standards.”

Arguments against divestment are rebutted in detail. An FAQ section provides a guide to divestment.

Tom Sanzillo, IEEFA’s director of finance and the lead author of the paper, said the fossil fuel industry is afflicted by what has now become a long-standing weakness in its investment thesis, “which assumed that a company’s value was determined by the number of barrels of oil (reserves) it owned.”

“In the new investment environment, cash is king, which creates a conundrum for the industry,” Sanzillo said. “Aggressive acquisition and drilling will likely lead to more losses for investors. If oil and gas companies pull back, on the other hand, and acknowledge the likelihood of lower future returns and more modest growth patterns, their actions will only confirm the industry is shrinking financially.”

“Historically, fossil fuel companies were drivers of the world economy and major contributors to the bottom line of institutional funds. This is no longer the case,” Sanzillo said. “Whether oil prices are rising or falling the investment thesis cannot replicate the sector’s strong past performance.”

“In the new investment thesis, fossil fuel stocks are now increasingly speculative. Current financial stresses — volatile revenues, limited growth opportunities, and a negative outlook — will not merely linger, they will likely intensify. Structural headwinds will place increasing pressure on the industry, causing fossil fuel investments to become far riskier.”

The paper, published jointly with Sightline Institute was co-authored also by Sightline’s director of energy finance, Clark Williams-Derry.

The federal government's latest international energy projections are out, and there’s no question we’re living in a time of enormous change—and perhaps remarkably little progress.

The International Energy Outlook from the U.S. Energy Information Administration tries to identify the big trends and projections affecting the energy world through 2040. Some of the trends include:

• The world is getting hungrier and hungrier for energy, but that’s mostly about China, India and the rest of the developing world. Energy consumption in countries that belong to the Organization for Economic Cooperation and Development (basically the industrialized world) is expected to go up 17 percent by 2040. Consumption in countries outside the OECD is projected to nearly double.
• Renewable energy and nuclear power are projected to be the fastest-growing energy sources, increasing by 2.5 percent per year. Thanks to new sources opened by fracking, natural gas is projected to be the fastest-growing of the fossil fuels, and by 2040 half of all the natural gas produced in the U.S. will be shale gas.
• Because of improving technology, the world will continue to get more efficient in energy use, and that will have an impact on greenhouse gases.

Yet for all that, the EIA projects the world’s overall energy mix won’t change much at all by 2040 (click on image).

Yes, renewables and nuclear are the fastest-growing sources. But overall, the percent of energy produced by fossil fuels will only drop from 84 percent today to 78 percent in 2040. Renewables only grow from 11 percent to 15 percent, and nuclear rises from 5 percent to 7 percent. Liquid fuels drop by 6 percent, largely because of rising prices. And despite all the debate about the decline of coal and rise of natural gas, the overall percentage of those two fuels barely changes at all. Given that picture, we still be pumping out plenty of greenhouse gases. EIA is predicting a 46 percent increase in global warming emissions during the study’s time frame.

There are important differences in what’s happening in developed nations versus emerging ones. For example, even though the EIA is projecting a small 1 percent drop in the share of coal used by 2040, it expects a dramatic increase in coal consumption between now and 2020, most of it coming from the developing countries that need cheap forms of energy to house and feed their growing populations and to industrialize.

Projections aren’t karmic. They depend on taking current trends and best estimates of what will happen if those trends continue. But it’s a fair question: if there’s so much activity around new energy sources, then why don’t the projections look different? Why don’t the changes have more traction?

The answer may lie in the fact that we haven’t, globally speaking, really reached consensus on the fundamentals: What kind of energy sources should we be using? What economic changes are we willing to make to back up those choices? What are developed nations willing to do to help poorer countries improve their citizens’ lives without depending so heavily on fossil fuels? Those of us living in the developed world have already reaped the benefits of industrialization based on cheap coal. It’s not surprising that developing nations would be tempted to follow the same path—and harder for us to preach to nations that are still building their economies.

The fact is that the changes we’re making on energy are working on the margins, and that’s why the long-term projections only show marginal shifts. If you want big shifts, you have to start making big changes—and that means persuading the public that those changes are worth making.

Ireland committed to divesting public funds from fossil fuel companies on Thursday after parliament passed a bill forcing the 8.9 billion euro ($10.4 billion) Ireland Strategic Investment Fund (ISIF) to withdraw money invested in oil, gas and coal.

Members of Ireland’s Dail (Parliament) passed the Fossil Fuel Divestment Bill, which requires the fund to divest direct investments in fossil fuel undertakings within five years and not to make future investments in the industry.

In an amendment, the bill describes “fossil fuel undertakings” as those “whose business is engaged, for the time being, in the exploration for or extraction or refinement of a fossil fuel where such activity accounts for 20 percent or more of the turnover of that undertaking.”

The bill also said indirect investments should not be made, unless there is unlikely to be more than 15 percent of an asset invested in a fossil fuel undertaking.

The ISIF is managed by Ireland’s National Treasury Management Agency. As of June last year, the fund’s investments in the global fossil fuel industry were estimated at 318 million euros across 150 companies.

“This (bill) will make Ireland the first country to commit to divest (public money) from the fossil fuel industry,” said independent member of parliament Thomas Pringle who introduced the bill to parliament in 2016.

“With this bill we are leading the way at state level ... but we are lagging seriously behind on our EU and international climate commitments,” he told lawmakers.

Ireland was ranked the second-worst performing European Union country, in front of Poland, in terms of climate change action in June by environmental campaign group Climate Action Network (CAN) Europe.

The world’s top oil, gas and coal companies face rising pressure from investors to shift to cleaner energy and renewables to meet international greenhouse gas emissions cut targets.

Fossil fuel divestment has gained traction over the past few years as pension funds, sovereign wealth funds and universities, have sold oil, gas and coal stocks, especially after the 195-nation Paris climate agreement set a goal in 2015 of phasing out the use of fossil fuels this century.

Norway’s $1 trillion sovereign wealth fund, the world’s largest, is barred from investing in firms that get more than 30 percent of their business from coal and it has also proposed to drop its investments in oil and gas.

The government will give its opinion about that broader divestment in October.

In the United States, New York City announced a goal earlier this year to divest its $189 billion public pension funds from fossil fuel companies in five years.

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.

Trustees have a fiduciary duty to act in the economic best interests of the beneficiaries – full stop. They have no fiduciary duty to “re-examine their commitments to” any particular holdings, except to the extent such re-examination is required to discharge their fiduciary duty. It’s a subtle but important point: the fiduciary duty is a macro duty, and there are all sorts of micro actions that are taken to discharge that duty, but the duty itself does not dictate any particular micro action.

If the trustees judge energy investments to be inconsistent with the best economic interests of the beneficiaries, they must divest. Environmental considerations are irrelevant except to the extent, and only to the extent, that they bear on the economics of the investment. A trustee that places his or her environmental preferences ahead of the economic interests of beneficiaries is surely in breach of his or her fiduciary duty.

Some of the arguments cited in the note (above) are therefore breathtaking. If the law is that in discharging their fiduciary duties trustees must comply, or may comply, with their own subjective view of what’s ethical (which is what the arguments imply), how could courts ever determine whether they are in breach? The fiduciary standard would become potentially unenforceable by virtue of having become subjective.

As for the argument that divestment is recommended by the fact that the fossil fuel industry is dying, witness the attached chart showing the performance of Altria (MO) while its industry was dying (click on image).

Eduard van Gelderen, former APG chief executive, is to leave his position as senior managing director at the $107bn (€91.4bn) investment fund of the University of California after less than a year in the role.

Jagdeep Bachher, the fund’s chief investment officer, confirmed to IPE’s Dutch sister publication Pensioen Pro that Van Gelderen was to leave the university’s investment office, which runs endowment, pension and cash assets.

According to Bachher, Van Gelderen has accepted a new position as chief investment officer of the Public Sector Pension Investment Board, a CAD153bn (€99bn) investment manager based in Montréal, Canada. This has not been confirmed by the Canadian company.

When contacted, the former APG CEO indicated he could not comment, citing his current employer’s rules that forbid him to talk to the media.

Van Gelderen left APG in August after seven years at the Dutch asset manager. He joined initially as CIO, before succeeding Angelien Kemna as CEO in 2014.

When APG announced his departure in May 2017, its spokesman told Pensioen Pro that he had always wanted to work in the US. He added that Silicon Valley close by would make Van Gelderen’s new role “even more attractive”.

US publication Institutional Investor first reported Van Gelderen’s departure last week. It highlighted two other resignations from the university investment team in a three-week period.

In Bachher’s opinion, the job changes proved that the talent at his investment fund was being noticed by other large institutional investors.

However, he also made clear that Van Gelderen’s position would not be filled in and that other members of the executive team would take over his tasks.

Eduard van Gelderen — the former CEO of APG Asset Management — has put in his notice to resign from the University of California’s investment office, according to a source familiar with the situation.

Van Gelderen joined the team one year ago almost to the day, relocating from Amsterdam to Oakland, California, for the senior managing director position.

This is the second resignation of the week for UC’s investment office and the third in three weeks.

On Monday, investment officer Tom Fischer told UC leadership he would be stepping down, and correctly predicted more of his colleagues would follow.

“Yes, there has been a high number of departures, and I expect there will be more,” he told Institutional Investor by phone Wednesday. “I think the proof is in the pudding, and the factual aspect is that there are a lot of people who are leaving.”

Fischer’s last day is Friday. Next week he will return to the world of commercial real estate operations and acquisitions as senior vice president and director of investments at JB Matteson, a private property firm based in San Mateo, California.

His departure follows the resignation of public equities chief Scott Chan last month. Chan is leaving the university system to become deputy chief investment officer of the California State Teachers’ Retirement System in August, the pension fund announced June 21.

Van Gelderen, reached by II late Thursday evening, declined to comment.

The investment executives’ salaries range far beyond what even the governor and executives of Texas’ largest agencies make.

Charles Tull, director of investments for the Employees Retirement System, is on schedule to earn more than $783,000 in salary and bonuses in 2018, the most for any state investment executive. Jerry Albright, chief investment officer for the Teacher Retirement System, came in second at $760,398, according to the data provided to The Texas Monitor. Eric Lang, an investment fund director for Teacher Retirement, was third at $699,498.

By contrast, James Bass, head of the Texas Department of Transportation, overseeing more than 11,000 employees, will receive a little less than $300,000 this year. In fact, 20 investment executives for public pension funds in the state make more than Bass — and three times or more than the $153,750 salary of Gov. Greg Abbott.

Sixteen of those top 20 earners work for the state’s two biggest pension plans, the Teacher Retirement System and the Employees Retirement System. The Teacher Retirement System carries more than half of the total unfunded liabilities — $35.5 billion — for all of the 92 public pensions in the state.

The steady increase in such salaries comes as political attention has turned to the growing debt of public pension systems throughout the state. At the end of 2016, Moody’s Investors Service ranked Dallas second only to Chicago among major American cities in the amount of pension debt it was carrying. Houston ranked fourth, Austin was ninth and San Antonio came in at 12th among the top 15 cities.

President Donald Trump said the stock market rally since his election victory gives him the opportunity to be more aggressive in his trade war with China and other countries.

“This is the time. You know the expression we’re playing with the bank’s money,” he told CNBC's Joe Kernen in a “Squawk Box” interview aired Friday.

The president has a big cushion. The S&P 500 is up 31 percent since Trump's win on Election Day, Nov. 8, 2016, through Thursday. The market's gain has slowed this year as the administration has implemented new tariffs on countries, with the benchmark index up 4.9 percent for 2018 through Thursday.

Trump added the market would likely be much higher if he didn’t escalate the trade issues with China and the rest of the world.

“We are being taking advantage of and I don’t like it,” he said. “I would have a higher stock market right now. … It could be 80 percent [since the election] if I didn’t want to do this.”

The president also said he is willing to slap tariffs on every Chinese good imported to the U.S. should the need arise.

"I'm ready to go to 500," Trump added.

The reference is to the dollar amount of Chinese imports the U.S. accepted in 2017 — $505.5 billion to be exact, compared with the $129.9 billion the U.S. exported to China, according to Census Bureau data.

So far in the trade war between the two largest economic powers in the world, the U.S. has slapped tariffs on just $34 billion of Chinese products, which China met with retaliatory duties.

"I'm not doing this for politics, I'm doing this to do the right thing for our country," Trump said. "We have been ripped off by China for a long time."

Trump said the U.S. is "being taken advantage of" on a number of fronts, including trade and monetary policy. Yet he said he has not pushed the tariffs out of any ill will toward China.

"I don't want them to be scared. I want them to do well," he said. "I really like President Xi a lot, but it was very unfair."

Trump also said he was told by unspecified Chinese officials that "nobody would ever complain" from past administrations "until you came along — me. They said, 'Now you're more than complaining. We don't like what you're doing.'"

“I’m not thrilled,” he told CNBC's Joe Kernen in the interview that aired in full Friday. “Because we go up and every time you go up they want to raise rates again. I don't really — I am not happy about it. But at the same time I’m letting them do what they feel is best.”

Fed officials, including Chairman Jerome Powell, have raised interest rates twice this year and have pointed to two more before the end of 2018. The Fed did not comment on the president's remarks Thursday.

After Trump’s criticism of the central bank aired on Thursday, the White House sent a statement to clarify the president’s remarks.

"Of course the President respects the independence of the Fed. As he said he considers the Federal Reserve Board Chair Jerome Powell a very good man and that he is not interfering with Fed policy decisions," the statement said. “The President’s views on interest rates are well known and his comments today are a reiteration of those long-held positions, and public comments."

But then Trump hit the Fed again on Friday in the tweet.

....The United States should not be penalized because we are doing so well. Tightening now hurts all that we have done. The U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals. Debt coming due & we are raising rates - Really?

— Donald J. Trump (@realDonaldTrump) July 20, 2018

• For 30 years, US policy toward China was to build a solid economic relationship so US corporations can produce goods at a lower cost and sell them to Americans and others all over the world. Politically, this moved China away from a purely communist country like North Korea, which is what the US wanted, to a mixed market economy which is still communist but has a growing middle class which can buy US and European goods. This policy also weakened labor unions and allowed US corporate profits to soar to record levels, kept inflation and wage growth low in America and elsewhere, and the current account deficit with China was tolerated as long as Wall Street benefited from a capital account surplus to recycle China's savings and speculate on risk assets all over the world. 
• Now comes Trump who is tapping into the disenchantment of American workers in the Rust Belt, he tells them the level playing field isn't there and that's why manufacturing jobs have left the US but he's going to rectify the situation by standing up to China. The truth is China does get away with murder when it comes to trade but the problem is it's still a communist country. Moreover, it's paying for students to come study in the US so it can steal intellectual property and become a leader in many high-value industries, competing with the US and Europe head-on.
• In effect, Trump is promoting his economic nationalistic agenda, so it's odd people are surprised. He's not listening to Larry Kudlow, he's listening to Peter Navarro, appealing to his disenchanted base who feel that Republicans and Democrats have let them down over the years to solely pander to corporate interests (ie. campaign contributors).
• Sure, US corporations don't like trade wars but Trump has given them a huge tax break and has told large companies the US government will do business with them. The money US corporations are saving in taxes can go into investing, increasing wages, paying off debt or buying back shares but they will all opt for share buybacks to increase their senior level compensation which is based on earnings per share. 
• But China isn't stupid, it's striking back with its own tariffs on American products coming from Rust Belt states, ie. Trump's base. It knows it can hit Trump in areas where midterm elections are taking place in November. It might also choose not to finance US debt but I doubt this will occur and besides, the Fed can just buy US bonds through QE if it needs to.
• I do not see a US recession before 2020. Trump still has the billion-dollar infrastructure program in his arsenal. The only wild card is the stock market which can get clobbered but even there, he will force the Fed and Treasury to buy stocks, it's already going on through the Bank of Israel and the Swiss National Bank via swaps and outright purchases, and don't be surprised if he privatizes Social Security to force it to invest in US stocks if things get really bad.

My friend got me thinking that maybe there is a method to Trump's madness. He obviously has a clear nationalistic economic agenda to fulfill and he's going to try to score a victory with China, even if it's a pyrrhic one.

Buy more bonds! Duh! https://t.co/fYnvNgk166

— Leo Kolivakis (@PensionPulse) July 20, 2018

La Caisse de dépôt et placement du Québec is teaming up with global investment manager AMP Capital Investors Ltd. to provide more than $657 million in financing to U.S. developer Tillman Infrastructure.

The investment will help finance the building of new telecommunications towers across the U.S., providing new ground for carriers to cover, as well as boosting the country’s overall communications infrastructure. The agreement could eventually reach up to $1.3 billion based on future growth needs.

Currently, Tillman owns and operates a portfolio of cellular towers, in addition to its construction activities.

“With Tillman’s strong leadership and seasoned experts, along with our partner AMP Capital, we look forward to contributing to Tillman’s great potential. It has a competitive product that delivers coast-to-coast speed and efficiency,” said Marc Cormier, executive vice-president of fixed income at the Caisse, in a press release. “The company will only continue to benefit from a growing demand for data that will drive mobile infrastructure spending and development for years to come.”

Over the next few years, mobile service providers are expected to spend 15 to 20 per cent of their revenue on capital expenditure to meet the growing demand from consumers and to cater to increasing data traffic, according to the press release. As well, merger-and-acquisition activity within the sector is expected to grow.

“We are excited to have found great partners in CDPQ and AMP Capital to fuel the next stage of our aggressive growth plans,” said Suruchi Ahuja, chief financial officer at Tillman. “We are committed to continue to be the carrier-friendly and carrier-preferred infrastructure provider, and a true partner to our customers as they focus on expanding their coverage and capacity across the nation.”

In other investment news, the Canada Pension Plan Investment Board is forming a joint venture with Boston Properties Inc. to purchase a business park in Santa Monica for about $825 million.

The office, in Santa Monica’s Ocean Park neighbourhood, is part of 47 acres and includes 21 buildings making up about 1.2 million new square feet of rentable property. The CPPIB is investing about $193 million to gain a 45 per cent ownership of the park, while Boston Properties, which will be operating and managing it, is investing more than $236 million.

“We are very pleased to establish a partnership with Boston Properties to acquire Santa Monica Business Park,” said Hilary Spann, managing director, head of Americas and real estate investments at the CPPIB, in a press release. “The investment provides us with immediate scale in the West [Los Angeles] office market with a top-tier owner and operator, and we look forward to growing our relationship in the future.

“Santa Monica consistently sees strong demand, driven by technology and media firms in the area, and the supply constraints make this asset attractive for CPPIB to hold long term.”

La Caisse de dépôt et placement du Québec ("CPDQ"), one of North America’s largest institutional investors, and global investment manager AMP Capital announce that they will provide US$500 million of financing to Tillman Infrastructure (“Tillman”), an American developer and owner of telecommunication tower infrastructure. This initial investment will help finance the construction of new telecommunications towers across the United States. These new structures will satisfy demand for coverage in additional locations, provide new service opportunities for carriers, and increase the overall communications infrastructure in the U.S. Under this agreement, the investment could eventually reach up to US$1 billion based on future growth needs.

Founded in 2016 and based in New York, Tillman builds, owns and operates a portfolio of cell towers, which are core infrastructure assets used by wireless carriers to relay their cellular signals to mobile subscribers. Tillman began construction on its first sites in late 2017 and is actively building in over three dozen states across the U.S.

In the next few years, mobile service providers plan on spending 15 to 20% of their revenue on capital expenditure to meet the growing demand from consumers and to cater to ever-increasing mobile data traffic. This represents approximately US$40 billion in yearly investment. M&A activity within the sector is expected to increase the expenditure of telecom companies looking to capture the significant potential of 5G and the data market.

Founded by Sanjiv Ahuja, Tillman Global Holdings is a holding company focused on building businesses with long-term value. The firm invests in and manages telecommunications towers, small cells and smart city businesses in both developed and emerging markets.

Canada Pension Plan Investment Board (CPPIB) has partnered with Boston Properties Inc (NYSE: BXP) in a joint venture to buy Santa Monica Business Park, a Santa Monica, California office and retail business park.

The 47-acre property was acquired for about US$627.5 million, including US$11.5 million of seller-funded leasing costs.

As part of the joint venture, CPPIB will invest US$147.4 million to obtain a 45 percent interest in the park.

Hilary Spann, CPPIB managing director and head of Americas real estate investments, said the deal gives the pension fund “immediate scale” in the West Los Angeles office market.

PRESS RELEASE

Boston Properties and Canada Pension Plan Investment Board Complete the Acquisition of Santa Monica Business Park in Santa Monica, California

BOSTON, MASS/ TORONTO, CANADA — July 23, 2018: Boston Properties, Inc. (NYSE: BXP), one of the largest public owners and developers of office buildings in the United States, and Canada Pension Plan Investment Board (CPPIB) announced today that they have formed a joint venture and completed the acquisition of Santa Monica Business Park in the Ocean Park neighborhood of Santa Monica, California for a purchase price of approximately US$627.5 million, including US$11.5 million of seller funded leasing costs after the effective date of the purchase and sale agreement.

Santa Monica Business Park is a 47-acre office park consisting of 21 buildings totalling approximately 1.2 million net rentable square feet. Approximately 70% of the rentable square footage is subject to a ground lease with 80 years remaining, including renewal periods. The ground lease provides the joint venture with the right to purchase the land underlying the properties in 2028 with subsequent purchase rights every 15 years. The property is 94% leased.

“We are excited to expand our presence in the Los Angeles region with the acquisition of Santa Monica Business Park,” commented Owen D. Thomas, CEO of Boston Properties. “The Santa Monica market has demonstrated strong growth in demand and rental rates from a variety of world class tenants and industries. With the acquisitions of Santa Monica Business Park and Colorado Center in 2016, Boston Properties along with its joint venture partners now owns 2.3 million square feet and controls 24% of the Santa Monica Class A office market, creating a strong platform for us to continue to grow in the West LA markets. We are also very pleased and honored to commence a relationship with Canada Pension Plan Investment Board, a leading global investor in commercial real estate.”

As part of the joint venture, CPPIB will invest US$147.4 million for a 45% ownership in the Business Park. Boston Properties will provide customary operating, property management and leasing services to, and will invest US$180.1 million in the joint venture. In addition, the acquisition was completed with US$300.0 million of financing. The mortgage financing bears interest at a variable rate equal to LIBOR plus 1.28% per annum and matures on July 19, 2025. At closing, the borrower under the loan entered into interest rate swap contracts with an aggregate notional amount of $300.0 million through April 1, 2025, resulting in an effective fixed rate of 4.063% per annum through the expiration of the interest rate swap contracts.

“We are very pleased to establish a partnership with Boston Properties to acquire Santa Monica Business Park. The investment provides us with immediate scale in the West LA office market with a top tier owner and operator, and we look forward to growing our relationship in the future,” said Hilary Spann, Managing Director, Head of Americas, Real Estate Investments, CPPIB. “Santa Monica consistently sees strong demand, driven by technology and media firms in the area, and the supply constraints make this asset attractive for CPPIB to hold long term.”

Canada Pension Plan Investment Board (CPPIB) said on Thursday it will invest in China’s rental housing sector with local property developer Longfor Group (0960.HK), with an initial targeted investment of $817 million.

The companies will invest in China across major cities - Tier 1 and core Tier 2 - via developments, acquisition and master-lease of commercial assets to be converted into rental housing, CPPIB said in a statement.

Beijing-based Longfor, China’s No. 9 homebuilder by sales value, is one of the most aggressive players in the policy-supported rental housing sector, with a target to add 45,000 new units in the second half to its 20,000 unit portfolio. It expects operating income from renal housing business to be over 3 billion yuan ($448.60 million) in 2020.

The company was the first in the country to issue bonds to the public for the business, as Chinese developers have been rushing to raise funds, including via the securitization and debt market, since the second half of last year for the low-return sector.

China announced plans in August to launch pilot programs in 13 major cities, including Beijing and Shanghai, to develop rental housing projects in an effort to ease a housing shortage.

“Demand for modern, quality rental housing amongst young professionals and new graduates in China is growing rapidly, and through this collaboration, we are pleased to have the opportunity to participate in this fast-growing sector of Chinese real estate and to further diversify our investments in the market,” said Jimmy Phua, CPPIB’s Asia head of real estate investments.

CPPIB and Longfor first started collaborating in 2014 with investments in retail malls and mixed-use projects.

Or, to be more, precise, it's not the primary cause.  Rather, a study by Wirepoints made available on their website yesterday points to a far more troubling cause:  the value of promised benefits has skyrocketed in the years since 2003, both in absolute terms and relative to measures such as those states' GDP growth.

Here is their headline, eye-popping chart:

What's going on?

In some cases, there is a simple answer:  as readers will recall from my prior article, the accounting rules for public pensions differ, depending on whether there's enough future projected assets, including future scheduled contributions, to cover promised pension benefits.  If there is, the plan discloses liabilities based on the expected future returns from those assets.  If not, then for the portion of the benefits which are not even hypothetically funded from planned future contributions, a municipal bond rate is used instead.  This can lead to swings in the liability, based solely on whether the legislature has a future contribution schedule in place -- when, of course, the real pension debt doesn't change whether you have a plan to fund it, any more than a hypothetical balloon mortgage isn't any more or less of a debt depending on how you plan to save up for it.

But this accounting rule is new, with the change being phased in starting in 2015.  Previously, plans could use this expected asset return even if the level of funding was only a trivial sum relative to the overall funding level.  As Bloomberg reported in 2017, Minnesota saw a dramatic increase in its liability, and a decrease in its funded status, as a result of the new accounting standard.

But much of the growth in benefit liability is, in fact, growth in benefits promised. As detailed at Crain's in 2015, the history of Illinois public pensions has been a litany of pension increases. In 1989, the state increased its cost-of-living adjustment from a non-compounded to a compounded basis.

As Crain's reports,

The bill's sponsors, including former Democratic Senate President Emil Jones, never said during floor debate how much that change might cost, once again leaving lawmakers in the dark about what they were voting on. It wound up passing by lopsided margins of 41-12 in the Senate and 108-4 in the House.

Subsequent legislation increased benefit formulas for "regular formula" state employees and teachers (1998), increased "alternative formula" benefit formulas for state employees and implemented earlier retirement ages for state employees (2001), and provided for early retirement benefit enhancements, described again by Crain's:

In 2002, as it became clear Democrats would retake state government, [former governor George] Ryan signed off on a lucrative exit strategy for thousands of state employees who got their starts under Republican administrations.

Ryan declined an interview request from Crain's. His plan, touted as a way to avoid nearly 7,000 layoffs, gave state workers and downstate and suburban teachers the option of speeding up their retirements by buying age and service credits needed to qualify for a pension.

Initial forecasts by the nonpartisan Illinois Pension Laws Commission estimated that 7,365 people would take advantage of the plan at a cost to the pension systems of $543 million over 10 years. . . .

The offer of full pension benefits to retirees as young as 50 proved so enticing that some state workers took out home-equity loans to generate enough money to gain eligibility. All told, 11,039 employees took the offer, a CGFA analysis in 2006 showed. That increased the liability to the state pension systems to $2.3 billion.

It's a pattern that is repeated over and over again: legislators using pension benefits as a form of "free money" to give away without the immediate and tangible financial consequences that would arise if they gave the affected employees pay raises.

Another state on this chart of most dramatic increases, New Hampshire, again, has a similar list of benefit increases over time, from multipliers and early retirement eligibility made more generous in 1974, to the use of asset gains in good years to fund cost of living adjustments, rather than reserve for lean years (1983), as well as expansions in medical subsidies, spouse's benefits, and a special program allowing for voluntary savings with generous interest crediting.

(Nevada appears to be something of an exception, since the benefits, while exceptionally generous, have been only modestly enhanced in recent years.  To what extent their growth in benefit liability is a long-term consequence of its earlier explosive population growth, from 800,000 in 1980 to 3 million now, requires some further math.)

Yes, reports on pension contribution holidays, or the "Edgar Ramp" detailed at Crain's, in which the former governor put together a funding plan which amounted to "let future generations pay" are enough to make your blood boil.  But this wouldn't have been avoided, only mitigated, if only shortsighted governors hadn't taken contribution holidays.  Even after reducing benefits for new employees in 2011, the cost of the annual new pension accrual for active employees amounts to 20% of pay in the Illinois Teachers' Retirement System, and 21% for the Illinois State Employees' Retirement System -- and, for the latter system, due to the generous early retirement provisions, the liability for retirees is double that of those still working.

How does your state rank? Take a look at the Wirepoints full 50-state listing to see.

It looks like all hell is breaking loose in Pennsylvania and I will be the first to admit that I was aware something was cooking here as I was approached months ago by a lady consulting the state treasurer telling me they're looking closely at fees being paid out to alternative investment managers at SERS and PSERS.

I put her in touch with a bunch of people I knew in Canada and never heard back from her. I also carefully explained the Canadian pension model to her so she understands that the success is built on two principles:

1. World-class governance: Allows Canada's pensions to hire top talent across public and private markets and pay them properly. This is why over 70% of the assets are typically managed internally, lowering fees and costs, adding meaningful alpha over benchmark index returns over the long run.
2. A shared-risk model: This means when pensions run into trouble and there is a deficit, the risk of the plan is shared which in turn means higher contributions, lower benefits or both. Pension plans in Canada with a shared-risk model have adopted conditional inflation protection to partially or fully remove cost-of-living-adjustments for a period until the plan's funded status is fully restored again.

I also explained to her that Canada's large pensions also pay big fees to private equity and real estate funds but they are doing more co-investments to lower overall fees (see my recent comment on PSP upping the dosage of private equity).

But to develop a solid, long-term co-investment program where pensions can invest alongside a GP on larger transactions where they pay no fees, they first have to invest in the traditional funds where they pay big fees and they need to hire qualified people to evaluate co-investment opportunities as they arise.

Still, if done properly, a good co-investment program allows pensions to scale into private equity and maintain target allocations without paying a bundle on fees.

I mention this because I guarantee you very few US public pensions have developed their co-investment program to rival that of Canada's large public pensions which is why they're paying insane fees to their private equity managers per dollars invested in their PE portfolio.

The California State Teachers’ Retirement System (CalSTRS) saw a 9% net return in the fiscal year ending June 30, exceeding its assumed expected return of 7% by two percentage points, Chris Ailman, the system’s CIO, told the CalSTRS investment committee Friday.

The 9% return also beat the system’s custom benchmark of 8.6%.

The overall returns for the $223 billion retirement system, the second-largest in the US by assets under management, beat the nation’s largest retirement system, CalPERS, which announced last week fiscal year returns of 8.6% for the June 30 fiscal year.

“We will rank high compared to similar funds, but it is only one year,” Ailman said. “We need to repeat that performance year in and out, on average, over the next 30 years.”

Private equity was the best-producing asset class with returns of 13.8%, slightly under its custom benchmark of 14.7%.

This was followed by global public equities, which produced returns of 11.7% against a custom benchmark of 11.8%.

The third-best results among large assets classes was real estate, which saw results of 10.4%, above the custom benchmark of 7.1%.

Fixed income saw returns of 0.3%, above the returns of the custom benchmark of -0.2%.

CalSTRS’s new risk mitigation asset class saw returns of 1.8%, beating its custom benchmark of 1.7%. The pension system has put $20 billion into the new asset class designed to mitigate the risk of a market downturn.

Among smaller strategies, Innovative Strategies had the biggest results of 11.4% above the custom benchmark of 6.5%.

CalPERS’s Inflation Sensitive Strategy saw results of 8.5%, above the custom benchmark of 4.5%.

Over the three-year period ending June 30, CalSTRS saw returns of 7.8%, over the five-year returns of 9.1% and 10-year returns of 6.3%.

Ailman said the 10-year results were more challenged. Those results include the great financial crisis when CalSTRS lost around 25% of its portfolio.

The California State Teachers’ Retirement System announced that the fund posted a 9.0 percent return (net of fees) for the 2017-18 fiscal year, exceeding the investment assumption of 7.0 percent for the second consecutive year and helping advance the fund towards full funding in the decades ahead. As of June 30, 2018, the total fund value was $223.8 billion.

“This year’s positive investment performance is yet another testament to the long-term sustainability of a well-run pension fund guided by a committed board of trustees and a staff of diverse and talented investment experts,” said Chief Executive Officer Jack Ehnes. “The fiscal year returns are only one part of CalSTRS’ pursuit of long-term value creation. The CalSTRS Funding Plan, passed into law in July 2014, is the overarching model of shared responsibility, working in tandem with the positive return performance generated by the investment portfolio.”

CalSTRS’ returns reflect the following longer-term performance (click on image):

“This year we beat the 7.0 percent goal and exceeded our benchmark,” said Chief Investment Officer Christopher J. Ailman. “We will rank high compared to similar funds, but it is only one year. We need to repeat that performance year in and year out, on average, over the next 30 years. No small feat, but our award-winning staff and our complex portfolio are designed to do just that. This is a marathon, not a sprint to the finish line. And, as a large, mature pension system, we must continue to explore, innovate and collaborate to build an efficient, successful portfolio for the long term.”

The fiscal year saw strong double-digit returns in both the public and private equity markets with the S&P 500 returning over 14 percent. CalSTRS was positioned well to take advantage of this growth while maintaining a diversified portfolio to provide risk protection through the full allocation to the Risk Mitigating Strategies asset class which was fully implemented during the last 12 months. Given the focus on long-term funding to protect the funds’ value, these strategies are important to avoid losses experienced during market downturns such as the historic 2008 global financial crisis.

As of June 30, 2018, the CalSTRS investment portfolio holdings were 53.7 percent in U.S. and non-U.S. stocks, or Global Equity; 12.8 percent in Real Estate; 12.3 percent in Fixed Income; 8.9 percent in Risk Mitigating Strategies; 8.2 percent in Private Equity; 1.9 percent in Inflation Sensitive; 0.8 percent in Innovative Strategies and Strategic Overlay; and 1.4 percent in Cash.

About CalSTRS

The California State Teachers’ Retirement System, with a portfolio valued at $223.8 billion as of June 30, 2018, is the largest educator-only pension fund in the world. CalSTRS serves California’s more than 933,000 public school educators and their families from the state’s 1,700 school districts, county offices of education and community college districts. A hybrid retirement system, CalSTRS administers a combined traditional defined benefit, cash balance and voluntary defined contribution plan. CalSTRS also provides disability and survivor benefits. CalSTRS members retire on average after more than 25 years of service, with a median retirement age of 62.9, and a monthly pension of approximately $4,475, which is not eligible for Social Security participation. For more data, download the CalSTRS Fast Facts 2017 brochure.

See how CalSTRS demonstrates its strong commitment to long-term corporate sustainability principles in its annual Global Reporting Initiative sustainability report: Global Stewardship at Work.

CalSTRS posted a net return of 9% for the fiscal year ended June 30, outperforming its benchmark return of 8.6%, said Christopher Ailman, chief investment officer, at the pension plan's investment committee meeting on July 20.

The $223.8 billion pension plan outperformed its benchmark for the three-, five- and 10-year periods, earning a 7.8% annualized return for the three years, 9.1% for five years, 6.3% for 10 years and 6.5% for the 20 years ended June 30. By comparison, the benchmark returns were 7.7% for the three years, 9.3% for the five years, 7.15% for 10 years and 6.5% for the 20 years. CalSTRS earned a 13.4% net return for fiscal year 2017.

The asset class with the highest return for the fiscal year was private equity, earning 13.8%, although it underperformed its 14.7% benchmark return. The next highest returning asset class was global equities at 11.7%, slightly underperforming its 11.8% benchmark.

Innovative strategies earned 11.4%, outperforming its 6.5% benchmark; real estate returned 10.4%, vs. its 7.1% benchmark; inflation sensitive produced 8.5%, compared to its 4.5% benchmark; risk-mitigating strategies earned a 1.8% return vs. its 1.7% benchmark; and fixed income returned 0.3%, outperforming its -0.2% benchmark.

The risk-mitigating asset class was established in 2016 to protect against equity market downturns and includes long-duration U.S. Treasuries, trend following, global macro and systematic risk premiums.

CalSTRS' actual asset allocation as of April 30, the most recent data available, was 53.7% global equities, 12.3% real estate, 12.2% fixed income, 8.9% risk-mitigating strategies, 8% private equity, 2.9% cash and 1.9% inflation-sensitive.

Mr. Ailman also discussed the 10-year business plan, which he called a "road map" for the pension plan that could approach $400 billion in assets in 10 years. The business plan expects lower returns because assets are expensive these days, but also lower costs in the future, in part, as a result on CalSTRS' becoming less reliant on external managers, he said.

The California State Teachers' Retirement System, West Sacramento, is in the midst of studying how it can use a collaborative approach to investing including making direct investments either alone or together with other asset owners in each of its asset classes. Projected lower costs is consistent with the collaborative model, Mr. Ailman said.

Staff expects to return to the investment committee in September with a recommendation regarding the collaborative model and how pension officials can implement the approach.

Among the challenges reflected in the road map is hiring talent, Mr. Ailman noted. Hiring investment executives, motivating them and retaining them as they move up the ladder is part of what Mr. Ailman said he considers CalSTRS' succession planning. The 10-year plan across asset classes includes training junior staff for relationship transfer and succession planning.

Still, Mr. Ailman noted that "it is more and more a challenge to recruit."

In private equity, for example, CalSTRS has been looking to hire investment professionals with more transaction experience, said Margot Wirth, director of private equity, at the July 20 investment committee meeting. The private equity team has been "drifting toward" hiring more deal-focused professionals but that should accelerate as CalSTRS moves toward the collaborative model, she said.

Currently, 93% of CalSTRS' $18.2 billion private equity portfolio as of March 31 was invested with external managers, with the remaining 7% internally managed, Ms. Wirth said.

She said that it would "not be overly ambitious" to expect that 20% of the portfolio could be internally managed in co-investments in three years.

As part of its fiscal year 2019 business plan, CalSTRS' private equity team expects to work to establish joint ventures with other like-minded and complementary investors as well as to consider investing in money managers "when strategic for the program."

Also at the meeting, the investment committee got a first look at a revised private equity investment policy statement in which it would establish a subasset interim target allocation of 2% and a long-term target of 4% of the private equity portfolio for what it is now calling a multistrategy subasset class. (Interim targets are allocations expect to be achieved in 12 months to 36 months.) Last fiscal year, CalSTRS transferred the strategy it had then called tactical opportunities to the private equity portfolio from its innovations portfolio, where the strategy had been incubated. The new subasset class currently consists of 1.2% of the private equity portfolio but staff believes that some existing investments might logically reside in this subasset class, according to a staff report to the investment committee.

In addition to adding the new allocation, CalSTRS would increase its interim target to buyouts by 3 percentage points to 69% within the private equity portfolio, while retaining a 69% long-term target to buyouts, and trim the interim allocation to debt-related strategies by 5 percentage points to 10%. CalSTRS' long-term target allocation to debt-related strategies is dropping to 11% from 15%. The interim and long-term targets will not change for venture capital (10% and 7%, respectively,) longer-term strategies (2% and 5%) and special situations (7% and 4%).

The new private equity investment policy would reorganize its two main categories — traditional and opportunistic — by moving longer-term strategies (formerly "core private equity") and special mandates to opportunistic from traditional. The traditional category would then consist of buyouts, venture capital and debt-related investments. Opportunistic would consist of longer-term strategies, special mandates and the new multistrategy subasset class. The revised private equity investment policy would also allow staff to make co-investments alongside all of CalSTRS' general partners across asset classes, not only private equity general partners.

Staff is expected to bring the private equity investment policy statement back to the investment committee for adoption in September.

Mr. Ailman noted that longer-term strategies, which include investing in longer-dated funds that can last 20 years, is at the early stages with a lot of managers "stepping in" to the strategy. He added that private equity is undergoing "big changes." He mentioned that CalPERS is considering creating a separate entity to make direct private equity investments.

"I don't think you would … replicate that but good luck to them," Mr. Ailman said. "That's my pension plan."

Separately, Mr. Ailman said that he was starting a study of whether to keep investments in private prisons because they are posing an increased risk to CalSTRS' portfolio. The new risk factors are in respect to violations of human rights by private prisons that are now being used to house immigrants and children of immigrants who have separated from their parents. CalSTRS staff have already been speaking to company executives but this process increases resources to staff. CalSTRS has $120 million invested in three private prison companies: CoreCivic Inc., General Dynamics Corp. and GEO Group Inc.

Mr. Ailman noted the University of California Regents has already divested from private prison investments. The UC's investment office oversees the Berkeley-based university system's $66.7 billion pension fund and $11.9 billion endowment.

A spokeswoman for UC said that university sold some $25 million worth of indirect holdings in private prison companies in 2015. "As part of a comprehensive evaluation process for investments, UC assessed that these holdings were not a good long-term investment," she said in an email.

During public comment, a large number of CalSTRS' members asked the investment committee to divest from its private prison investments. Douglas Orr, a retired professor of economics and social sciences at City College of San Francisco, speaking on behalf of the American Federation of Teachers, suggested that CalSTRS collaborate with other asset owners to pressure private prison companies to discontinue its contracts to house immigrants and immigrant children with the federal government. California Federation of Teachers is also pressing the idea with CalSTRS and the $357.3 billion California Public Employees Retirement System, Sacramento, said Tristan Brown, legislative representative in the union's Sacramento office.

In other actions, CalSTRS' board on July 19 approved a compensation committee recommendation setting the incentive criteria for a new position of director of investment strategy and risk. The new director would implement and monitor the overall investment portfolio's strategy and risk profile. During the board meeting, Mr. Ailman also noted as CalSTRS develops its collaborative model, the new director would make connections with other asset owners.

Facebook's sudden and stunning vulnerability threatens to undercut the foundation of the stock market rally since Donald Trump was elected president.

The social media giant has been the cornerstone of the FAANG trade — Facebook, Amazon, Apple, Netflix and Google parent Alphabet. Just by itself, Facebook has gained more than 80 percent since Trump's November 2016 victory. The S&P 500 more broadly is up some 35 percent during the time period.

But a disappointing earnings report Wednesday, particularly regarding its growth forecast, had investors fleeing the company Thursday and pulling down tech stocks in general. Other market indexes were not impacted as strongly.

Facebook was off more than 18 percent Thursday morning, costing the company more than $120 billion of its market cap. The loss by the social media giant pulled down the technology sector broadly, with the Nasdaq index losing more than 1 percent.

Of the other FAANG components, Apple shares were slightly positive while Amazon fell 2.2 percent and both Netflix and Alphabet also were negative.

Since the election, information technology stocks on the S&P 500 have gained 63.8 percent, easily the best among all sectors in the index, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

As those gains have occurred, the FAANG stocks have assumed outsize positions in many broad-market index funds.

For instance, the top four holdings in the $266 billion SPDR S&P 500 Trust ETF are Apple, Microsoft, Amazon and Facebook. Together, the four companies comprise more than 10 percent of the index's weighting.

"This is just another example of a classic, late-cycle development often found in tired bull markets – the hot money chase indeed," Larry McDonald, author of the Bear Traps Report newsletter, said in a recent post. "As more and more capital flows into passive index funds, more and more FAANG shares MUST be owned. Returns appear far better than the rest of the market's offerings, so even more capital flows in – it's a toxic, self-fulfilling cycle – when broken the declines will be HISTORIC."

McDonald said he expects the FAANG stocks to be targeted by the government, which will have to fund new tax revenue to pay for underfunded entitlement programs.

The good news is that the rest of the market was generally undisturbed for now. In fact, the Dow industrials, of which Facebook is not a member, surged some 150 points early on, boosting the blue chips by more than 0.5 percent. Even the S&P 500, which does have Facebook exposure, was off only fractionally.

In recent decades, the yield curve has inverted an average of 4-5 months before a market top and about 11 months before the start of a recession. However, these time lags are quite variable and the yield curve has given both false positives and false negatives when it comes to bear markets. The 1987 crash occurred when the curve was still quite steeply positive and the 1998 inversion was not followed by a serious bear market, nor by a recession in the U.S. Investors should be wary of putting too much faith in the yield curve and overreacting to its levelling slope. It is only one of many monetary indicators to follow.

In a post-financial crisis world, many US public pension plans are finally beginning to see a light at the end of the tunnel, but others are still at their wit’s end on how to crawl out of their obligatory holes.

Canada, on the other hand, is doing just fine.

With most of its pension plans at either fully funded status or close to it, Canadians have achieved a balance that the US has only seen in the corporate sector. In fact, some Canadian plans, such as the Colleges of Applied Arts and Technology ($8.3 billion) and the Healthcare of Ontario Pension Plan ($59.9 billion) have become overfunded.

Eight Canadian pension funds ranked in the top 100 global funds by size in a 2015 Boston Consulting Group study titled “Investing for Canada on the World Stage.” Three were in the top 20.

This begs the question: What do Canadian pension systems do that those in the US don’t?

GOVERNANCE, LOW RISK AND ASSET DIVERSITY

One key element of what asset owners call the “Canadian model” is independent governance. Public US plans typically go through legislatures and governors’ offices to make changes. That brings a layer of politics into the picture. Canadian plans instead follow a structure free of government intervention, only having to go through their boards.

This is key, Jeff Wendling, senior vice president and chief investment officer, equity investments, of the Ontario healthcare plan, told CIO. “One is this independent governance idea, so you don’t have political bodies or agencies getting involved in how the assets are managed, or when contributions are made, or use of surplus, or all of those kinds of things.”

Result: Canadian funds can make faster investment decisions.

Another element is a more risk-aversive portfolio. Many US plans tend to focus on adding risk by investing in public equities or hedge funds. But Canadian pensions look to de-risk, making safer bets on bonds, private equity, and infrastructure. Many of these assets are also eco-friendly.

“There’s a lot of asset class diversification. There’s a lot of geographic diversification. Canadian funds are looking for opportunities—and a lot of that has been going on for quite some time, so I think that’s part of the story as well,” Wendling said. “Most of these plans here don’t just use private equity funds, they also have direct private equity investing capabilities in-house and also real estate.”

Also important: They keep the costs down by avoiding outside managers, preferring to handle their money in-house.

ORIGINS

Despite the Canadian model’s success, it is relatively new. The pension concept began in the late 1980s and developed throughout the 1990s.

Before that, most Canadian pension plans were invested mostly or completely in domestic government bonds and were generally funded on a pay-as-you go basis. Plus, the public plans did not have independent governance. Muted investment returns, lack of future planning, and too much political influence was not an ideal mix. A 2017 report by Common Wealth and the World Bank Group on the model’s history called that approach an “error-prone fashion.”

Fears that the pension plans would fall short of meeting their obligations kicked off the reforms in 1987, leading to the creation of the Ontario Teachers’ Pension Plan as an independent institution.

To start, the government commissioned three reports on public pension structure, which agreed that Canadian public pension plans should move from the pay-as-you-go structure to a fully funded pension financing model. One suggested stakeholder consensus to develop reforms that would give the plans joint trusteeship and governance, joint sharing of risks and rewards between plan members and the government, investment of the plans’ funds in the market, and arms-length organizations that would operate independently of government. These and other changes were made over the next several years.

The Ontario Teachers’ Pension Plan, the king of the Canadian pension world, now controls nearly $200 billion in net assets, boasts a fully funded status, and has returned double digits every year since 1990.

Not all the pension programs did well at the outset, though. The 1990s saw another slew of reforms to the new structure following the growing instability of the Canada Pension Plan, a contributory earnings-based social insurance program. The fund’s reserves were nearly depleted and its investments had been restricted to nonmarketable federal and provincial government debt. In 1995, Canada’s chief actuary issued a report on its perilous situation that was a call to arms. Otherwise, the fund may have perished.

The mid-1990s reforms raised the Canada Pension Plan’s contribution rates and reduced benefits, but also created the Canadian Pension Plan Investment Board (CPPIB), an agency tasked with handling the floundering plan’s assets. The founding legislation kept the board’s framework intact, splitting oversight between the federal government and provincial governments, a board with government-appointed directors as recommended by the minister of finance.

The investment board was also given a single mandate to maximize long-term task-adjusted returns on the pension plan’s assets. And the board was also required to produce accountability and transparency measures, which included regular public reporting. In the beginning, regulation restricted the board to passive investments in domestic equities, but this was soon nixed by the government following the organization’s inception.

The organization currently manages $317 billion in assets.

Over the next decade, other Canadian plans would adopt these rules, leading to an abundance of healthy pensions for retirees.

US ADOPTION

For US plans to get their funding levels up to snuff, Derek Dobson, CEO of the 118% funded Ontario-based Colleges of Applied Arts and Technology pension, suggests they begin with “overall inroad steps,” such as setting funding goals, getting all plan sponsors, taxpayers, employers, and members aligned with them, and then becoming “ruthless” in making sure “all of your key decisions point to the direction of making those goals happen.”

Dobson also said a “risk appetite statement” (the amount and type of risk an organization is willing to take to hit its targets) is needed to drive those funding goals. To meet the risk appetite, he said that transparency and trust in the boardroom table are “necessary components” to building it.

Oftentimes US plans will struggle with external management fees, but still continue to outsource fiduciary roles. While this does benefit some plans, Canadian plans are more partial to keeping everything in-house. This cuts costs, and also eliminates performance-based agendas outside managers may have.

“If you look at it from a cost perspective, there’s a business case to be made that if some of the large US plans move to an internal pension model, the actual cost or net returns would be higher, all things equal,” said Dobson. Yet controlling that expense is the real challenge, he said.

Wendling, the Healthcare of Ontario Pension Plan’s CIO, said this low-cost structure also helps with risk management because “almost everything is in-house now, so you can really understand your risks and where they lie, I think, much better than if you’ve got a lot of external managers or even hedge funds, where it sometimes even opaque in terms of what the risks really are.”

To bring things in-house, Wendling said plans need a scale as well as the ability to properly compensate their internal talent, an issue he said hits US public plans. “It’s hard to do if all of your investment management is outsourced,” said Wendling.

One US fund that is taking Wendling and Dobson’s advice and putting its own spin on things is the $147 billion Teacher’s Retirement System of Texas. CIO Jerry Albright’s “Building the Fleet” strategy started a decade ago. Now that it has the money to stay afloat, Albright is looking to cut costs as he gradually brings more internal staff to the fund’s investment division to create what he calls the “Texas Model.”

Also Canadian at heart are the classes Albright sees as the most ripe with opportunity. The Texas Teachers’ CIO is looking at private equity, energy, and natural resources allocations as well as watching the fund’s real estate portfolio.

“As we grow to $200 billion we need to maintain that level of real estate transactions and the real estate portfolio turns over quite frequently, so you have to be out there to replace the transactions that turn over,” Albright told CIO.

The fund also has an opportunistic portfolio that sits outside of the private markets team, which picks up assets that don’t quite fit the private bill.

Albright also has other plans for the Texas model that are not typically Canadian, such as looking for “additional authority in the future” where Texas Teachers’ could directly own businesses. “We could say…own subsidiaries that would have operating companies that would operate effectively directly,” he said.

Another American pension fund seeking to adopt Canadian elements is the $349 billion California Public Employee Retirement System (CalPERS), through its $13 billion CalPERS Direct initiative. The fund will set up two internal funds that will manage leveraged buyouts, cutting private equity management costs.

Despite changing times, pressures, and circumstances, Dobson warned CIOs that once they adopt Canadian measures, they should not stray from their strategies as plans have gotten into “real big trouble” by changing their objectives annually, losing massive amounts of credibility and assets losses as they move to “the flavor of the day.”

“Once you have those goals,” Dobson said, “I think everything else will follow from that.”

Mr. van Gelderen will lead PSP’s Total Fund Strategy Group, overseeing multi-asset class investment strategies and total fund allocations and exposures in terms of asset classes, geographies and sectors. The responsible investment, government relations and public policy functions will also report to him. Mr. van Gelderen will report to the President and CEO and his appointment is effective immediately.

“Eduard has the precise combination of strong global expertise and leadership skills we were seeking for the Chief Investment Officer position,” said Neil Cunningham, President and CEO of PSP Investments. “He is an accomplished, multi-asset class investment leader with highly relevant C-level investment expertise in large scale, pension investment managers. With his proven ability to think both as an investor and as a strategist, I’m confident he has the edge required to take our Total Fund operations to the next level.”

“The Canadian model is a leader amongst global pension markets,” added Mr. Van Gelderen. “PSP Investments has earned its place as one of Canada’s top four pension investment managers, with a clear and focused strategy backed by a strong Board. I am excited to join PSP Investments at a time of accelerated evolution for the organization.”

About Eduard van Gelderen

Prior to joining PSP Investments, Eduard van Gelderen was Senior Managing Director at the Office of the Chief Investment Officer of the University of California. As a member of the executive team, his primary responsibilities included overseeing the University’s retirement plan, heading up equity and real assets activities, and handling strategic partnerships in Europe. He also served as CEO of the Dutch financial service provider APG Asset Management and Deputy CIO of ING Investment Management.

He holds a master’s degree in Quantitative Finance from Erasmus University Rotterdam and a post-graduate degree in Asset Liability Management from Maastricht University in Limburg. He is currently a PhD candidate at the International School of Management in Paris. Eduard is a certified Financial Risk Manager and a Chartered Financial Analyst and has served on several investment advisory boards.

The news went under the radar last May. Just a few weeks after the groundbreaking of the Metropolitan Express Network (REM), held in the shadow of the skyscrapers of downtown Montreal, the Caisse de depot et placement du Quebec has quietly embarked on the first stages of a similar light rail system project in Auckland, New Zealand.

This multi-billion dollar project, if it comes to life, could mark the first milestone in a brand new export model of the institution's know-how in complex infrastructure projects. In an interview with La Presse, Michael Sabia, the Caisse's boss, and Macky Tall, president and CEO of the subsidiary CDPQ Infra, confirm that their phone has been ringing a lot since the beginnings of REM in 2015. The calls come from United States, Europe, English Canada and Oceania.

"The world is looking for new ideas, new ways to finance and structure infrastructure projects," explains Michael Sabia. In the world, there is a deficit of at least $ 1,000 billion a year in infrastructure. All experts in this field understand that it is impossible for governments to have all the financial resources to invest. "

MAKE AN IMPRESSION

The Caisse has obviously made an impression with its recent - and pronounced - turn towards infrastructure. Following an agreement with the Quebec government in 2015, the pension fund manager created CDPQ Infra to study two public transit projects that had been making strides for decades: a rail link to Montréal airport -Trudeau and another to the South Shore.

After eight months of accelerated analysis: the surprise. Rather than two separate sections, CDPQ Infra suggested building a single automated network of 26 stations spread over 67 km, which would connect several sectors of the metropolitan area. A project of 6.3 billion with a commissioning scheduled for 2021.

The Caisse proposed to act as majority investor, prime contractor and long-term operator of the network, which it will also own.

This unprecedented business model has earned many critics in Quebec, but so far, it works pretty much according to plans.

The REM is under construction, two years and dust after its initial announcement.

The pressure for the Caisse is enormous today.

"I think we have now demonstrated our ability to develop the idea, to plan the project, to work with governments and to choose world-class suppliers, but now, we have to demonstrate that we are able to monitor the implementation. the construction of a project of this magnitude, "admits Michael Sabia.

"If I can give you a sentence, it's proof of concept," he continues. In the CDPQ Infra model, REM is this proof of concept. That's why we have to deliver the goods. Show that it's not just an idea, not just a plan, but you have to make it real, realize that idea."

DELIVER RETURNS

If the Caisse proposed the REM's bold project, it is convinced that it can derive stable and predictable profits for the benefit of Quebec savers. It believes it can generate a minimum return of 8% on its investment, threshold at which the two minority shareholders - Quebec and Ottawa - can expect to receive royalties.

If the plan works as planned, both levels of government should ultimately recover their capital investment ($ 1.3 billion each), as well as the financing costs incurred. Montréal, for its part, will inherit a state-of-the-art transportation system that could attract 160,000 users a day - and relieve some of its oversaturated roads and subways.

If construction costs explode along the way, or passengers shun the REM, the Caisse will look bad. Michael Sabia, however, indicates that his confidence level is "very high" and that he is "very comfortable" with the level of risk of the project.

"There is no guaranteed return, and that's why we've done detailed studies to make sure our financial projections are realistic and reasonable," said Macky Tall. And we are confident of achieving this return."

Mr Tall recalls that all the Caisse's investments in transport infrastructure are generating profits at the moment. The institution's portfolio of infrastructure assets has returned 10.3% over the last five years, resulting in a gain of $ 5.4 billion for Quebec savers.

The Caisse is a shareholder in the Eurostar and the Heathrow Express in Europe, as well as in the Canada Line in Vancouver. Jean-Marc Arbaud, who successfully piloted the Vancouver light rail project in the 2000s, was recruited as project leader for the REM.

"UNIQUE WINDOW"

The difference between the previous investments of the Caisse in infrastructure and the REM project is that it is part of a blank sheet - or almost - in this file. The CDPQ Infra team has developed the technical and financial aspects of the project from A to Z, and the Caisse's subsidiary will oversee its construction and operation. A "greenfield" investment, very different from an equity investment in an existing project or a traditional public-private partnership.

Without wanting to replicate the REM to infinity in all the major cities of the planet, the Caisse's executives hope to be able to export the "one-stop-shop" model developed in the Montréal light rail project.

"You bring all the elements: make the financial package, manage the construction, do the long-term operation and, yes, invest too, says Macky Tall. There are benefits to this model, because since most capital costs are financed, it gives the option that the project is off the government's balance sheet, which is not the case for the very, very large majority transport projects. "

AUCKLAND TO WASHINGTON

While the Caisse has received dozens of expressions of interest in the REM model, it has only been in recent months that it has dispatched teams abroad to concretely study a handful of potential investments.

"We now have the ability to ask our planning people to look at other opportunities," says Michael Sabia. We are open, but since very, very recently. Since the beginning of the construction process [of REM]. "

NZ Super Fund, the New Zealand equivalent of the Caisse de dépôt, has identified CDPQ Infra as a potential partner to develop a light rail system of about 60 kilometers in the city of Auckland, valued at around 5.3 billion. In the spring, the group submitted an unsolicited offer to the government of that country to study the financial viability of a commercial investment in the transportation system, which was struggling to be achieved through traditional channels.

"This is a project that is at a preliminary stage, comparable to where REM was two or three years ago," said Macky Tall. The partnership was the subject of a press release and several articles in New Zealand, but the Caisse ignored it in Quebec.

For now, CDPQ Infra is studying "four or five" infrastructure projects outside Quebec in a slightly more serious way. They are mostly in the United States and "directly or indirectly" related to transportation, confirms Michael Sabia. The leader was invited to present the Board's business model to the White House in 2015 under the administration of Barack Obama before several governors.

SINCE TRUMP

The Caisse has not had any new discussions with the White House since the election of Donald Trump in 2016, confirms Michael Sabia. But he does not believe that the protectionist aims and the policy of "America First" advocated by the president will hinder the participation of the Quebec group in a possible project on US soil. Especially since decision-making is more at the level of cities and states in the infrastructure sector.

"In the few states we are working with now, some governors are Republicans, others are Democrats, not an overly partisan issue," says Macky Tall. It refuses to name the states concerned since the discussions are still preliminary.

The Caisse's strategy will be based from now on a gradual "intensification" of the export efforts of the CDPQ Infra model, says Michael Sabia.

"For now, the focus and priority are here, because I repeat, you have to deliver the goods. We will intensify our work outside of Montreal, but for at least a year, the priority remains the EMN because we have to deliver this 67 km project. It's not simple."

The Caisse's main investments abroad in transport infrastructure

The Caisse de dépôt et placement has been involved in several projects or transport companies in recent years outside Quebec.

Canada Line

The Caisse has been one of the main investors in the construction and operation of this 20 km light rail link in Vancouver, which connects the airport to downtown. The line carries 120,000 passengers a day, beyond the initial forecast of 100,000.

Heathrow Express

The Québec institution is a shareholder of this rail link that connects Paddington Station in central London with Heathrow Airport (of which the Caisse is also one of the minority shareholders). The steep train line attracts 5.8 million passengers a year.

Keolis

The Caisse is one of the two shareholders of Keolis, a public transport operator operating in 16 countries, which each year welcome more than 3 billion passengers, including by train, coach and tram. The Quebec group owns 30% of this business, which posted a turnover of 5.4 billion euros (8.2 billion CAN) last year.

Eurostar

Since 2015, the Caisse holds a 30% stake in Eurostar, which operates high-speed trains in Europe, including the only rail link between London and Paris. Eurostar carries about 10 million passengers a year.

Michael Sabia responds to critics

"It's not impossible"

Michael Sabia is agitated when he is reminded of the skepticism expressed by many when the Caisse announced its REM project in 2016. The leader, known for his sometimes boiling character, was visibly fed up with the "bullshit" that often surrounds the speeches about major structuring projects in the province. "At the beginning of this project, frankly, many, many people told us: it's impossible. Impossible. But we got here today, where people are building the project. Many people have told us that it is impossible in the next two or three years, to plan the project, to launch the tendering process, to look for all the approvals, impossible because it requires six, seven, eight years, usually. But it's done. So, frankly, when I hear, "oh, but in the other example, it does not work," or "oh, there's a problem here," my answer, frankly, is: bullshit. "

"We are capable"

Michael Sabia, who has spent most of the last 20 years in Montreal, first at the head of Bell Canada and the Caisse de dépôt, hopes that the REM project will act as a catalyst to restore Quebecers' confidence. "At one point, here in Quebec, we must be able to say that we are capable. We are not prisoners of history, we are not prisoners to deliver an infrastructure project that requires 10 years of planning and another 10 years of construction. We are capable and frankly, for me, another element of REM is to demonstrate here that we are capable of delivering world-class things, and within a reasonable time. "

"Inevitable" disadvantages

Critics of citizens affected by the $ 6.3 billion mega deal have begun to make their voices heard in recent weeks. Passengers on the Deux-Montagnes suburban train line, which will be replaced by an REM antenna, are already feeling the effects of the start of work. The digging of a huge hole on McGill College Avenue in downtown Montreal, to connect the REM to the subway, should also cause a lot of inconveniences. Michael Sabia says he approaches criticism with "a lot of collaboration and openness". Several modifications were made to the REM during the development of the project, such as the addition of connections to the Montréal metro. "That being said, you can not make an omelette without breaking eggs. This is not our goal, we will do everything to minimize these issues, but in the end, it is unfortunately inevitable that there are some issues. A forum will be held in the fall to explain in detail the different impacts, adds Macky Tall.

A "priority" performance threshold

The agreement between the Caisse and the Québec government provides for a "priority" performance threshold of 8% for CDPQ Infra, the project's prime contractor. This threshold must be met "to trigger the production of return for minority shareholders", namely Quebec and Ottawa, specifies a financial information note prepared by CDPQ Infra. Beyond this level, the dividends generated by the REM - if the project generates more profits - will be paid mainly to Quebec City and Ottawa, until the minimum level of return stipulated in the agreement for these projects is reached for these two minority shareholders (3.7%). This equates to the average cost of Quebec borrowing on all of its debt. "The REM project is the first public transit project for which the government will have a repayment of its capital investment and the average cost of borrowing," says one. Any excess dividends would then be shared among the three shareholders (CDPQ, Quebec and Ottawa).

The REM in numbers

• 67 km automated network
• 26 stations
• Will connect downtown Montreal, the South Shore, the North Crown, the West Island and the airport.
• In service 20 hours a day
• Budget: 6.3 billion
• Planned commissioning: 2021

FINANCING

• CDPQ Infra: 2.95 billion
• Government of Quebec: 1.3 billion
• Government of Canada: $ 1.3 billion
• Regional metropolitan transport authority: 512 million
• Hydro-Québec: $ 295 million

Source: CDPQ Infra

Cyril Cabanes, Head of Infrastructure investments, Asia-Pacific, CDPQ, shares his views on the Australian and Indian markets, his take on disruption and the Canadian pension fund manager’s new in-house expertise in infrastructure development and operation.

With all the debate surrounding driverless cars and the future of transportation, you could almost forget driverless trains have been a reality for some time now.

The first, fully automated line that operated without a driver present in the cabin was the Port Island Line, which opened in 1981 in Kobe, Japan.

Since then the list of fully automated train lines has been growing and Canada is set to add another track in the form of a light rail network, the Réseau électrique métropolitain (REM), a rapid transit system for the Greater Montreal area in Quebec.

It will be the fourth largest automated transportation system in the world and it is being developed by one of Canada’s largest pension funds, Caisse de dépôt et placement du Québec (CDPQ), while the Quebec and federal governments are both minority shareholders of the project.

From an institutional investor perspective, what makes the venture unusual is that as far as infrastructure projects go, this one is as green as greenfield projects come.

Historically, pension funds have shown a preference for more mature infrastructure projects, or brownfield projects, where the risks are better known and the objective is to capture an income stream rather than capital appreciation.

But CDPQ has chosen to build in-house expertise in infrastructure development and operation through a newly established subsidiary, CDPQ Infra.

“CDPQ Infra’s first focus is the REM, a C$6 billion project. But as the REM evolves, we will be looking at other projects. CDPQ Infra is not just set up for one project, it’s a solid team that is able to manage a project from start to finish,” says Cyril Cabanes, Head of Infrastructure investments, Asia-Pacific, at CDPQ.

As the infrastructure sector becomes more and more crowded for investors, the establishment of a dedicated infrastructure development arm will help increase CDPQ’s added value in its dealings with partners and should give it a competitive edge over its fellow institutional investors, Cabanes says.

“This is a pretty unique capability; we are going to be able to use those skills to develop projects and become a more efficient investor in greenfield projects.

“We are not trying to put out a message that we are going to control everything we do going forward; we are still about strategic partnerships. But we will be a more sophisticated partner.”

Australia

Since joining CDPQ in 2016, Cabanes has looked after infrastructure transactions in the Asia-Pacific region and is based in Singapore. But as he worked for several years in Sydney, he is very familiar with the opportunities in Australia. Today, he oversees CDPQ’s infrastructure activities in this market, including stakes in the Port of Brisbane, in Plenary, the largest specialist public-private partnership business in the region, and in Transgrid, the owner and operator of the electricity transmission network in New South Wales.

Often Australian pension funds lament what they see as the lack of a clear pipeline of infrastructure projects they can invest in. But Cabanes says this perception has probably more to do with the abundance of privatisations in the past, than with the current pipeline of projects.

“Historically, in Australia, people have been reactive, largely because the market has been throwing quite a lot of opportunities at people. So when investors say the pipeline looks thin, then what they are basically saying is that the privatisation pump is being turned off,” he says.

“Now that doesn’t mean nothing else gets done.

“The good thing about Australia is that it has always provided a fairly regular, reliable flow of transactions.

“It has always punched above its weight in terms of infrastructure relative to its GDP (gross domestic product) and population. That has been the case since at least the mid-‘90s, when the privatisation trend started.

“I guess it is expected that in the next few months or years there will be a slowdown, but we’ve seen this before, where we’ve had two years without privatisations and then the pump started again.

“We are still pretty excited about the pipeline in Australia. We’ve built a large portfolio and strong partnerships, which now give us more opportunities.”

India

CDPQ has also been very active in India, following the reforms introduced by Prime Minister Narendra Modi, and recently announced a number of deals in private equity and infrastructure in the logistics, specialised corporate finance and energy sectors.

“Infrastructure in India has a patchy history, but we are lucky that we are coming in as the second wave of investors in India,” Cabanes says.

“It is particularly attractive because of the reforms that the country has been introducing in recent years and we are starting to see the effects of that quite tangibly.

“For example, India has a very high rate of non-performing assets sitting on the banks’ balance sheets.

“It has been a long-held hope in terms of providing a source of deals, but it was only recently that reforms were introduced to facilitate the restructuring of those loans and the sale of those assets. We are starting to see those assets coming to market now.

“Now, this is literally a several-weeks-old phenomenon, but it is going to have a huge impact on that potential.”

Last year, CDPQ acquired a 20 per cent stake in the largest solar energy developer, Azure Power.

Investments in companies such as Azure are perfectly aligned with the pension funds manager’s recently announced climate change investment strategy, which includes a 50 per cent increase in its low-carbon investments by 2020, Cabanes adds.

Technological Advancements

Driverless technology and solar energy generation are areas that have benefited from the increasing pace of technological advancements. But Cabanes is not concerned this rate of advancement reduces the time horizon for infrastructure investments.

“When we invest, we invest for the long haul, so of course we look very closely at technology and increasingly so in the last few years, even for assets that are so-called boring and that you would think are not especially sensible to technology and disruption,” he says.

Energy transmission has come under scrutiny from some analysts, who argue solar and battery technology will lead to a disaggregation of energy transmission. But Cabanes says these new technologies form more of an opportunity than a threat to the incumbents.

“Take Transgrid, for example, it is the largest energy transmission grid in Australia and we’ve been invested in Transgrid for a couple of years now,” he says.

“A lot of people would think that technology has nothing to do with Trangrid. It is regulated and will go on for many generations. Don’t worry about it.

“But people who are more technology savvy would tell you that we are crazy; microgrids could destroy the value of these assets.

“But we need to look at this from a new angle.

“We spend a huge amount of time on assessing technology risk and rather than looking at technology as a threat, you also have to ask yourself: ‘Could it be an opportunity?’

“In the case of Transgrid, it clearly is.

“The company benefits from renewables, because when you build a wind turbine or a solar plant, you need to connect it to the grid, because often these plants are far from deload centres. This is additional revenue and value for us.

“These are not threats; they are opportunities. Disruption is always as much an opportunity as a threat and it all depends on how you respond to it.”

The British Columbia Investment Management Corporation (BCI) today announced an annual combined pension return, net of costs, of 9.0 per cent for the fiscal year ended March 31, 2018, versus a combined market benchmark of 7.4 per cent. This generated $1.9 billion in added value for BCI’s pension plan clients.

A key contributor was the outperformance of global equities relative to their benchmark. Strong performance in illiquid asset investments also provided value-add — infrastructure, private equity, and renewable resources outperformed for the calendar year and delivered above-benchmark returns.

As pension plans have long-term financial obligations, BCI focuses on generating long-term client wealth while protecting the value of the funds. Returns are important — for every $100 a pension plan member receives in retirement benefits, on average $75 is provided by BCI’s investment activity. Over the five-year period, the annualized return was 9.9 per cent against a benchmark of 8.7 per cent, adding $5.8 billion in value. For the 10-year period, the annualized return was 7.4 per cent against a benchmark of 6.8 per cent. BCI added $6.6 billion in value over this period.

BCI began our transformation of the investment strategy and business model in 2015. Now three years into the transition from a more passive investment model, that was historically able to generate the necessary returns, to an active in-house model with a greater probability of sustained long-term performance, the shift is positioning us to continue to deliver meaningful financial futures for our clients over the longer term.

“BCI has a proud history of investing for British Columbia’s public sector,” said Gordon J. Fyfe, BCI’s Chief Executive Officer and Chief Investment Officer. “Our transformation to an active in-house asset manager, diversifying globally and with a focus on illiquid investments, ensures that we continue to provide the returns our clients need.”

Fiscal 2018 Highlights

• Committed $11.5 billion to illiquid assets— infrastructure, mortgages, private equity, real estate, and renewable resources. Notable direct investments included: Hayfin Capital Management LLP, Refresco Group N.V., Nova Transportadora do Sudeste (NTS), and Endeavour Energy.
• Increased internally managed assets to 73.3 per cent from 63.5 per cent the previous year.
• Launched quantitative active funds for Canadian and global securities.
• Continued the transfer of property and asset management of real estate investments from BCI’s former external property managers to QuadReal Property Group.
• Expanded the team to a total of 413 employees and added expertise in portfolio management, asset management, risk management, information technology, investment operations, and finance.

BCI’s operating costs were 29.6 cents per $100 of net assets under management; compared to 24.2 cents in fiscal 2017. Costs incurred on our behalf by third parties and netted against investment returns are not included in operating costs. By increasing the percentage of assets managed by BCI’s investment professionals, we are transitioning from a reliance on third parties to a more cost-effective model of managing our clients’ illiquid assets. We realize the benefits of the transformation to an in-house asset manager using sophisticated investment strategies and tools, and BCI continues to build our global reputation as world-class investment manager — increasing our access to high-quality opportunities.

In fiscal 2018, BCI increased managed net assets to $145.6 billion, an increase of $10.1 billion from the previous year. BCI’s asset mix as at March 31, 2018 was as follows: Public Equities (44.3 per cent or $64.6 billion); Fixed Income (21.8 per cent or $31.7 billion); Real Estate (14.4 per cent or $21.0 billion); Infrastructure (8.0 per cent or $11.6 billion); Private Equity (7.1 per cent or $10.3 billion); Mortgages (2.5 per cent or $3.6 billion); Renewable Resources (1.8 per cent or $2.6 billion); and Other Strategies (0.1 per cent or $0.2 billion). BCI’s 2017–2018 Corporate Annual Report is available on our website at www.bci.ca.

Today, about 66 per cent of our clients’ assets are invested in fixed income and public equites and we are operating in markets with different conditions. Over the last three years, expected returns for fixed income have declined by 0.4 per cent and 1.2 per cent for public equities. As we can no longer generate the returns from the public markets with the same confidence, our clients are increasing their exposure to private markets. And to support our clients’ asset mix allocations, BCI is transitioning to an active asset management model.

By comparison, an active asset management model is more dependent on skills and expertise than a passive investment model. As an active manager, our investment professionals’ focus shifts to identifying inefficiencies and value creation opportunities within the public and private markets. In-house investment research, sector knowledge and risk analysis, combined with an agile and decisive team, allows BCI to use their scale to our clients’ advantage by taking bigger equity positions in stable companies, negotiating better terms with business partners, moving swiftly in bidding and closing on transactions, and offering our clients more sophisticated investment vehicles such as derivatives.

Our new investment approach requires a different skill set and talent. And for BCI to attract and retain the required expertise, we need a framework and compensation structure that aligns with, and supports, an active asset management approach. This led the board to review BCI’s compensation framework to ensure that we are competitive and can attract the best talent within the industry.

With the foundation of our strategy now firmly established, we are beginning to see the results of the change to our investment strategy and business model. This year we increased our internal asset management to 73.3 per cent compared to 63.5 per cent from the previous year.

By using our competitive advantages as a sophisticated, agile investor with large amounts of capital we are increasing our access to high-quality opportunities. We continue to build strategic partnerships and be more innovative and entrepreneurial when negotiating transactions, setting the terms of these deals while aligning the investment interests of BCI, our investment partners, our portfolio companies, and our clients.

This year we committed $11.5 billion in the illiquid markets — expanding our direct investments and increasing our global exposure. With a more global outlook, we are putting our clients’ capital to work with stable and reliable companies that operate in sectors that we believe to be growing and evolving.

BCI’s private equity program committed more than $3.4 billion in new capital around the world this year. Our team is taking advantage of our new strategy and business model by strengthening existing partnerships and building new ones, giving us better access to high-quality deals. Key transactions for the year included: Hayfin Capital Management LLP, a leading private credit asset manager; a pharmaceuticals manufacturer; and we announced our intention to acquire a significant stake in Refresco Group N.V., a beverage and bottling company, which completed in April 2018.

Our infrastructure program committed $1.5 billion in new capital. The team continues to focus on regulated assets that provide stable cash flow and opportunity for capital appreciation. We directly invested in Nova Transportadora do Sudeste (NTS), a wholesale gas transmission business in Brazil; and Endeavour Energy, the second largest regulated electricity distributor in New South Wales, Australia. Within the infrastructure program, direct investment comprised 82 per cent of the total portfolio at year-end.

QuadReal Property Group, BCI’s real estate company 100 per cent owned by clients, continued internalizing our assets from previous third-party managers. They have assembled world-class real estate expertise with over 860 investment and property professionals solely focused on managing, expanding, and diversifying our clients’ global real estate portfolio. QuadReal committed $2.7 billion to international real estate opportunities this year.

The core focus for new development is in industrial, high-density residential, office, and retail properties in major urban centres. Similar to our other direct investments, BCI maintains strategic oversight of QuadReal and is not involved in the day-to-day operations.

A large percentage of our assets under management will remain in public markets — fixed income and public equities — and we are transforming our approach and model here as well. The public markets team is shifting to appropriate strategies that target cost-effective indexing in liquid public equities, while deploying active management in less-efficient markets.

Our public markets team transformed the High Yield Bond Fund into the Corporate Bond Fund. The expanded mandate will include U.S. investment-grade bonds, provide access to new market opportunities, and add much greater capacity and liquidity.

We also established the Principal Credit Fund which aims to generate higher returns than traditional bonds and take advantage of more illiquid segments of the global credit market. This fund officially launched April 2018.

During 2017, we committed approximately $2.5 billion to 13 new fund investments with external managers that we consider to be strategic partners. We continue to focus on strategic relationships and partners, in identified sectors, that will provide us with strong returns and potential co-investment opportunities. We divested 20 fund investments that no longer aligned with our program strategy.

Focusing on our strategy, we committed approximately $950 million to new co-investments. Notable transactions included: Hayfin Capital Management LLP, a leading private credit asset manager; a pharmaceuticals manufacturer; and we announced our intention to acquire a significant stake in Refresco Group N.V., a beverage and bottling company — the transaction closed in April 2018. As an active investment manager, our focus continues to be on increasing our co-investment opportunities and transitioning to more in-house asset management.

The Canada Pension Plan Investment Board, the Alberta Investment Management Corp. and the WPT Industrial Real Estate Investment Trust are joining forces to aggregate a portfolio of U.S. industrial properties in key logistics markets.

“The combination of AIMCo and CPPIB’s scale and sophistication creates a long-term opportunity that will meet the needs of our clients and stakeholders,” said Micheal Dal Bello, senior vice-president of real estate at AIMCo, in a press release. “AIMCo looks forward to this expanding relationship with WPT in this U.S. industrial venture with CPPIB.”

The venture will consist of up to US$1 billion of total equity between the three parties, with the CPPIB and the AIMCo set to own 45 per cent each. WPT will hold 10 per cent and will manage the acquired properties.

“We are thrilled to partner with two premier global real estate investors that share our long-term vision for the industrial sector,” said Scott Frederiksen, chief executive officer of WPT, in the release. “We appreciate the continued confidence and support of AIMCo and look forward to building our relationship with CPPIB through the growth and success of the joint venture.”

The portfolio will focus on national hubs, including Atlanta, Chicago and Dallas. Major port locations, such as Los Angeles, Seattle and New Jersey, also present favourable fundamentals, the release noted.

“The U.S. industrial sector provides an attractive investment opportunity, driven by trends such as growth in e-commerce, as well as the evolution and modernization of global supply chains,” said Hilary Spann, managing director and head of Americas, real estate investments at the CPPIB, in the release. “We are pleased to be partnering with WPT and AIMCo to expand our presence in this sector.”

Canada Pension Plan Investment Board (CPPIB) and Alberta Investment Management Corp (AIMCo) have agreed to back a joint venture that will acquire industrial properties in key U.S. logistics markets.

The joint venture, which is being formed in partnership with WPT Industrial Real Estate Investment Trust (REIT), a Toronto-based investor in U.S. warehouse and distribution assets, will seek to deploy up to US$1 billion.

CPPIB and AIMCo will each own a 45 percent stake in the joint venture. WPT Industrial REIT will hold the remaining interest and manage the acquired properties.

PRESS RELEASE

WPT Industrial REIT, CPPIB and AIMCo Form Joint Venture in U.S. Industrial Property Sector

Toronto, ON/New York, NY (July 31, 2018) – WPT Industrial Real Estate Investment Trust (the “REIT”) (TSX:WIR.U), Canada Pension Plan Investment Board (CPPIB) and Alberta Investment Management Corporation (AIMCo) announced today that they have formed a joint venture to aggregate a portfolio of industrial properties in strategic U.S. logistics markets through a value-add and development investment strategy.

The joint venture will target investing up to US$1 billion of combined equity. CPPIB and AIMCo will each own a 45% interest in the joint venture and the REIT will own the remaining 10% interest.

“We are thrilled to partner with two premier global real estate investors that share our long-term vision for the industrial sector,” said Scott Frederiksen, Chief Executive Officer of the REIT. “We appreciate the continued confidence and support of AIMCo and look forward to building our relationship with CPPIB through the growth and success of the joint venture.”

The joint venture will invest in a diversified mix of strategic U.S. logistics markets with favourable fundamentals primarily national hubs such as Atlanta, Chicago and Dallas as well as global gateway markets such as New Jersey, Los Angeles and Seattle.

“The U.S. industrial sector provides an attractive investment opportunity, driven by trends such as growth in e-commerce, as well as the evolution and modernization of global supply-chains,” said Hilary Spann, Managing Director, Head of Americas, Real Estate Investments, CPPIB. “We are pleased to be partnering with WPT and AIMCo to expand our presence in this sector.”

The REIT will manage the properties acquired by the joint venture.

“The combination of AIMCo and CPPIB’s scale and sophistication creates a long-term opportunity that will meet the needs of our clients and stakeholders,” said Micheal Dal Bello, Senior Vice President, Real Estate, AIMCo. “AIMCo looks forward to this expanding relationship with WPT in this U.S. industrial venture with CPPIB.”

About WPT Industrial REIT

WPT Industrial Real Estate Investment Trust is an unincorporated, open-ended real estate investment trust established pursuant to a declaration of trust under the laws of the Province of Ontario. The REIT has been formed to own and operate an institutional-quality portfolio of primarily industrial properties located in the United States, with a particular focus on warehouse and distribution properties. As of March 31, 2018, WPT Industrial, LP (the REIT’s operating subsidiary) indirectly owns a portfolio of properties consisting of approximately 17.6 million square feet of gross leasable area, comprised of 52 industrial properties and one office property located in 15 states within the United States.

Morgan Stanley's Michael Wilson believes the stock market is entering a destructive phase.

"The Nasdaq could correct by 15 percent plus, the S&P 500 probably goes down about 10 [percent]," the firm's chief U.S. equity strategist said Thursday.

His comments came on CNBC's "Trading Nation," where he was speaking publicly on Monday's correction warning research note for the first time. Wilson contends financial conditions are tightening more than most investors appreciate, and a correction has already started.

"The market has just been getting narrower and narrower. So what we've seen is every sector within the S&P has gone through about a 20 percent correction on valuation except for two: technology and consumer discretionary — basically growth stocks," Wilson said. "Our view is that this rolling bear market has to complete itself by hitting those two sectors, and we think that's actually begun."

Wilson, who was one of last year's biggest bulls, sees this shift from growth to value stocks creating a lot of trouble because technology and consumer discretionary groups make up nearly half the S&P.

"If the growth stocks get hit disproportionately hard, it's going to be very difficult for that money to leak into other parts of the market without having some loss of value," he said.

Wilson's S&P year-end target is 2,750 — 4 percent below the index's record high of 2,872 hit on Jan. 26 and about 3 percent from current levels.

As for next year, he doesn't see the situation getting much better.

"There are definitely a lot of signs already that there's a view that things are going to slow materially next year whether there is a recession or not," Wilson said."

However, he isn't bailing on stocks altogether. Wilson likes energy, utilities, industrials and financials as a rotation from growth to value picks up steam.