Opposition to proposed pension reforms continued to gather strength on Thursday afternoon as Finance Minister Blaine Higgs met with hundreds of angry retired civil servants in Moncton.

About 600 people attended the public information session about switching to the shared-risk model, including Betty Smith, a retired teacher and member of the Pension Coalition of New Brunswick.

"What they are doing is unacceptable, we will not accept it," said Smith. "There will be war in the province before this is over."

Under the provincial government’s reforms, the future pension risk would be shared by both sides.

Guaranteed cost-of-living increases will also be eliminated for pensioners and instead be dependent upon market performance.

'All we want is what we paid for — nothing more, nothing less.'—Betty Smith, retired teacher

Smith, who spent 12 years teaching and 33 years in the classroom, said she worked too hard to see her pension plan change.

"What they are doing is illegal, very illegal," she said.

"All we want is what we paid for — nothing more, nothing less. Shared-risk is great on a go-forward basis, not the way it's going now."

"We paid dearly for what we have today, and the money has been squandered by the governments. And they want to get more of our money. And we're not going to put up with it," Smith said.

Higgs 'embarrassed' about lack of consultations

The finance minister was also peppered with questions about a lack of communication and consultation on the changes.

Higgs, who is touring the province, visiting seven cities in four days, acknowledged their concerns and apologized to the crowd several times.

"I have not been involved in the process to this level til this point," he said. "I am embarrassed to be in this position at this time, where discussions were not held to the degree where they should have been."

Higgs was defensive, however, when it came to threats that his government will suffer consequences at the polls over the unpopular pension changes.

That type of threat has scared previous governments and put the province deeper and deeper into debt, he said.

"For me and for my colleagues, we didn't join this to just have this province to continue to spiral down this hole. We joined it to say can we start to recover."

Under the current plan, the risk of any market downturns is borne by the provincial government alone. Under the reforms, the risk would be shared by both sides.

The proposed model, unveiled last May by Premier David Award, also includes increased contribution levels and higher age of retirement phased in slowly over a period of time.

Government officials have previously said the pension changes would not cut the benefits in place for retirees.

But a government actuary at the Saint John meeting acknowledged cost-of-living increases will be eliminated for pensioners and instead be dependent upon market performance.

The Public Service Superannuation Act (PSSA), which covers employees who work directly for government departments and NB Power, currently has a $1 billion shortfall.

It included 13,441 pensioners as of March 31, 2012. Their average annual pension was $20,603.

A meeting was also held in Miramichi on Thursday night.

Meetings are also scheduled for:

• Bathurst, April 19, 1 p.m.-3 p.m., Collège communautaire du Nouveau-Brunswick amphitheatre, Room 286C, 75 Youghall Dr.
• Campbellton, April 19, 6 p.m.-8 p.m.: Collège communautaire du Nouveau-Brunswick gymnasium, 47 du Village Ave.
• Edmundston, April 20, 1 p.m.-3 p.m.: Clarion Hotel, Banquet Room, 100 Rice St.

A pension law expert says he doubts retired civil servants will be able to convince the courts that proposed pension changes in New Brunswick are a breach of contract.

"All contractual arrangements between employers and employees and retirees are governed by the Pension Benefits Act," said James Pierlot, who is based in Toronto.

"So the government does have the legal power to change how that functions. And indeed, to introduce shared-risk pension plans as it has done. So it that sense, no, there is no illegality here," he said.

Anger among pensioners has continued to grow this week as Finance Minister Blaine Higgs held a series of public meetings across the province to explain the changes.

Under the current plan, retired civil servants are sheltered by the provincial government from any risk of market downturns.

Under the reforms, however, the risk would be shared by both sides.

Guaranteed cost-of-living increases will also be eliminated for pensioners and instead, be dependent upon market performance.

Many pensioners have argued it's unfair for them to lose benefits they've already paid for.

Current employees hardest hit

Pierlot says it's understandable that retirees are upset about the changes, but they will be the least affected.

It is current employees who will bear the brunt of the new plan, he said.

"And the younger they are, the more modest their pensions are going to be going forward. They're facing later retirement ages, lower benefits, et cetera. Whereas any reductions or risks faced by retirees is considerably less."

Premier David Alward announced the government was overhauling the pension system last May, saying the current plan is not sustainable.

The new plan will see increased contribution levels and a higher age of retirement phased in. The targeted retirement age would be moved to 65 from 60 over a 40-year period.

•  AIMCo delivered 11.5% on their balanced fund for fiscal year 2013 which ended on March 31st. This represents 200 basis points value added above the policy (benchmark) portfolio which is excellent. The annual report will be made available in June.
• Unlike Ontario Teachers' or HOOPP, AIMCo cannot leverage its portfolio using derivatives and repos. It's forbidden by Alberta's provincial law.  It's important to keep this in mind because looking at headline figures doesn't explain risks. Leo thinks intelligent use of leverage is fine but they can't do this at AIMCo and he jokingly told me: "this could change but by then the timing will be wrong."
• We talked a lot about the global economy, monetary and fiscal and policy. He explained how monetary policy is raising the value of all assets as cheap money floods the system. "Problem is all the money is benefiting the banking system, corporations are hoarding record amounts of cash but the money isn't flowing into the real economy."
• We talked about inefficient demand and the paradox of thrift. Leo thinks governments need to facilitate infrastructure spending to ignite demand and that the myopic focus on fiscal austerity will create more problems down the road.
• We discussed rising inequality in the United States and elsewhere. He told me GDP is not capturing everything in the economy. In particular, human capital isn't being captured: "Take a company like Facebook. Probably used $100M in physical capital or less and they extracted $20B and more. Where did it go?"
•  He also told me to read a book, Race Against the Machine, to understand how  the digital revolution is accelerating innovation, driving productivity and irreversibly transforming employment. 
• But technology isn't all bad. Leo sees incredible innovations taking place in energy, healthcare and many other fields. 
• He told me that on a recent trip to Palo Alto, he was amazed to see how universities are working closely with the private sector and venture capitalists to commercialize ideas. "We are lagging in Canada and this needs to be addressed. Canadian universities are not producing students with the skill sets that are needed by industry."
• In terms of markets, we talked about bonds, stocks and the facade of strength. He still thinks that stocks will outperform bonds over the long-run but he notes the performance of stocks won't be spectacular.
• In the unlisted markets -- private equity, real estate and infrastructure -- they look at deals that make sense and like to "invest between the cracks." 
• AIMCo is looking to sell its stake in Place Ville Marie here in Montreal, most likely to the Caisse, the other major owner. The decision has nothing to do with Quebec but they think it's time to give another operator the opportunity to work the asset. "That's what makes a market."
• Finally, we discussed benchmarks in private markets and compensation. Leo thinks benchmarks must reflect opportunity cost but he also told me that even "top quartile managers can underperform markets on any given year," so you need to make sure your compensation is competitive enough to attract and retain the right people to manage the unlisted assets which have all sorts of issues like J-curves and stale valuations.
• But he did add that using different benchmarks in private markets (ie. one for performance and one for compensation) can create "organizational, behavioral and agency issues." You have to make sure your investment mangers are aligned with the long-term targets of the pension plan.

Ivanhoe Cambridge — the real estate arm of the C$35 billion Caisse de Depot et Placement du Quebec — is snapping up multifamily real estate at a fast clip, and it's not done yet.

This month, Ivanhoe Cambridge bought into the $1.5 billion Equity Residential portfolio recently taken private by Goldman, Sachs & Co. and real estate manager Greystar Real Estate Partners.

Executives of Montreal-based Ivanhoe Cambridge believe the time is right to increase multifamily investments in the United States and the United Kingdom.

“Ivanhoe Cambridge believes in increasing its investment in the multiresidential segment in key markets and the U.S. is one in which we want to register growth this year,” said Sebastien Theberge, senior director, public affairs and communications at Ivanhoe Cambridge in an e-mail. “The economy is picking up and social-demographic trends are favorable, two key factors that will support the sector in the near future.”

The Equity Residential deal includes a portfolio of 27 high-quality multiresidential properties in high-performing submarkets in the U.S. Most properties in the portfolio were built in the 1990s and have strong existing cash flows. The partners will embark on a multiyear maintenance and renovation program for the properties. Mr. Theberge declined to provide terms of the transaction.

All together, Ivanhoe Cambridge has investments in 56 multiresidential properties located in major urban centers in Canada, the U.S. and the U.K.

“In the U.S., we are focusing on markets with strong, diversified employment bases, primarily New York, Boston, Washington, Los Angeles and San Francisco,” Mr. Theberge said in his e-mail. “In Europe, the focus is on Paris and London. Our London investments are through an alliance with Residential Land.”

In February 2012, Ivanhoe Cambridge — in partnership with Residential Land and Apollo Global Real Estate — bought four multiresidential buildings in prime central London. In December, Ivanhoe Cambridge acquired majority ownership interests in two multiresidential complexes in prime central London — one in South Kensington and the other in Belgravia.

Ivanhoe Cambridge's partnership gives it participation in any acquisition opportunity the partners come across that matches Ivanhoe Cambridge's investment criteria.

Sky-high prices for Manhattan apartment properties and rock-bottom low yields for investors may have reached the limit.

“The yield is down to the bare bones,” says Peter Schubert, managing director of capital markets for Transwestern. “I am calling the bottom.”

New York City’s clear strengths, including strong demand for rental apartments and a sharply limited supply of new apartments, are no longer enough to justify the prices paid by investors for top properties in top neighborhoods, according to Schubert, co-author of Transwestern’s “2013 Multifamily Housing Survey.”

Investors from all around the country are pouring money into New York City apartment properties. They are looking for an investment that yields more than Treasury bonds but that is still safe, even in our slow, uneven recovery. New York multifamily properties were resilient during the downturn, so they are attractive. “I’m talking to clients in Texas who say that their new mandate is to go and spend money in New York City,” says Schubert. “They have money burning a hole in their pocket.”

Low, low cap rates

Prices kept rising through the end of 2012. Average cap rates for apartment properties in Manhattan, which express their net operating income as a shrinking percentage of rising prices, fell to 3.9 percent in the fourth quarter. That’s more than a full percentage point below the year before, according to data firm Real Capital Analytics. “There is no cap rate compression left,” says Schubert.

Meanwhile, the average price per unit at apartment properties was well above $500,000, according to Real Capital Analytics. That’s high even for Manhattan.

Rent risk

Properties sold at low cap rates may have a difficult time growing their net operating incomes enough to justify their high prices. Expenses such as property taxes and utilities have been growing at three times the rate of inflation in the City.

Rent growth is also slowing. “We could endure a year or two of flat rent growth,” Schubert warns. Other market analysts see rent growth slowing already. Effective rent growth was just 0.1 percent over the first quarter of this year and actually shrank 0.2 percent in the fourth quarter of last year, according to Reis Inc. That’s in spite of a vacancy rate among institutional investment-quality apartments of just 1.9 percent in the first quarter. Usually, low vacancies mean higher rents. But rents still need to fit what residents can pay. “We may be seeing that rents are hitting the upper bound of what people can charge,” says Brad Doremus, vice president of research and economics for Reis.

Many investors are assuming rent growth will be much higher at the properties they buy in Manhattan. Even relatively conservative underwriting often assumes annual rent growth of 3 percent, Schubert says.

Big city risk

New York City real estate also carries unique risks. Nearly one-third of the City’s housing stock is restricted by rent stabilization laws. During the boom, investors bought dozens of rent-stabilized properties with plans to quickly raise the rents. Nearly all of these plans failed. Stuyvesant Town in Manhattan was just one high-profile property seized by lenders. Even if a buyer fully understands the local rent laws, those laws could always change. “It’s an evolving set of rules,” says Schubert.

For all these reasons, Schubert is urging his clients to look further afield from the core neighborhoods of Manhattan and risky “value-added” acquisitions of rent stabilized properties. Investors could look to other neighborhoods of New York City where values still have room to increase. “The best way to add value is to be ahead of the curve,” he says. “There will be more appreciation in these frontier neighborhoods.”

I wouldn't want to own most kinds of commercial real estate at today's valuations. Given the causes and direction of the radical restructuring that continues to grind through our economy, there's almost nowhere for demand for office and retail space to go but down.

Why? Because we don't have the same need to be near to each other to get things accomplished anymore.

Since the Industrial Revolution took hold 200-plus years ago, to make a product or perform a complex service, we had to gather in factories and office buildings. The need to be close to fellow workers was so critical and so vital that we literally started stacking them on top of each other in big cities, building skyscrapers that allowed thousands of employees to work together under the same very tall roof.

And in the world of retailing, we bought selections we made from what was on display on the shelves of a department store or big-box retailer.

But the Internet has begun to change the rules of proximity in significant ways. While many of us still gather in offices (fewer and fewer all the time in factories), the very nature of what it's like to work in those offices is different. Stop and think: Fifteen years ago, a typical office was an active, noisy place, with people walking purposefully about to converse with a co-worker, phones ringing with inquiries and orders, and lobbies full of visitors coming and going.

Now think about your most recent day in the office (or your attorney's or banker's office). What did you hear? Chances are ... nothing. Collaboration now happens largely in the digital world. Files are shared.

Multiple co-workers interact and move projects forward in virtual space. The phones are quiet because a company's information is online, so live inquiries are rarer. Orders get placed and paid for through the cloud.

The idea of "Putting a face to a name" used to be a huge reason for business travel. Now putting a face to a name involves pointing your browser to LinkedIn.

In short, the search box is becoming the human race's most fundamental organizing principle. We can find exactly what we want when we want it.

And unless we're trying to get served a stack of pancakes, we generally don't care where it's currently located. When collaboration is called for, we can find the very best collaborators on the planet offering us the lowest price for the services we need, and we can see them and talk with them and monitor their progress real-time all without ever once coming anywhere physically near them.

So here's your problem if you're a company owner or executive: You have lots of ways of getting things done. You can outsource, crowdsource, offshore, subcontract, use freelancing platforms — or you can hire employees and put them in your space.

But that will likely be both the most expensive and inflexible choice that your company can make.

Creating a physical space for a person to work in costs a lot of money — you can guesstimate $5,000 to $7,000 a year for a standard-sized manager's office in Class A space in downtown Denver. Because of the way most commercial real estate leases are structured, if you want office space, you're going to commit to paying for it for a very long time. You're locked in.

Now consider that we live in the most unpredictable and volatile economic climate we've seen in generations. Put yourself in the business owner's shoes: Do you want to stay lean and fast, or would you like to predict what you'll be needing and wanting four years from now?

Thinkers and investors much smarter than I (like Jeff Jordan from Silicon Valley's elite venture-capital firm Andreesen Horowitz) have written extensively about the coming destruction of the big-box retail and shopping mall business models courtesy of nimbly aggressive online retailers. Not just behemoths like Amazon.com, either.

Jordan cites specialty retailers that sell everything from tailored clothing to eyeglasses online and doesn't see a single skilled entrepreneur choosing to create a new retail brand exclusively in physical locations. He points out that the inherent financial leverage in real estate-based retailing models is devastating when sales and margins turn south, which is exactly what's happening to huge retailers such as Best Buy and J.C. Penney.

It's ultimately the same forces - search vs. proximity. Do I want what's handy, or do I want exactly what I want for the fewest dollars I can spend?

Am I right?

You don't have to take this argument to its extremes — that everyone will work out of their house or that all retailing will be done online — to know that the bloom is way off the rose in the commercial real estate world. Less demand means soft or weakening lease rates and increasingly squishy terms for tenants. Vacant retail space hurts remaining tenants and again puts downward pressure on both rates and terms.

No one said commercial real estate is going away. But I bet you can't create a long-term scenario where demand outstrips supply and investors win big.

The Wall Street Journal reported last week that “the American Federation of Teachers listed 34 executives at hedge funds and other investment firms that help lead or make contributions to organizations with a hostile stance toward traditional defined-benefit plans.”

This is just the tip of the iceberg.

Many public pensions hold these hedge funds, such as the much maligned SAC Capital via a Hedge Fund of Funds. This is the case with the Kentucky Retirement System who owns SAC via the Blackstone Hedge Fund of Funds.

Rolling Stone's Matt Taibbi had highlighted Daniel Loeb of Third Point LLC (also listed by the AFT) in his blog article last week which caused an uproar and forced Loeb to withdraw from a scheduled speaking engagement at a Council of Institutional Investors conference.

The WSJ quoted Jay Rehak, president of the Chicago Teachers' Pension Fund. "They come to us with their hand out, and then they are stabbing us in the back."

This is not the first time that money managers have been called to the carpet for taking a hostile stance toward traditional defined-benefit plans. Blackstone strategist Byron Wien got in big trouble in 2010 for saying that retirement benefits were too generous.

Pete Peterson, a Blackstone co-founder, put millions behind think tanks that are hostile to DB plans and to an effort to cut Social Security benefits.

Record Currency management's (which did have Kentucky and is still with the Maryland Public plan) founder Neil Record is a leader in the United Kingdom in reducing Defined Benefit plans.

Pension politics continues to evolve and the next likely target is Private Equity — and as we all know from Bain Capital, is very likely to have the same issues.

Unfortunately, investors have plowed over $2 trillion dollars into the hedge fund complex under the misguided assumption that they'd be able to deliver alpha and absolute returns to juice performance. In actual fact, so-called "alternatives" have done the opposite for the vast majority of their investors.

And before you say "But what about what's his name?", bear in mind that the rare few hedge funds that have consistently posted great returns would never in a million years take money from you. And the odds of you identifying an emerging manager from the ground floor who becomes Paul Tudor Jones are about the same as you making out with Kate Upton in an outdoor shower on a Tahitian beach. There are amazing and talented fund managers out there - but even the fund of funds industry has been proven ineffective in terms of being able to sort them out from the rest.

To retirees, the offers can sound like the answer to every money worry: convert tomorrow’s pension checks into today’s hard cash.

But these offers, known as pension advances, are having devastating financial consequences for a growing number of older Americans, threatening their retirement savings and plunging them further into debt. The advances, federal and state authorities say, are not advances at all, but carefully disguised loans that require borrowers to sign over all or part of their monthly pension checks. They carry interest rates that are often many times higher than those on credit cards.

In lean economic times, people with public pensions — military veterans, teachers, firefighters, police officers and others — are being courted particularly aggressively by pension-advance companies, which operate largely outside of state and federal banking regulations, but are now drawing scrutiny from Congress and the Consumer Financial Protection Bureau.

The pitches come mostly via the Web or ads in local circulars.

“Convert your pension into CASH,” LumpSum Pension Advance, of Irvine, Calif., says on its Web site. “Banks are hiding,” says Pension Funding L.L.C., of Huntington Beach, Calif., on its Web site, signaling the paucity of credit. “But you do have your pension benefits.”

Another ad on that Web site is directed at military veterans: “You’ve put your life on the line for Americans to protect our way of life. You deserve to do something important for yourself.”

A review by The New York Times of more than two dozen contracts for pension-based loans found that after factoring in various fees, the effective interest rates ranged from 27 percent to 106 percent — information not disclosed in the ads or in the contracts themselves. Furthermore, to qualify for one of the loans, borrowers are sometimes required to take out a life insurance policy that names the lender as the sole beneficiary.

LumpSum Pension Advance and Pension Funding did not return calls and e-mails for comment.

While it is difficult to say precisely how many financially struggling people have taken out pension loans, legal aid offices in Arizona, California, Florida and New York say they have recently encountered a surge in complaints from retirees who have run into trouble with the loans.

Ronald E. Govan, a Marine Corps veteran in Snellville, Ga., paid an interest rate of more than 36 percent on a pension-based loan. He said he was enraged that veterans were being targeted by the firm, Pensions, Annuities & Settlements, which did not return calls for comment.

“I served for this country,” said Mr. Govan, a Vietnam veteran, “and this is what I get in return.”

The allure of borrowing against pensions underscores an abrupt reversal in the financial fortunes of many retirees in recent years, as well as the efforts by a number of financial firms, including payday lenders and debt collectors, to market directly to them.

The pension-advance firms geared up before the financial crisis to woo a vast and wealthy generation of Americans heading for retirement. Before the housing bust and recession forced many people to defer retirement and to run up debt, lenders marketed the pension-based loan largely to military members as a risk-free option for older Americans looking to take a dream vacation or even buy a yacht. “Splurge,” one advertisement in 2004 suggested.

Now, pension-advance firms are repositioning themselves to appeal to people in and out of the military who need cash to cover basic living expenses, according to interviews with borrowers, lawyers, regulators and advocates for the elderly.

“The cost of these pension transactions can be astronomically high,” said Stuart Rossman, a lawyer with the National Consumer Law Center, an advocacy group that works on issues of economic justice for low-income people.

“But there is profit to be made on older Americans’ financial pain.”

The oldest members of the baby boom generation became eligible for Social Security during the recent housing bust and recession, and many nearing retirement age watched their investments plummet in value. Some are now sliding deep into debt to make ends meet.

The pitches for pension loans emphasize how difficult it can be for retirees with scant savings and checkered credit histories to borrow money, especially because banks typically do not count pension income when considering loan applications.

“The result often leaves retired pensioners viewed like other unqualified borrowers,” one of the lenders, DFR Pension Funding, says on its Web site. That, the firm says, “can make the ‘golden years’ not so golden.”

The combined debt of Americans from the ages of 65 to 74 is rising faster than that of any other age group, according to data from the Federal Reserve. For households led by people 65 and older, median debt levels have surged more than 50 percent, rising from $12,000 in 2000 to $26,000 in 2011, according to the latest data available from the Census Bureau.

While American adults of all ages ran up debt in good times, older Americans today are shouldering unusually heavy burdens. According to a 2012 study by Demos, a liberal-leaning public policy organization, households headed by people 50 and older have an average balance of more than $8,000 on their credit cards.

Meanwhile, households headed by people age 75 and older devoted 7.1 percent of their total income to debt payments in 2010, up from 4.5 percent in 2007, according to the Employee Benefit Research Institute.

Financial products like pension advances, which promise quick cash, appear especially enticing because their long-term costs are largely hidden from the borrowers.

Federal and state regulators are spotting fresh examples of abuse, and both the Consumer Financial Protection Bureau and the Senate’s Committee on Health, Education, Labor and Pensions are examining these loans, according to people with knowledge of the matter.

Though the firms are not directly regulated by states, officials from the California Department of Corporations, the state’s top financial services regulator, filed a desist-and-refrain order against a pension-advance firm in 2011 for failing to disclose critical information to investors.

That firm has since filed for bankruptcy, but a department spokesman said it remained watchful of pension-advance products.

“As the state regulator charged with protecting investors, we are aware of this type of offer and are very concerned with the companies that abuse it to defraud people,” said the spokesman, Mark Leyes.

Borrowing against pensions can help some retirees, elder-care lawyers say. But, like payday loans, which are commonly aimed at lower-income borrowers, pension loans can turn ruinous for people who are already financially vulnerable, because of the loans’ high costs.

Some of the concern on abuse focuses on service members. Last year, more than 2.1 million military retirees received pensions, along with roughly 2.6 million federal employees, according to the Congressional Budget Office.

Lawyers for service members argue that pension lending flouts federal laws that restrict how military pensions can be used.

Mr. Govan, the retired Marine, considered himself a credit “outcast” after his credit score was battered by a foreclosure in 2008 and a personal bankruptcy in 2010.

Unable to get a bank loan or credit card to supplement his pension income, Mr. Govan, now 59, applied for a payday loan online to pay for repairs to his truck.

Days later, he received a solicitation by e-mail from Pensions, Annuities & Settlements, based in Wilmington, Del.

Mr. Govan said the offer of quick, seemingly easy cash sounded too good to refuse. He said he agreed to sign over $353 a month of his $1,033 monthly disability pension for five years in exchange for $10,000 in cash up front. Those terms, including fees and finance charges, work out to an effective annual interest rate of more than 36 percent. After Mr. Govan belatedly did the math, he was shocked.

“It’s just wrong,” said Mr. Govan, who filed a federal lawsuit in February that raises questions about the costs of the loan.

Pitches to military members must sidestep a federal law that prevents veterans from automatically turning over pension payments to third parties. Pension-advance firms encourage veterans to establish separate bank accounts controlled by the firms where pension payments are deposited first and then sent to the lenders. Lawyers for retirees have challenged the pension-advance firms in courts across the United States, claiming that they illegally seize military members’ pensions and violate state limits on interest rates.

To circumvent state usury laws that cap loan rates, some pension advance firms insist their products are advances, not loans, according to the firms’ Web sites and federal and state lawsuits. On its Web site, Pension Funding asks, “Is this a loan against my pension?” The answer, it says, is no. “It is an advance, not a loan,” the site says.

The advance firms have evolved from a range of different lenders; some made loans against class-action settlements, while others were subprime lenders that made installment and other short-term loans.

The bankrupt firm in California, Structured Investments, has been dogged by legal challenges virtually from the start. The firm was founded in 1996 by Ronald P. Steinberg and Steven P. Covey, an Army veteran who had been convicted of felony bank fraud in 1994, according to court records.

To attract investors, the firm promised an 8 percent return and “an opportunity to own a cash stream of payments generated from U.S. military service persons,” according to the California Department of Corporations. Mr. Covey, according to company registration records, is also associated with Pension Funding L.L.C. Neither Mr. Covey nor Mr. Steinberg returned calls for comment. In 2011, a California judge ordered Structured Investments to pay $2.9 million to 61 veterans who had filed a class action.

But the veterans, among them Daryl Henry, retired Navy disbursing clerk, first class, in Laurel, Md., who received a $42,131 pension loan at a rate of 26.8 percent, have not received any relief.

Robert Bramson, a lawyer who represented Mr. Henry in the class-action lawsuit, said that pensioners too often failed to contemplate the long-term costs of the advances.

“It’s simply a terrible deal,” he said.

• 2012 at a Glance (PDF 54 kB)
• Messages from the Chairman and from the President and Chief Executive Officer (PDF 74 kB)
• Our Clients, the Depositors (PDF 77 kB)
• Management Report (PDF 923 kB)
• Contribution to Québec's Economic Development (PDF 360 kB)
• Responsible Investment Report (PDF 106 kB)
• Reports of the Board of Directors and Board Committees (PDF 201 kB)
• Board of Directors and Executive Committee (PDF 91 kB)
• Financial Report (PDF 165 kB)
• Combined financial statements (PDF 375 kB)

In my mind, 2012 is not important in and of itself. The year is important because it is part of a series of years. A period during which we have repositioned la Caisse so that we achieve our
mission in a world that is very different than the one of even five or six years ago. A few themes come to mind.

Balance. The new balance that we have struck between returns and risk. The simple but important idea of understanding thoroughly the assets that we invest in. To have the right tools and to master risks so that we can take the decisions needed to meet the expectations of our clients, our depositors.

Performance. The performance that we have delivered in a volatile and turbulent environment, thanks to an overall portfolio that is today better aligned with the world economy. Since we restructured our portfolios in 2009, our average annual returns: 10.7%. Proceeds from our investment activities: $50.7B. Which bring our assets to $176.2B.

Flexibility. The flexibility that we have built, which gives us the agility we need to seize the interesting investment opportunities that are available in today’s world – always with the goal of producing long-term returns for our depositors. This same flexibility is now permitting us to put in place new investment strategies to take advantage of changes in the structure of the world economy – once again, to the benefit of our depositors and Québec’s businesses.

Québec. Where we have significantly increased our investments, always prioritizing promising businesses and always with an eye to their development and expansion. In terms of numbers, over the last four years, we have undertaken $8.3B of new investments and investment commitments.

Beyond all of that, in my judgment, nothing demonstrates profound change better than when a group of people change how they think about themselves and the work they do. That’s what happened at la Caisse in 2012. And collectively, that’s the thing that we are most proud of.

A Broad Collaboration

We posed this question to our people: given the importance of the changes that are under way in the economic and financial environment, what are the guiding principles for our work in such a world?

Through a series of meetings over a period of many months, in small groups, large groups, in workshops and online, our people thought about and debated which convictions and which behaviours would best serve la Caisse.

Several hundred of our employees participated actively in this broad collaboration. The result is not a directive from top management. It is not a “little red book.”

It’s the affirmation of what our people are, of how they define themselves, and of what they aspire to be.

• Refocusing the Hedge Fund portfolio on strategies that complement the traditional asset classes, starting July 1, 2012.
• Creation of the Global Quality Equity portfolio to focus on companies with a stable, predictable return on invested capital, as of January 1, 2013. 
• Addition to the Private Equity portfolio of a relationship- investing mandate geared to development of long-term relationships with promising companies, as of January 1, 2013.
• Gradual closing-out of the Global Equity portfolio, starting July 1, 2013.
• A gradual transition from indexed management to active management for the Emerging Markets Equity portfolio, starting July 1, 2013.

• On January 1, 2012, the DEX Adjusted Long Term Government Bond Index was modified to increase the weighting of the Long Term Bond portfolio in provincial bonds.
• Since January 1, 2012, the benchmark for the Real Estate Debt portfolio has been the DEX Universe Bond Index. The sale of the international component of the portfolio was completed in 2011, which justified removal of the Giliberto-Levy portion (10%) of the benchmark index.
• On July 1, 2012, the Adjusted Aon Hewitt – Real Estate Index was modified to add the DEX 30 Day T-Bill Index, to reflect the cash held by the Real Estate portfolio.
• Since July 1, 2012, the benchmark of the Hedge Funds portfolio has been in transition. When the transition period ends on July 1, 2013, the benchmark index will go from 10 strategies to three: futures management, market-neutral and global macro.
• On January 1, 2013, the index of the Private Equity portfolio was changed to reflect the portfolio’s composition more accurately. The change was due to the addition of the relationship-investing mandate and the higher proportion of direct investments in companies. The index now consists of 50% State Street Private Equity Index (Adjusted) and 50% MSCI World Hedged.
• The Global Quality Equity portfolio was created on January 1, 2013. Its index consists of 85% MSCI ACWI Unhedged and 15% DEX 91 Day T-Bill. The benchmark index is intended to reflect a traditional equity market investment, but adjusted for the level of portfolio risk.

The substantial support provided by central banks, and the gradual reduction of systemic risks prompted the Caisse to reduce the rather defensive bias of the overall portfolio. The overall portfolio’s relative exposure to the equity markets went from an underweight position of more than $4 billion at the end of 2011 to an overweight position of $1.5 billion at the end of 2012. This change is the main reason for the evolution of the risk profile of the Caisse’s overall portfolio between the start and the end of 2012 (see Figure 32, p. 44).

In addition to greater relative exposure to the equity markets, the Caisse’s portfolio maintains its protection against an increase in interest rates. Despite this slightly procyclical positioning of the overall portfolio, its level of market risk continues to be moderate, from both  active and absolute standpoints.

The total amount of the incentive compensation (paid and co-invested) granted by the Board of Directors to Mr. Sabia is exactly the same as that granted in 2011. As Mr. Sabia's salary also remains unchanged, the total amount of his total compensation also remains the same. 

The OPSEU Pension Trust (OPTrust) today reported gross investment results of 10.1% for 2012, surpassing both its funding target return of 6.5% and its composite benchmark. Since its inception in 1995, the Plan has achieved an average annual rate of return of 8.6%. These solid results have helped OPTrust maintain its position as a fully-funded pension plan.

The Plan's net assets increased to $14.7 billion at year-end ($13.7 billion as at December 31, 2011) after paying over $745 million in pension benefits in 2012.

"The ongoing commitment to the Plan by its sponsors, Board of Trustees, employees and membership was key to the success of our program in 2012," said Bill Hatanaka, President and CEO of OPTrust. "Our investment results and fully-funded status demonstrate that, with strong sponsorship and prudent management, defined benefit is a highly effective model that can help people achieve economic security in retirement."

Investment results by portfolio

OPTrust's long-term diversification strategy, along with strong double-digit returns in its real estate, infrastructure and private equity portfolios were major contributors to its results.

The infrastructure portfolio led performance in 2012, with a return of 23.7%. The Plan's other alternative asset classes, private equity and real estate, had similarly good results, returning 20.5% and 17.9% respectively. The Plan also benefitted from the sharp recovery of global equity markets in the second half of the year, with its global equities portfolio posting a 17.8% return. Canadian equities generated a return of 9.1%.

Positive returns of 3.4% and 3.0% were generated from the fixed income and real return bond portfolios, respectively. The energy commodities portfolio posted a loss of -3.8%.

Funding position

The Plan's 2012 funding valuation shows that the Plan remained fully-funded as of December 31, 2012 with a surplus of $34 million after accounting for the Plan's $852 million rate stabilization reserves.

The valuation also identified $528 million in deferred investment gains, compared to $189 million at the end of 2011. These gains will be recognized between 2013 and 2016, further improving the Plan's funded status.

More detailed information about OPTrust's 2012 investment results, funding position and other activities will be available in its annual report, to be released later this spring.

About OPTrust

With assets of $14.7 billion, the OPSEU Pension Trust (OPTrust) invests and manages one of Canada's largest pension funds and administers the OPSEU Pension Plan, a defined benefit plan with almost 84,000 members and retirees. OPTrust was established to give plan members and the Government of Ontario an equal voice in the administration of the Plan and the investment of its assets, through joint trusteeship. OPTrust is governed by a 10-member Board of Trustees, five of whom are appointed by OPSEU and five by the Government of Ontario.

The Colleges of Applied Arts and Technology (CAAT) Pension Plan today announced an 11.8% rate of return for the year ended December 31, 2012, which increased the Plan’s net assets to $6.3 billion from $5.6 billion the previous year.

In its most recently filed valuation, the CAAT Pension Plan is 103% funded on a going-concern basis with a funding surplus of $347 million. The valuation is as at January 1, 2013, and has been filed with the Financial Services Commission of Ontario.

The 11.8% rate of return is gross of investment fees and expenses totaling 50 basis points. Since the economic crisis of 2008, the CAAT Pension Plan’s well-diversified investment portfolio has earned an average annual rate of return of 11.1% before expenses and 10.5% net of expenses.

Contributions to the CAAT Plan, shared equally by employees and employers of the Ontario college system, were $332 million in 2012, while income from investments was $624 million. The Plan paid $332 million in pension benefits for the year.

The CAAT Pension Plan has 21,400 members employed in the Ontario college system, which is made up of 24 colleges and five affiliated non-college employers, and 12,600 retired members with an average annual lifetime pension of $22,700. In 2012, members on average retired at age 62 after 24 years of pensionable service. The 630 members who retired last year collected an average annual lifetime pension of $36,800.

Created at the same time as the Ontario college system in 1967, the CAAT Plan assumed its current jointly sponsored governance structure in 1995. CAAT is a contributory defined benefit pension plan with equal cost sharing. Decisions about benefits, contributions and investment risk are shared equally by members and employers. The Plan is sponsored by Colleges Ontario, OCASA (Ontario College Administrative Staff Association) and OPSEU (Ontario Public Service Employees Union).

The CAAT Plan seeks to be the pension plan of choice for single-employer Ontario university pension plans interested in joining a multi-employer, jointly sponsored plan in the sector. The postsecondary education alignment and similar demographic profile of university and college employees makes the university plans an ideal fit with the CAAT Plan’s existing asset and liability funding structures.CAAT has been in exploratory discussions with individual universities, employer and faculty associations, and with government officials, about the feasibility of building a postsecondary sector pension plan that leverages CAAT’s infrastructure and experience, reducing costs and risks for all stakeholders.

“The proposal we’ve been discussing offers an immediate solution for those universities with pension funding problems or who want to better manage their risk. It builds a postsecondary education pension plan without recreating an administrative infrastructure and its associated costs and risks,” says Derek Dobson, CEO of the CAAT Pension Plan. “Our idea is a ready-made, long-term solution that limits contribution rate volatility and risks for universities and for colleges.”

The 2012 CAAT Pension Plan Annual Report will be available on the Plan website later this spring.


April 2, 2013: CAAT Plan announces ongoing surplus

Delivering retirement income security

The CAAT Pension Plan has filed the January 1, 2013 actuarial valuation with the regulators. The valuation shows that the Plan has a going-concern surplus of $347 million, up from $154 million at the last valuation (January 1, 2012). This means the Plan is 103% funded on a going-concern basis.

The valuation means ongoing stability for members. Read more

To outsiders, cross-country skiing may seem like a calm, low-stress activity. But many trails have unexpected challenges for even experienced skiers.

“There are trails with some short but terrifying hills. There are some where you can’t see some of the hill from the top,” says Julie Cays, chief investment officer of the Colleges of Applied Arts and Technology (CAAT) Pension Plan. “And you don’t have edges [as in downhill skiing], so you’re not carving your way down the hill. You just get on the tracks and go. It’s exhilarating.”

While Cays enjoys the sport today, it wasn’t so long ago that the thought of it made her freeze with panic. She was over 40 when she resolved to conquer her fears of heights and speed in order to spend more time with her family, all avid cross-country skiers. She met that goal through years of dedication and small steps: first going out with an instructor and then spending each weekend conquering the trails at her own pace. “I now seek out hills that are called things like Terminator and Eliminator and Vertigo,” she says proudly.

Having the confidence to ski up a hill is as important as being able to ski down it, Cays explains—even when you can’t see what’s on the other side. In many ways, this is an apt metaphor for pension investing.

The CAAT Pension Plan, a $5.5-billion DB plan whose members include employees at Ontario’s 24 colleges of applied arts and technology, has undergone some major changes over the past few years to ensure that it’s equipped to face the instability of investment markets. Chief among these changes—and what Cays views as her proudest career achievement—has been altering the way the fund’s investment committee looks at governance and risk.

“It’s not about focusing on what our investment managers are doing relative to the TSX, what bets they’re making. It’s how much we should have in equities, in infrastructure, in real return bonds.”

Cays says she’s drawn on her ability to take complicated but important pieces of information and present them clearly to help the fund’s investment committee, comprised mostly of college representatives without a formal investing background, understand where the risks are in the fund versus its liabilities. This, in turn, has helped the committee create policy designed to keep the plan on sound footing over the long term.

Despite her extensive track record of success over more than 20 years in pensions and investments—Cays worked with CIBC and the Healthcare of Ontario Pension Plan prior to joining CAAT in 2006—it wasn’t her first career choice.

“My dad was a chorister in the U.K. at Durham Cathedral [an icon of Romanesque architecture built in 1093]. Music was everywhere in our house. We sang in the church choir; I played the piano and French horn.”

When it was time to decide on post-secondary education, Cays considered studying math at the University of Waterloo in Ontario, hoping to combine the computer science elements of the program with her love of music.

“It turned out that I wasn’t all that good at the computer science part of the math program, so that changed,” says Cays, who instead earned a BA in economics and eventually became a CFA.

One of the most important lessons Cays has learned is that life throws a lot of curves, both personally and professionally. Her ability to adapt and change course has served her well over the years. “I’ve never been terribly good at plotting out either my career or my personal life, but I think I’ve made good choices.”

The definition of a hedge fund, people used to joke, was a fee structure in search of an investor to fleece.

However, four years on from the financial crisis, and with so far little to show for it, hedge funds’ notoriously high fees are looking less and less definable, let alone defensible.

Some investors now hope that the industry’s totemic “two and 20” fee structure – 2 per cent of assets and 20 per cent of returns annually: a formula that has made many managers fantastically wealthy – may finally be beginning to crack.

Challenging fees is no easy task for investors, however.

Thanks to the crisis, they may well have more clout than ever before when it comes to negotiating with managers, but they are also themselves more desperate. In a time of ultra-low bond yields and high equity volatility, hedge funds are proving an irresistible draw.

And as such, investing in hedge funds still seems to be a game rigged in the managers’ – and not the investors’ – favour.

“With any industry in its development, margins start out high. Then, as an industry starts to mature, firms start to compete on price,” says Jeff Holland, managing director of Liongate Capital, which has $2bn invested in hedge funds. “The hedge fund industry, for whatever reasons, has so far been very good at avoiding that path. Managers have been very good at defending their margin.”

According to data from Hedge Fund Research this month, industry assets rose by $122bn in the first three months of 2012 – the largest quarterly inflow in more than two years – to stand at $2.375tn. Hedge funds now manage more money than ever before.

With those large inflows, however, a shift has taken place.

Institutions – pension funds, insurance companies and endowments – are now the single largest group of hedge fund investors, accounting for close to three-quarters of the industry’s assets.

By comparison, the wealthy individuals and private banks that once dominated hedge fund investing and brought with them a more handshake-oriented, take-my-money-and-shoot-the-lights-out attitude are becoming bit-part operators.

Glitzy penthouse offices with Tracey Emin paintings and Jeff Koons sculptures are out, and institution-friendly sobriety is in.

“There are increasing numbers of sophisticated institutional investors who are questioning managers on fees as a result of both regulatory and investment pressure,” says Erich Schlaikjer, co-founder of $5bn quant fund Cantab Capital Partners, which recently launched a new, low-fee fund.

“Australian superannuation funds, as an example, are unable to pay the industry standard fees of two and 20. Investors are also used to paying less for scalable strategies – for example, those investing in large-cap equities,” he says.

There is every indication the trend is set to continue. According to a recent comprehensive survey of hedge fund investors by Deutsche Bank, 66 per cent of pension funds increased their hedge fund allocations in 2012, compared with just 19 per cent of private banks. Furthermore, 94 per cent of pension funds said they would increase or maintain their hedge fund allocations in 2013 (click image below).

“There is now a lot of flexibility on the manager side,” says Anita Nemes, global head of capital introduction at Deutsche. “It is really the institutional investors that are driving fee changes – they are the ones that are negotiating.”

The Deutsche survey also showed that, while on average, wealthy individuals targeted returns of 10 per cent from their hedge funds annually, institutional investors target just 8 per cent.

Institutions look not just for managers promising the big gains on investments, but for those with returns that are uncorrelated to broader markets, or else are consistent, with as little volatility as possible.

And if the expected returns are lower, they believe, then the fees should be too.

“The reality is that while we say we don’t negotiate on fees, if a North American pension plan comes to us looking to invest $200m, then we’re going to sit down and have a talk,” says the head of marketing for one of Europe’s biggest hedge funds, who declined to be named because discussing fees publicly is too sensitive an issue. “Anyone who says otherwise is lying to you.”

In particular, it is hedge funds’ management fees – the “two” – that are coming under pressure.

And with good reason: the average hedge fund has returned just 9 per cent in the past five years, meaning investors have paid more in management fees alone to their managers since the crisis than they have received in profits.

Janchor Partners, one of Asia’s most successful recent hedge fund launches, has a management fee which decreases as firmwide assets under management rise: incentivising the manager to concentrate on performance as a source of income, rather than asset gathering.

Even big, established blue-chip funds have not been averse to pressure.

In October, Caxton Associates, one of the world’s biggest macro hedge funds, cut its management and performance fee in a concession to the “tough investment backdrop” and changed investing “reality”. Caxton’s fees, though, started at three and 30. The company now charges 2.6 and 27.5.

“In a way, whether you are a hedge fund manager or in any other industry, the lesson is the same – quality commands a premium,” says Deutsche’s Ms Nemes.

He told me that part of their due diligence is to look at the internal rate of return (IRR) and how it has evolved as assets grow. In his own words: "It's important to track the dollar-weighted return of these funds. We ask them data going back since inception. If a manager can't provide us with their IRR, we don't even look at them. Also, if  alpha is shrinking as assets mushroom, we flag it and review their performance."

This pension fund manager told me he read Simon Lack's book criticizing hedge funds, enjoyed many parts but he didn't agree with everything in the book. He thinks that hedge funds play an important part in an institutional portfolio and I agree. I'm also careful not to throw the baby out with bathwater when it comes to hedge funds as I think many commentators just do not understand their role in an institutional portfolio.

A fall in asset-to-asset correlations could mean a good year for many hedge fund strategies, even though volatility is expected to remain relatively low, according to research from Axioma

Despite negative factors such as US sequestration, the Cyprus euro crisis and continued weak job growth in Europe and the US, risk has fallen globally. Markets are generally strong and predicted risk largely continued the decline that started a year ago, according to Axioma's first quarter 2013 quarterly risk review.

A decline in correlations between individual assets within markets as well as between markets globally was also reported by Axioma, a risk management solutions provider to the largest investors.

In contrast to the relatively positive performance of US and European markets, forecasts for China, Japan and Australia bucked the trend. Risk increased during the quarter, especially at the short horizon. For example, FTSE Japan in yen is now one of the riskiest benchmarks covered by Axioma compared with only a year ago when it was one of the least risky. China's forecast risk in US dollar for the CSI 300 now exceeds that of the euro crisis countries.

All of the benchmarks tracked by Axioma showed far lower risk forecasts at the end of the first quarter of 2013 compared with the end of the same quarter in 2012. The exception was Japan where short-horizon risk ended the first quarter more than six percentage points higher than a year earlier.

"We've finally reached the point where we are getting over the hangover of the global financial crisis and the European crisis," says Melissa Brown, senior director of applied research at Axioma (pictured). "Markets have been doing well in general. They've been going up relatively slowly. Investors seem to be gathering a little more confidence in equity markets. All of that comes together to drive equity risk lower. In addition it's something that feeds on itself as risk goes down," she notes.

"With volatility down, you're more likely to get more flows into the equity markets which in turn are likely to keep equity volatility down. There's still plenty to worry about if you want to worry but a lot of the headline concerns are already reflected in equity prices," Brown adds.

Another trend picked up by Axioma is low volatility investing. "We have seen a lot of interest in strategies that seek to be overweight or to buy lower volatility stocks. That kind of strategy, while it still did okay in the last 12 months, did worse than it usually does [in the first quarter]," she says. Low volatility trends are not working as well as previously while the trend towards momentum is "quite profitable", according to Brown.

Brown's research also shows that currency risk has risen, particularly in European currencies. "European currencies, the Japanese yen and the [South] Korean won have all seen a sharp increase in their volatility. Most other currencies have not." This is a trend she says is worth watching.

Another theme emerging in the first quarter of 2013 is a decline in correlations. As correlations fell, investors became better diversified, resulting in steadier returns. Asset-to-asset correlations fell to lows not seen in most markets for over five years.

This seems to have had an unusually large impact. "In almost all the markets we look at, correlations have gone very low. They are at five-plus-year lows as of the end of the first quarter," says Brown. "That's a big trend in terms of what it means for manager returns, particularly long/short returns."

The trend towards lower asset-to-asset correlations is a result of fewer concerns about markets in general, believes Brown. "We've gotten away from some of these overriding, overarching concerns about markets in general. We're seeing more differentiation in results from individual companies. We're seeing that's what drives these correlations down."

So far in the first month of the second quarter, Brown confirms there has been a small increase in correlations. "It hasn't been dramatic and it hasn't been across all markets. We've seen that increase in the US and in Europe in particular but not so much in Asia," she says, adding, "We expect the correlations will settle back down again."

Brown also confirms there has been a slight increase in risk at the start of the second quarter, particularly in the US and Europe. However, figures show the opposite happening in China and Japan.

"Risk is coming down in China. Japan had a very sharp increase in risk in early April but that has also died down. We are seeing different results in different markets. The theory is that we're no longer seeing one thing, one topic driving global markets. What's driving Asian markets is what's going on in Asia and concerns about economic growth slowing in China, We've seen risk in the yen go up quite a bit. Logically that should affect Asian markets and perhaps other markets less."

This decoupling of the Chinese and Japanese markets from the global scene is expected to continue "because you have different economic issues, different actions by central banks", affecting responses by investors. If this divergence of policy action continues, Brown predicts markets are likely to see "continued decoupling".

"In terms of diversification across portfolio, I think [decoupling is] good for global portfolio managers because they are getting better diversification when some markets behave differently from other markets."

Moving into the second quarter, Brown expects the "unusual calmness" of markets to continue for a while but with more volatility creeping into equity markets overall. "We're still looking at volatility that is dramatically below what we saw in 2008-2010. While the volatility may be slightly higher than in quarter one [in quarter two], most markets' volatility hasn't even reached the level it was at the end of 2012."

There may be a slight increase in risk in the second quarter, too, although Brown does not believe it will reach the levels experienced over the past few years.

If correlations remain low, either between equities within a specific market or between markets, hedge fund strategies could be in for a much better year in terms of performance. Research by Axioma has shown that "when correlations are very high, that's typically very bad for hedge fund strategies. They tend to do much better when correlations are low".

However, lower volatility may inhibit outperformance by managers. "The lower volatility may dampen the ability of the really good hedge funds to create outsized returns. But I still think they can create good solid and steady returns this year."

It’s the job he has coveted since the early 1980s when he was a doctoral student at the University of Western Ontario.

Immersed at the time in the threats central banks face from exchange rate gyrations and global shocks, Stephen Poloz wasn’t shy about his ultimate ambition.

“As a PhD student, he always said his goal was to be the Bank of Canada governor,” said Michael Parkin, Mr. Poloz’s PhD thesis supervisor and now a professor emeritus in economics at Western.

Now Mr. Poloz, 57, president and chief executive officer of Export Development Canada since 2011, inherits many of the economic challenges that were the stuff of his PhD thesis, a high dollar and the constant threat of global shocks.

Part of what burnished Mr. Poloz’s resume in the eyes of the Conservative government was his firm guidance of the EDC through the global financial crisis.Ottawa turned to Mr. Poloz and the EDC to help flood the economy with liquidity as it lurched to halt, allowing the Crown corporation to lend to domestic companies for the first time, not just exporters. Over the next four years, EDC’s assets would to $36.2-billion in 2012 from $23-billion in 2007.

“The answer may be that the minister would like to see a governor with more experience with dealing directly with the private sector,” said economists at CIBC World Markets.

“Mr. Poloz has this experience along with a good understanding of the bank’s work given that he spent 14 years within the bank, so in many ways in the eyes of the Finance Minister he brings more to the table and is not quite the ‘outsider.’ Also, helping here is the recent federal government’s focus on trade, and the potential view that with his recent experience as the head of the EDC, he will be better positioned to provide leadership on that front,” the economists said.

Mr. Poloz eventually went to work at the Bank of Canada, but his driving ambition to become governor led him to leave the bank in the early 1990s, when he was considered a rising star.

“He couldn’t see his way to the top,” Prof. Parkin said, adding that Mr. Poloz wanted to be at the top, somewhere, so he moved on.

“I don't think his heart ever left the Bank [of Canada],” added Conference Board of Canada chief economist Glen Hodgson, who worked as Mr. Poloz’s deputy economist at EDC from 2001 to 2004.

Mr. Poloz would then spend five years in the private sector, working as editor of the Montreal-based Bank Credit Analyst. In 1999, he became chief economist at EDC, the federal Crown corporation that does export financing.

Those who know him well say Mr. Poloz, a native of Oshawa, Ont., is a highly competent manager and economist, with a passion for the global economy – a perfect fit for the job given the trade challenges that Canada faces. He’s also an avid golfer and Star Trek fan.

An EDC official, who works closely with Mr. Poloz, called him a perpetual optimist and a “glass half-full” kind of guy.

“In his heart of hearts he’s a global economist. So it’s a natural,” the executive added, characterizing him as a small-c conservative, neo-classical economist.

Doug Williamson, a leadership consultant who works with EDC’s top executives, said Mr. Poloz’s greatest strength is his pragmatism, which he suggested comes from his upbringing as the son a General Motors line worker in Oshawa.

“He’s got a common-sense approach. He’s an everyday guy,” Mr. Williamson said.

Mr. Hodgson of the Conference Board added that Mr. Poloz was “a great boss.” Speaking from Winnipeg, Mr. Hodgson said “he's a serious, creative, innovative economist.” By “innovative” he means they tried out new ideas, all with the aim of “supporting wealth creation in Canada.”

Elliot Lifson, vice-chairman of Montreal-based Peerless Clothing Inc. and an EDC director, called Mr. Poloz an economist with “street” smarts.

“Not that I’m excited about economists, but he’s an economist who knows what’s going on,” Mr. Lifson said. “He doesn’t just sit in his ivory tower.”

And unlike Tiff Macklem, 51, the bank’s senior deputy governor who spent his entire career in government, Mr. Poloz has a mix of both private and public sector experience.

“He's a good mix of someone who had time within the walls of the bank, and outside the walls,” said Sébastian Lavoie, Montreal-based economist at Laurentian Bank of Canada and former economist at the Bank of Canada.

Prof. Parkin, who supervised Mr. Poloz over the course of four or five years, describes him in quintessentially Canadian characteristics. He said he’s “very smart, a quiet-ish sort of person, not a show-off, subdued, a low-profile sort of guy, careful, clever, thoughtful – all good qualities.”

Mr. Poloz's approach to writing his PhD offers a window into his mind. His doctoral dissertation – the challenges for the conduct of monetary policy arising from exchange rates and global shocks – was “empirical, statistical, thorough and very rigorous,” Prof. Parkin said.

It was a “well-thought-out piece of work,” which didn't require many revisions, Prof. Parkin says, something he still remembers, three decades later.

And Prof. Parkin, who also knew Mr. Macklem at Western, agrees with the Conservative government that Mr. Poloz was the better candidate. “He [Poloz] would have the edge in terms of a really rigorous mind, a focused, clear-headed view of how the economy works and how to make it better,” he said.

The Directors of the Bank of Canada appointed under Section 9 of the Bank of Canada Act today announced that they have appointed Stephen S. Poloz as Governor of the Bank of Canada for a seven-year term, effective 3 June 2013. Mr. Poloz will succeed Mark Carney, who is leaving the Bank of Canada on 1 June 2013.

"After pursuing an exhaustive domestic and international search to find the best candidate for this important and challenging role, the Board ultimately found such an individual in Stephen Poloz,” said David Laidley, Chair of the Special Committee of the Board of Directors. "Mr. Poloz has significant knowledge of financial markets and monetary policy issues and extensive management experience. We are confident Mr. Poloz will make an outstanding contribution to the work of the Bank and uphold its reputation as a leading central bank.”

A native of Oshawa, Ontario, Mr. Poloz graduated from Queen's University in 1978 with a bachelor's degree in economics. He received a master’s degree in economics in 1979 and a PhD in economics in 1982, both from the University of Western Ontario. Mr. Poloz first joined the Bank of Canada in 1981, and occupied a range of increasingly senior positions over a fourteen year span, culminating in his appointment as Chief of the Bank’s Research Department in 1992. Mr. Poloz joined Export Development Canada in 1999 as its Chief Economist. He was appointed President and Chief Executive Officer of EDC in January 2011, a position in which he served until his appointment as Governor of the Bank of Canada.

On behalf of the directors, Mr. Laidley thanked Governor Carney for his dedicated service to the Bank and to the Canadian public during an extremely trying period for the global economy, and wished him well in his future role as Governor of the Bank of England.

...while Tiff Macklem is the name circulating as Carney's successor, I hope the Canadian government expands its search to include people like Steve Poloz, President and CEO of Export Development Canada, and former Chief of research at the Bank of Canada.

I worked with Steve at BCA Research and think highly of him on a professional and personal basis. Not sure he wants the job at this stage of his career, but he's the ideal candidate to steer our central bank in the difficult years ahead.

Late last year, federal and provincial finance ministers met to discuss plans to expand the Canada and Quebec Pension Plans (CPP and QPP). This discussion was largely lost in the pre-Christmas buzz, but holds massive implications for entrepreneurs and working Canadians.

Of course, the concept of CPP expansion has been widely discussed in media stories and columns, typically with the focus on the need to force Canadians to save for their own retirements and the benefit of the low administrative costs associated with CPP. While entrepreneurs support the current CPP model, they are deeply concerned about the costs associated with any expansion of benefits.

Last week, CFIB issued an update of its Forced Savings report, which originally looked at the impact of an expanded CPP/QPP in 2010. The latest report examines the so-called 10-10-10 proposal for CPP/QPP expansion. This plan would hike CPP benefits by 10 percentage points from 25% to 35% of maximum pensionable earnings (MPE), raise the MPE by $10,000 from today’s $51,100 to $61,100, and implement all of this within 10 years.

Although this proposal contemplates a more modest increase than what the Canadian Labour Congress proposed in 2010 — which called for a doubling of benefits — the costs would be substantial nonetheless.

• Employees would pay up to $1,100 more a year in premiums.
• Employers would pay up to $1,100 more a year, per employee.
• The self-employed would pay up to $2,200 more a year (they must pay both shares of CPP).
• Higher labour costs would lead to 700,000 person years of lost work.
• Overall wages would be forced down by 1.5%.
• Federal and provincial governments’ debt-to-GDP ratios would increase by 2% and 1.2%, respectively.

These should be major concerns for all working Canadians and the businesses, non-profit or government that employs them. While all of us would love to retire with additional CPP/QPP benefits, we need to look a lot deeper.

For instance, with the 10-10-10 plan signing us all up for 10 straight years of CPP hikes, we can all expect a drop in our take-home income on Jan. 1 of each year. And I wouldn’t count on your employer giving you a raise to offset the added CPP costs. Many will struggle to cover off the increase in their share of CPP costs. And, of course, hardest hit of all will be the self-employed as they already pay double the amount of everyone else.

On top of that, we should really question how much benefit we will receive should CPP/QPP rates go up. Even the Canadian Labour Congress, which is one of the big unions pushing for this kind of change, admitted the full benefits of an increase wouldn’t take effect for 40 years. That means many people currently working will never see the full benefits of this annual tax hit. For small businesses struggling through a fragile economy, it would increase payroll costs and cause some to cut staff, others to reduce work hours.

The question of who would support such a move was one we puzzled over. After all, it’s largely been public sector unions calling for a CPP/QPP hike, and because of the way public sector pensions are calculated, if CPP/QPP went up, public sector workers wouldn’t get any more money. The real motivation can be found in the massive unfunded liabilities that exist in several public sector pension plans across the country. A CPP/QPP hike would actually reduce government’s pension liabilities, masking the problem of overly generous plans. Keeping CPP expansion in the news helps government unions divert attention away from their own gold-plated plans.

Unfortunately, government unions have been quite successful in getting provincial finance ministers to do their bidding. Most are calling for a CPP expansion and, with a meeting around the corner, CFIB is working hard to let ministers know that small business owners are overwhelmingly opposed to any mandatory expansion in CPP benefits.

To this end, CFIB has launched a web campaign, titled All signs point to trouble, to educate Canadians about this issue. You can calculate the potential cost to yourself, and express your opinion through an online petition. Go to cfib.ca for more information.

The provinces are pushing the federal government toward a decision on this issue at a meeting of finance ministers in June. But ordinary Canadians hold the cards. If they stay silent, it is very possible provincial finance ministers will support a hike. But if they make it clear to provincial decision-makers they won’t stand for a self-serving cash grab, we can stop this ill-advised idea from becoming reality.

This June, Finance Ministers from across Canada will meet to decide whether or not to expand the Canada Pension Plan (CPP). An overwhelming majority of the Canadian public support CPP expansion, as does an ever-growing body of seniors' groups, pension experts, academics and even financial industry leaders.

The Canadian Labour Congress (CLC) plan would gradually phase-in a doubling of CPP benefits, which currently provide retirees with a maximum of about $1,000 per month (though the average retiree receives just over $500 per month). The CLC plan would see these amounts double.

CPP expansion is an efficient, well supported, affordable and much-needed way to ensure that all workers can retire with dignity and security. Here are ten reasons why expanding the CPP is the best way to ensure retirement security for all Canadians.

1) Expanding CPP would benefit all workers. As participation in the CPP is virtually universal, private sector, public sector, unionized and non-unionized workers would all benefit from an expanded CPP. However, the workers who would benefit most from CPP expansion are the two in three Canadian workers (more than 11 million in total) who currently lack a workplace pension plan.

2) Canadians are unable to save enough for retirement in our current system. Fewer than one in four Canadian tax filers contributed to an RRSP last year. Membership in good workplace pension plans has been on the decline for decades. Study after study shows that most Canadians cannot save enough for a decent retirement. A recent CIBC study demonstrated that this problem will worsen as each future generation of workers enters retirement. Expanding the CPP would ensure that Canadians have a better chance for a dignified and secure retirement.

3) CPP provides the security of a defined benefit pension plan. The risk-pooling and defined benefit characteristics of a large pension plan like the CPP ensures that individual retirees will know the amount of their monthly retirement pension in advance. This relieves individuals from having their quality of life in retirement tied entirely to the ups and downs of the market. Within the CPP, investment decisions and risk tolerance assessments can be made by qualified investment professionals, relieving Canadian workers from having to make these difficult decisions. CPP benefits are also fully indexed, so your purchasing power will be preserved throughout your retirement.

4) CPP benefits are portable across jobs and provinces. With CPP lifetime contributions all flow into one CPP payment (or benefit), even across a career of different jobs in different jurisdictions in Canada. With an increasingly mobile labour market, the importance of portable public pension plans like this will only grow.

5) CPP expansion would further reduce poverty among seniors, which would relieve pressure on the public purse. Too many Canadian seniors are living under or near the poverty line. One in three Canadian seniors currently receives payments from the Guaranteed Income Supplement (GIS) – the means-tested federal pension only available to low-income seniors. This program will cost the federal government nearly $10 billion this year alone. Allowing Canadian workers to save more for their own retirements through CPP expansion would relieve fiscal pressure from this federal program and similar programs at the provincial and municipal levels.

6) Low management expenses for CPP mean more of your hard-earned pension contributions will be used to fund your retirement. Canadians pay some of the highest mutual fund fees in the world. Over the years, these high fees mean a significant portion of your potential retirement nest egg is going to banks and money managers. The CPP's extremely low fees ensure that your CPP contributions will be more efficiently used to fund your retirement.

7) CPP expansion is affordable and will bring economic benefits. Some business groups and right-wing think tanks argue that we cannot afford to expand CPP, citing potential negative impact on employers. However, the last time CPP contribution rates were increased, in the late 1990s and early 2000s, the national unemployment rate actually fell. The contribution increase needed to fund a full doubling of CPP benefits is modest and affordable and would be phased-in gradually, leaving workers and employers ample time to adjust. The Finance Ministers' own research is clear that CPP expansion will bring long-term economic benefits to Canada, as retirees would have more money to spend in our economy.

8) A few short years after the financial crisis, the CPP remains entirely sustainable. Though Finance Minister, Jim Flaherty is blocking CPP expansion, even he can't deny that is fully sustainable. Federal pension actuaries, the OECD and numerous pension experts all say the same thing. The CPP has weathered the financial crisis, has a $173 billion investment fund, and is projected to be able to fully meet its obligations over a long 75 year projection period. Any expansion of CPP would be fully pre-funded by increased contributions before the expanded benefits begin to be paid out, ensuring ongoing sustainability of the CPP.

9) Canada's public pension system is modest by OECD standards. We currently pay much less into our public pensions than most OECD countries and our public pension system replaces less pre-retirement income in retirement as well. A modest expansion would bring Canada more in line with other advanced countries.

10) Canadians want an expanded CPP. Polling data shows that 75 per cent of Canadians support CPP expansion, even when they are presented with figures on the increased contributions required from them to double CPP benefits. Eight in ten provincial governments have indicated they are supportive of CPP expansion. Despite these high levels of public support, several provincial governments are yet to commit to expansion and the federal government has hinted at additional, unnecessary roadblocks it may introduce in the way of CPP expansion. These governments stop obstructing and should listen to Canadians by implementing CPP expansion without delay.

Please let your provincial Finance Minister know you support CPP expansion. Visit cupe.ca/pensions to get involved!

Canada’s Public Sector Pension Investment Board is buying the airports unit of construction group Hochtief in a deal valued at $1.4-billion (U.S.).

The division – Hochtief AirPort GmbH– has interests in the airports of Athens, Budapest, Dusseldorf, Hamburg, Sydney and Tirana.

The deal, which is retroactive to Jan. 1, 2013, is expected to close in the second half of 2013.

Like its fellow public pension plan managers, Montreal-based PSP Investments is out to diversify its portfolio, with increased activity in infrastructure, real estate and private equity.

Earlier this year, it bought a 50-per-cent stake in the TD Canada Trust office tower in downtown Toronto from OMERS for $465-million (Canadian).

For its part, Hochtief is selling assets in airports and real estate as part of a shift to a focus on ground transportation and energy infrastructure projects.

Hochtief is controlled by Spain’s Grupo ACS.

“The transaction is the result of a very competitive tendering process. We will use the released funds as planned to reduce debt and to invest in the operating infrastructure business,” Hochtief chief executive officer Marcelino Fernandez Verdes said in a news release Tuesday.

“Hochtief AirPort is passing into the hands of a long-term and trustworthy investor which will continue to support the airports business in a responsible manner,” said Peter Sassenfeld, chief financial officer and member of Hochtief’s executive board.

PSP Investments had net assets totalling $64.5-billion at the end of March, 2013. It manages investment portfolios for the federal Public Service, the Canadian Forces, the RCMP and the Reserve Force.

Hochtief AG, Germany’s largest construction company, agreed to sell its airports division to Public Sector Pension Investment Board of Canada as it narrows its focus to building.

The deal values the business, which has stakes in airports in Athens, Budapest, Dusseldorf, Hamburg, Sydney and Tirana, at about 1.5 billion euros ($2 billion) and Hochtief will get 1.1 billion euros as some shares are held by business partners, the Essen, Germany-based builder said in a statement.

“The price makes it look more like a gift,” said Marc Gabriel, an analyst at Bankhaus Lampe KG. “In the end, there’s not much left for the shareholders because no extraordinary result was achieved with the sale. OK, they managed to sell it after almost four years, but the price is not sexy.”

Chief Executive Officer Marcelino Fernandez Verdes, who took over in November and comes from majority owner Actividades de Construccion & Servicios SA of Spain, is reversing a decade- long strategy of expanding into services. Hochtief, scheduled to report first-quarter earnings today, is also looking into selling its real-estate development, facility and energy- management units.

“You can’t generate much margin with infrastructure and building and you have to take on high risk,” said Bankhaus Lampe’s Gabriel, who has a hold rating on the stock. “That puts a big question mark on whether it will work to completely focus on building again.”

Beating Estimates

Hochtief predicts a full-year pre-tax profit of between 600 million euros and 680 million euros after the sale of the airports, with net income reaching between 180 million euros and 220 million euros, it said today. It had earlier forecast net income of between 174 million euros and 190 million euros. The forecast excludes restructuring costs.

First quarter pre-tax profit climbed to 123 million euros from a year-earlier loss of 92 million euros. The average estimate of three analysts surveyed by Bloomberg was 111 million euros.

Hochtief shares rose 5.1 percent to 56.11 euros as of 10:15 a.m. in Frankfurt trading, valuing the company at 4.3 billion euros. Before today, the stock had risen 22 percent since the start of the year, while the Stoxx 600 Construction and Materials Index gained 4.2 percent.

Several Attempts

In a failed attempt to sell its six airports last year, bidders including Vinci SA (DG), Europe’s biggest builder, and China’s HNA Group, offered more than 1 billion euros for the unit, while Hochtief valued it at as much as 1.6 billion euros, people familiar with the process said at the time.

“The transaction is the result of a very competitive tendering process,” and Hochtief expects no significant “extraordinary earnings impact from the transaction,” it said in the statement. The sale to PSP Investments, based in Montreal, is subject to certain conditions and the transaction is expected to close in the second half of the year.

Hochtief may pay a special dividend following its disposals, Fernandez Verdes said when presenting 2012 full-year results in February.

Hochtief, the builder of Frankfurt’s Commerzbank tower, plans to dedicate the proceeds from unit sales to repaying debt, investing in the infrastructure division and entering new industries, it has said.

“The reason they give for the sales is to bring down net debt,” Gabriel said. “The net debt of Hochtief isn’t really the problem, it’s more the net debt of ACS.”

As little as a year ago, Brazil’s greatest concern was the currency war – a tsunami of international funds that it believed was threatening to inundate its financial markets and those of other emerging countries.

Now, Brazilian real interest rates have fallen so low that, in a dramatic reversal, the country’s own pension funds are looking abroad. While their initial offshore investments will not amount to anything like a tsunami, it marks the start of what may prove to be an important step in the maturing of Brazil’s financial industry.

Global asset managers, investments banks and international private equity funds are flocking to the country’s pension funds to try to win a share of the potential outward flows, which are estimated to be between $25bn and $45bn.

“Pension funds are very interested in doing this kind of diversification as they have very tough actuarial targets,” says Carlos Massaru Takahashi, chief executive of Brazilian fund manager BB Gestão de Recursos DTVM, which has more than R$400bn in assets under management. “Probably this investment will happen this semester.”

Not only are Brazilian pension funds looking for higher returns potentially offered by developed markets such as the US but they are also seeking to broaden portfolios centred on Brazilian government bonds and local equities.

“There is a part of this that is a search for returns and that will continue to be our objective, but there is also a part that is about global diversification from the perspective of risk management,” says Mauricio Wanderley, director of investments and finances at Valia, the pension fund of the world’s largest iron ore exporter Vale.

The sudden move towards diversification marks a turning point for a country that until now has been batting away foreign fund inflows by implementing currency controls and other defensive measures.

Brazil’s government was worried that hot money inflows, fuelled by loose monetary policy in developed markets, were driving up its exchange rate against the US dollar and weakening the ability of domestic industry to compete.

But then followed a historic fall in Brazil’s benchmark interest rate, the Selic, from 12.5 per cent in mid-2011 to an all-time low of 7.25 per cent. At the same time, inflation has crept up, reducing the real interest rate sharply.

For Brazilian investors, addicted to the easy pickings offered by the country’s high interest rates – a legacy of its earlier period of runaway inflation – the sudden decline has come as a shock. Rather than keeping most of their money in liquid government treasuries or other fixed income instruments, they now must look for alternatives if they are to meet their targets for returns.

Brazil’s pension fund industry body, Abrapp, said the country’s funds had 61.7 per cent of their money in fixed income as of December 31 last year and the remainder in shares and mixed funds.

With interest rates low and the local market underperforming – the Bovespa index is down 9 per cent this year compared with a 14 per cent gain in the S&P 500 – the incentive to begin investing abroad is compelling.

“What we are seeing is these big pension funds are going global,” says André Laport, partner at Goldman Sachs in São Paulo.

The tentative moves by the industry to begin looking overseas are provoking a feeding frenzy among foreign asset managers, pension funds and investment banks looking for a share of this new and unexpected source of money.

With assets estimated by JPMorgan at up to about $450bn, there is potential under the present law for 10 per cent of this, or up to $45bn, to flow into overseas markets.

“There is a lot of interest here in the US from private equity players,” says Sanjiv Kapur, a lawyer at Jones Day. He says he will be organising a seminar for private equity groups and pension funds in the US alongside a Brazilian law firm.

However, fund managers in Brazil caution the process will be gradual. Not only does the law require fund managers to form groups of four or more institutions, which would then invest in one Brazilian fund that in turn places that money abroad, they also need to familiarise themselves with offshore investment strategies.

Bankers believe these will at first be conservative, such as investing in the S&P 500, before they begin to pursue more aggressive strategies. Cassio Calil, president of JPMorgan Asset Management in Brazil, says pension fund managers in the country will need to analyse an array of considerations, from currency risk to the fact that investing in multinationals in developed countries would see some of their money returning to Brazil through these companies.

Then there is the fact that, though Brazilian benchmark interest rates have fallen, many pension funds are still making good returns at home. The concern is whether these will be sustainable in the future as Brazilian interest rates continue to move lower.

Who says US public funds can't get anything done?

In one morning, the five-member Oregon Investment Council, which manages the state's $63 billion employee retirement fund, signed off on three new private equity allocations totaling almost $1 billion.

Two of the allocations focus on distressed debt. The council committed $300 million to Apollo Global Management's new fund (number VIII), which will "target opportunistic buyouts, corporate carve-out transactions, and distressed investments," according to council documents. This is Oregon's third investment with Apollo since 2006—a relationship now worth nearly $1 billion to the private equity giant.

With the next investment decision of the day, the council didn't diversify, but instead doubled down on its last bet. Lone Star Partners, a $33 billion distressed assets specialist, secured $300 million from Oregon for its new fund. According to the investment proposal, Lone Star VIII will "seek to invest in distressed investment in loans and securities, including single family residential, corporate and consumer debt products, as well as financially-oriented and asset-rich operating companies.

The pension fund has an even longer relationship with Lone Star than Apollo: it has invested in every offering since 1995, committing a total of $2.17 billion over the last 18 years.

Finally, the council rounded out its morning with a $250 million allocation to Blackstone's tactical opportunities program. The managed account will pursue "a highly flexible investment approach" across nearly any asset type, "in order to generate superior risk adjusted returns with a focus on capital protection."

Blackstone and the New Jersey pension fund created the first such program together in 2011. While it is too soon to tell if the "tac-ops" structure is a robust, profitable one for the long term, Blackstone's launch of a full program indicates the funds have been a success thus far.

As for distressed debt, a number of CIOs and public pension investors have told aiCIO that the so-called "low hanging fruit" has largely been picked. However, according to Segal Rogerscasey data, $350 billion in corporate loans and bonds will need to be refinanced over the next six years.

Wednesday was a power breakfast morning for managers of state pension fund investments as several giants of the private equity industry successfully pitched new funds and went home with nearly $1 billion in commitments from Oregon's Public Employee Retirement Fund.

The Oregon Investment Council, the five-member citizen council that oversees pension investments, has slowed its pace of investing in illiquid private partnerships since the global downturn, as its allocation to the sector is above its target. But council members haven't lost their enthusiasm for private equity, and are anxious to diversify their investments by vintage year and cement relationships with top managers by investing each time they raise a new fund.

On Wednesday, the council made a $300 million commitment to a $12 billion buyout and distressed debt fund being raised by Apollo Global Management. It committed up to $400 million into a fund being raised by Lone Star to invest in distressed debt and real estate assets. And it committed $250 million into a "tactical opportunities fund" being raised by the Blackstone Group to make opportunistic investments.

Oregon has history with all three firms. It has invested in two prior Apollo funds. One is showing promising results, while the other is underperforming its target, in part because it badly overpaid in its bubble-era buyout of the casino company Caesar's Entertainment. Apollo undertook that $31 billion deal in 2008 in partnership with a buyout fund managed by Texas Pacific Group. Oregon was an investor in the TPG's fund, too, so it has exposure to the deal from both sides.

Apollo's slightly rumpled chairman, Leon Black, said Apollo was historically a conservative buyer, paying lower buyout multiples than competitors, and thriving during periods of market distress. He said the firm lost its discipline in the Caesar's deal. It is hoping to salvage a decent return by cutting costs and buying back discounted debt to de-leverage Caesar's balance sheet. It has also bundled Caesar's highest growth businesses into a separate entity to raise capital without the taint of company's current debt load.

During its public comment period, the council heard from a representative of the union that represents hotel workers at Caesars. Alyssa Giachino said workers were appalled that Apollo and TPG had paid themselves several hundred million dollars in transaction and monitoring fees from Caesar's for ongoing advisory and management services since the acquisition. In effect, Giachino said, the private equity funds had recovered their own investments in the Caesar's deal, while limited partners such as Oregon were left with a stinker of an investment, and hotel workers were losing their jobs.

The council voted unanimously to invest $300 million in Apollo's new fund, on the condition that all transaction and monitoring fees in the new fund are refunded to limited partners.

The council also heard from John Grayken, the founder and chairman of Lone Star. Lone Star is the largest manager of real estate investments by Oregon's pension fund. The state has committed almost $2 billion in funds managed by the firm since 1997. They have been among its most consistently profitable investments, though about half the profits are still unrealized. The new fund would continue investing in troubled loans backed by residential and commercial real estate, including assets that European banks are looking to unload as they unwind the big loan problems on their balance sheets.

Oregon's Lone Star investments have not been without controversy, however. In 2011, two public employees from Oregon sued Lone Star and trustees of the pension fund, including all the individual members of the investment council and PERS board, for breach of fiduciary duty. The lawsuit focused on the state's due diligence" or lack thereof -- before and after Lone Star and its top executive in South Korea were convicted in 2008 of stock manipulation in connection with their buyout of the Korea Exchange Bank.

At the time, the lawsuit alleged, council members essentially ignored the Korean lawsuit, accepting Lone Star's explanation that it was politically motivated and without merit. Lone Star's top executive in Korea was ultimately convicted, though the company is now suing the Korean government for interfering in its investments.

Earlier this year, Marion County Circuit Court Judge Joseph Guimond dismissed the public employees' lawsuit against Lone Star and the council members, saying the plaintiffs lacked standing. On Wednesday, council chair Keith Larson, an executive for Intel Capital, essentially apologized to Grayken, and described the lawsuit as "shameful and disgusting" and a waste of taxpayer dollars.

Jason Seibert, the lawyer for the public employees, said they agreed to drop an appeal after the state said it would waive its right to go after the several hundred thousand dollars in attorney's fees.

"DOJ essentially muffled these folks through legal extortion," Seibert said. "It's not like my clients were backed by a billion dollar hedge fund."

The lawsuit delayed Oregon's ability to commit to the new fund, which is oversubscribed by other investors looking to make investments. The council approved up to a $400 million investment in the fund Wednesday, hoping they will eventually get half that.

Treasurer Ted Wheeler was the only vote on the council against the Lone Star commitment. He said distressed real estate investing, particularly with the new fund's focus on Europe, was a riskier business than he wanted to get into at this time.

A glitzy Manhattan real-estate crowd gathered in March to join Barry Sternlicht, chief executive of Starwood Capital Group, at a party celebrating the launch of condo sales at the Baccarat Hotel & Residences, a new development across from the Museum of Modern Art.

The 50-story glass tower, expected to open in 2014 and feature a five-star hotel and Baccarat chandeliers in each condo, is the sort of development rarely seen in the years after the financial crisis. But riskier projects are starting to move forward again, thanks in part to a resurgence of so-called opportunity real-estate funds.

These private-equity funds invest in riskier real estate, such as half-empty office buildings, distressed properties weighed down with debt, or pricey new construction that must find well-heeled buyers to profit. The Baccarat, which is being developed by Starwood and Tribeca Associates for $400 million, is counting on selling condos for as much as $60 million each.

For most of the downturn, these real-estate funds struggled to raise money because their main source, big pension funds, were risk-averse and still licking their wounds from when these bets went wrong. The California Public Employees' Retirement System, the largest U.S. public fund with $263 billion, lost nearly half the value of its real-estate portfolio between July 2008 and June 2009—more than $10 billion.

But these days, many pension funds are reconsidering—or trying for the first time—riskier real estate in an effort to boost returns at a time of low interest rates. These funds project up annual returns as much as 20%.

A pension fund has to "take more risk to get double-digit returns," says Bob Jacksha, chief investment officer of the New Mexico Educational Retirement Board. His $10 billion fund recently committed $50 million to Crow Holdings, which manages opportunity funds.

Pension funds also have been emboldened by the steady rise of commercial-property values since 2009 and a winnowing of some of the worst-performing funds. The economy shows signs of stabilizing after a rough period, and borrowing for real estate is cheap with rates so low.

"Many prices have fallen quite a bit, so there's now a lot of opportunity," says Edward Schwartz, a principal at real-estate consultant ORG Portfolio Management. But some pension funds, he adds, "also have short memories."

In recent months, a public-employees fund in Texas, Kentucky's main public fund and an Oklahoma City police fund all have made commitments to opportunity funds.

Such funds raised about $25 billion in 2012, nearly double the amount in 2009, according to research firm Preqin. Nearly half of pension funds and other large investors allocating to real estate expect to make commitments to opportunity funds in the next 12 months, Preqin said.

Private-equity giants KKR & Co. and TPG Capital also are in the early stages of raising their first real-estate funds, which will focus on riskier investments, say people familiar with the matter. Starwood last month closed a $4.2 billion fund, well ahead of its initial $2 billion to $3 billion target, say people familiar with the fund. Brookfield Asset Management has raised about $2.8 billion for an opportunity fund that is targeting $3.5 billion.

During the downturn, many pension funds largely spurned risk and focused their real-estate investments on the safest, well-leased properties in the healthiest markets. But now they are straining to make these strategies work as high demand for these properties drives up prices.

Calpers acknowledged last month that the shift it started in 2011 from risk and toward more-stable property investments is proving tougher than it expected. It is becoming "hard for Calpers managers to make [real-estate] investments in which they can reasonably expect to generate returns in excess of" liabilities, the pension's real-estate consultant wrote the Calpers board.

While some opportunity funds aim for gold with new projects, others try to profit by turning around troubled buildings. Blackstone Group, which recently raised a record $13.3 billion opportunity fund, last month bought London's Adelphi Building for about £265 million ($412 million). That is a 19% discount from what the building fetched in 2007, but with a tenant occupying half the building departing, Blackstone will have to find a replacement.

Pension-fund investors embracing opportunity funds say they know it isn't a risk-free bet.

"The biggest risk, of course, is the downturn in the economy," says Steven Snyder, chief investment officer for the Oklahoma City Police Pension & Retirement System, who made two recent commitments to opportunity funds. "That could be a negative for our investment."

Mr. Schwartz of ORG says he has put clients such as the Texas Municipal Retirement System and state funds in Maine, Indiana and Kentucky in opportunity funds in part because these funds responded to investor complaints that went beyond poor performance.

It’s no secret that dividend recaps are again a major theme in leveraged finance this year. Private equity firms, as usual, are the main source of dividend deals. PE-backed issuers have tapped the leveraged loan and high-yield bond markets for $19.7 billion of dividend financing in 2013 (as of April 26), including $16.9 billion of loans and $2.8 billion of bonds.

That figure is just below the the $19.8 billion recorded during the same period last year ($16 billion/$3.8 billion). For all of 2012 there were more than $60 billion of PE-backed dividend deals, a hefty amount (click below).

Recaps have, in part, filled the hole created by a combination of lackluster LBO activity and the erratic, thin IPO market. With M&A-driven new-money deals far lagging demand for new paper from both loan and high-yield accounts, there’s excess liquidity available to finance dividends.

The industry appears to be in the midst of a private equity-backed IPO boom.

Nearly 20 companies are said to be in the pipeline, and more companies may queue up soon. Warburg Pincus and TPG for example, are exploring a sale or a public offering of Neiman Marcus Group, which went private in 2005 for $5.1 billion. The odds of a public float are fairly good, one would think, given the performance of PE-backed IPOs so far this year.

This is a welcome change after years of disappointing IPO activity. The chances of good outcomes are pretty likely for these companies – a fact that explains the warm response they are receiving.

As noted by Lex, "A study of 1,500 IPOs by Mario Levis of Cass Business School found that, while the average IPO underperformed the FTSE All-share by 13 percent over the next three years, those backed by PE funds outperformed by a similar amount. Larger PE-backed IPOs outperformed by even more, as did those where the fund retains a significant stake. And while they come to the market with more debt, this falls away rapidly – from an average of 46 percent of assets just before the float to 20 percent after three years. Finally, margins tend to be high and stable while those for average IPOs are lower and falling."

Exit opportunities in general are looking better. Strategic buyers, many flush with cash, may be warming up to more deal making right now. And sponsor-driven deals will not soon shrivel up. This could end up being a banner year for exits, which is what large private equity firms have been hoping for.

Private equity firm Carlyle Group LP on Thursday reported flat first-quarter profit and a decline in cash generated from managing and selling assets, despite strong capital markets that helped boost earnings for its peers.

A stock market rally and record-low interest rates have buoyed the value of private equity fund assets and prompted buyout firms to exit investments and return capital to their investors.

While Carlyle has been divesting assets, in what is referred to in private equity as realizations, it did not surpass the asset sales leading up to its initial public offering in May 2012.

"We've been on a realization mode in the last two years, having realized $33 billion ... As I look at the relatively near term, we do think our distributable earnings will be relatively flat," Carlyle's co-founder and co-chief executive, William Conway, told analysts on a conference call.

Carlyle shares slumped 3.2 percent to $31.18 in afternoon trading. Through Wednesday they were up 23.7 percent this year, compared with rises of 44 percent for peer Blackstone Group LP, 38.7 percent for KKR & Co LP and 55.2 percent for Apollo Global Management LLC.

Carlyle's 2012 fourth-quarter earnings also failed to impress stock market investors as the private equity firm reaffirmed its conservative approach to sharing with its shareholders "carried interest" - the slice of the profits from its investment funds the firm is eligible to receive.

If Carlyle's deals underperform an investment return hurdle that has been agreed with private equity fund investors, the firm may have to return carried interest to the investors, a move known in the industry as "claw-back."

Washington D.C.-based Carlyle said first-quarter economic net income, a measure of profitability that takes into account the market value of assets, was $394 million, compared with $392 million a year earlier. Its portfolio appreciated by 7 percent during the quarter.

On a post-tax basis, this translated into $1.02 per adjusted unit, beating analysts' average forecast of 94 cents in a Thomson Reuters poll.

Distributable earnings, however, which includes both management fees and performance fees and shows cash available to pay dividends, was $168 million on a pre-tax basis, down 6 percent. This led to a distribution of 47 cents per unit.

Blackstone reported a 134 percent rise in first-quarter distributable earnings to $379 million, while KKR posted a 77 percent rise to $290.6 million.

Carlyle had a very strong year of asset sales in 2011, when capital markets were much weaker and some of it peers held on to their holdings, a fact that it touted to potential shareholders as it marketed its IPO. It reported distributable earnings of $864.4 million in 2011 and $687.9 million in 2012.

ASSET SALES

Among Carlyle's asset sales in the first quarter were sales of shares in car rental company Hertz Global Holdings Inc, television ratings company Nielsen Holdings NV, financial software firm SS&C Technologies Holdings Inc, BankUnited Inc, and Cobalt International Energy Inc, as well as an exit from China Pacific Insurance Co Ltd .

All these deals reflect returns of between two and seven times Carlyle's investors' money, Conway said.

Carlyle also took advantage of bullish debt markets in the first quarter to offload about $950 million of debt assets in its buyout, mezzanine, distressed and real estate funds, he said.

Founded in 1987 by Conway, David Rubenstein and Daniel D'Aniello and rooted in private equity, Carlyle in recent years has expanded in other alternative asset classes, including corporate credit, hedge funds and real estate.

Carlyle said total assets under management were $176.3 billion at the end of March, up from $170.2 billion at the end of December. It raised $4.9 billion from fund investors during the first quarter, up from $2 billion a year ago.

Rubenstein said on the same conference call that Carlyle's latest flagship U.S. buyout fund, whose investment period kicks off in June, had raised $7.1 billion so far, would likely reach $9 billion in the second quarter, and could exceed its target of $10 billion this year.

Carlyle is also moving toward securing its first commitments from investors for its latest European buyout fund, and has secured $1.5 billion toward its latest $3.5 billion Asian buyout fund, while its fund-of-funds subsidiary AlpInvest is close to raising a $4.6 billion fund to invest in stakes in other private equity funds, Rubenstein said. Carlyle is currently raising 13 funds in total.

Carlyle has recently made efforts to expand its pool of high-net-worth investors. It launched Carlyle GMS Finance Inc, a private business development company to lend to U.S. companies, and a fund-of-funds that allows qualified investors to put money into Carlyle private equity funds with as little as $50,000.

Following Carlyle's takeover of commodities-trading hedge fund manager Vermillion Asset Management LLC and energy-focused buyout firm NGP Energy Capital Management LLC, Rubenstein said his firm was working on how to further expand its investment platform, but would not give details.

"If you have any good ideas, just email us -- david.rubenstein@carlyle.com," Conway told analysts on the call.

Global firms are amassing new regional funds as their last rounds raised between 2005 and 2008 are nearing the end of their investment cycles. TPG, based in Fort Worth, Texas, has raised $1.3 billion for its newest Asia fund since last year and expects to reach $2 billion -- half of its goal -- by the middle of this year, and intends to keep the target, two people with knowledge of the matter said.

Carlyle has gathered slightly more than $1 billion, just a third of its target of $3.5 billion, for its fourth fund, the two people familiar with the fund said.

Carlyle’s first Asia fund, raised in 1998, was its most successful, returning a net 18 percent, or four times capital, to investors after it completed its sale of a stake in China Pacific Insurance Group Co. in January, the firm reported. Its second fund had a 1.7 multiple at Dec. 31, company filings show. The firm said today its third fund was 1.2 times capital invested with a net return of 1 percent as of March 31.

Stable Team

On the investment side, fund performance is measured by criteria including internal rate of return, multiple of invested capital and cash distributed to investors.

KKR has had a more stable Asia team than its peers since it came to Asia in 2005, with no departures among its partners, and has made fewer mistakes in its investment decisions, according to two investors considering participating in the firm’s second fund who asked not to be identified. KKR is also good at managing client relationships by keeping investors posted on its portfolios, they said.

Its first Asia fund has exited two investments, including Intelligence Holdings Ltd., a Tokyo-based recruitment firm, in April. That sale returned to investors five times more than capital invested, according to two people with knowledge of the matter who asked not to be identified because the returns haven’t been made public.

Investors’ Priorities

“Investors look at exits and cash returns first and foremost,” said Roy Kuan, a managing partner at CVC, whose current Asia fund has returned to investors 75 percent of its $2.9 billion at 3.3 times capital invested. “Many Asian funds simply haven’t returned very much cash back to investors yet.”

KKR’s sale of computer-parts manufacturer Unisteel Technology Ltd. in Singapore last year also returned about two times capital invested, the people said.

The firm’s $1.8 billion acquisition of Oriental Brewery Co. of South Korea in 2009 will probably generate the fund’s highest return, the two people said. Values of its stakes in China Modern Dairy Holdings Ltd. (1117) and Chinese financial-leasing company Far East Horizon Ltd. are already 2.5 times to three times the cost, based on recent stock prices, one of the people said.

KKR sold a 20.5 percent stake in China Modern Dairy this week, representing 2.98 times invested capital, the person said. The fund retained a 3.5 percent stake.

Not all KKR’s investments are a success. The firm is expected to mark down the value of its $300 million stake in China International Capital Corp. investment bank, the people familiar with the fund said. Bond and stock underwriting revenues for 2011 slumped 62 percent from 2010 when private-equity firms including KKR and TPG bought stakes, according to the Securities Association of China, a self-regulatory body for the industry.

The squeeze is on. Persistently low yields on safe-haven government bonds and ultra-loose central-bank policy are pushing money into European credit markets. Portugal is the latest beneficiary, selling its first 10-year bond since its bailout in 2011, but it isn’t alone. Investors are increasingly buying riskier corporate bonds. The problem is that the underlying economic fundamentals look as poor as ever.

Portugal’s €3 billion ($3.92 billion) bond attracted orders of €10.2 billion, despite offering little premium to the government’s outstanding paper. Yields on 10- year Portuguese bonds are less than 5.5%, down about 6.5 percentage points in the past year or so.

For Portugal, the benefit is clear: It has covered its 2013 funding needs and is regaining market access. For investors, it isn’t so clear-cut. They are betting that if Portugal is to run into trouble, it is a ways off yet. For now, Europe won’t risk a disruptive debt restructuring exercise, even if many worry that Portugal’s poor track record of growth means it is ill- equipped to cope with debt that hit 123.6% of GDP at the end of 2012.

Meanwhile, the European “junk” bond market is seeing bumper issuance even as yields have fallen to record lows, with the Barclays nonfinancial high-yield index now yielding just 5.17%. The cost of insuring blue- chip corporate debt via the Markit iTraxx Europe index has fallen to its lowest since April 2010— before Greece’s first bailout. Investors are snapping up complex hybrid bonds that blend features of debt and equity.

True, corporate balance sheets are in better shape than those of many sovereigns. But the growth outlook for Europe remains poor, and there are continuing worries about the U.S. and China. The banking system in Europe remains a brake on economic growth. Even companies able to borrow cash virtually free aren’t using that to boost investment: Apple’s $ 17 billion record- breaking corporate bond was issued simply to return cash to shareholders.

Many investors acknowledge the dangers here: Too much money chasing too little paper, a throwback to the pre-crisis bubble days, except at far lower yields. But, in another echo of the bubble, they also say they can’t identify a near- term catalyst for the merry-go-round to stop. Without a real recovery or a renewed slump, expect cash to continue to flow into risky bonds.

As equity markets became more and more expensive towards the end of the decade, he became increasingly adamant that markets were overvalued and began to reduce his equity exposure. In 1999 his firm was 66th out of 67 in the UK equity league tables and in February 2000 he was sacked for poor performance. Within a few weeks of his dismissal, the FTSE peaked and one of the largest bear markets of all times began, all of which taught me a very important lesson – poor timing can ruin even the best investment decisions.

Now, you may well deduct from all of this that I am as bearish as I have ever been, but nothing could be further from the truth. The issues I have discussed in this month’s letter are clouds on the horizon which are likely to take years to play out and, in the meantime, investors will continue to be preoccupied with far more mundane issues.All I know is that financial markets cannot stay disconnected from economic fundamentals forever so, ultimately, the Tony Dyes of the world will be proven right. Unless they lost their jobs beforehand, that is.

Credible academic research indicates that economic growth deteriorates when debt to GDP reaches critical levels - a condition that has now been met in countries that represent 75% of global GDP. When this reality is coupled with the Fed’s inability to create money growth or inflation, the result will invariably be slow nominal GDP growth.

The financial and other markets do not seem to reflect this reality of subdued growth. Stock prices are high, or at least back to levels reached more than a decade ago, and bond yields contain a significant inflationary expectations premium. Stock and commodity prices have risen in concert with the announcement of QE1, QE2 and QE3. Theoretically, as well as from a long-term historical perspective, a mechanical link between an expansion of the Fed’s balance sheet and these markets is lacking. It is possible to conclude, therefore, that psychology typical of irrational market behavior is at play. This suggests that when expectations shift from inflation to deflation, irrational behavior might adjust risk asset prices significantly.

Such signs that a shift is beginning can be viewed in the commodity markets. The CRB Commodity Index peaked about two years ago at 691, but now stands at 551, a 20% decline despite massive Fed balance sheet expansion. The ability of the Fed to arrest a downside irrational move in risk assets may be limited. Non-risk assets, such as long dated U.S. treasuries, should benefit from this shift in perception.

We've been wrong to assume that the economic crisis is over, Arbess said. We stopped the crisis from reaching Great Depression levels through drastic fiscal actions such as TARP and the Obama administration's fiscal stimulus. But almost as suddenly as we started, we stopped these efforts, which Arbess says has resulted in us being "mired down" for the past four years.

What's kept us afloat has been monetary policy, but that's now reaching its limits, according to Arbess. The threat of deflation is once again rearing its head.

"The persistent risk in our economy is deflation not inflation," Arbess said.

His proposed solution is that we start directly funding government expenditures through the central bank. That is, we should stop relying on taxes or further debt issuances to finance government—or at least reduce our reliance on taxes and bonds. Just let the Federal Reserve pay the government's bills by exercising its money creation powers.

For now, investors in foreign markets are celebrating. With the dollar higher across the board and gold and other commodities lower, the disinflationary forces unleashed by Japan are giving other central banks room to follow its lead, exemplified by the European Central Bank’s and the Reserve Bank of Australia’s rate cuts this past week. In response, the Dow Jones Industrial Average has punctured 15,000 and the once alarmingly high bond yields of peripheral euro-zone countries are down at levels not seen since the pre-crisis bubble years.

But this virtuous circle can yet turn vicious. Together, the U.S. Federal Reserve and the Bank of Japan will print the equivalent of $155 billion every month for an indefinite period. With yield opportunities getting ever slimmer in the developed world, that flood of money will inevitably slosh into whatever currencies still offer a modicum of interest rate “spread.” (Even at a record low 2.75%, benchmark Aussie rates pay markedly more than the near-zero returns on the dollar or yen.) And this week, governments and central banks in various countries have taken action against currency appreciation. The term “currency war” has fallen out of vogue, but the forces that stirred those fighting words two years ago are alive and well.

The private equity arm of one of Canada’s largest pension funds has fended off bids from two of Europe’s largest buyout houses to buy UK software provider Civica from 3i Group, amid an increasing drive by Canada’s main pension funds to invest directly in the UK.

Omers Private Equity, the private equity arm of the Ontario Municipal Employees Retirement System, saw off the rival bids to buy Civica from 3i for an enterprise value of £390m.

3i, which bought Civica in 2008 in a £109m public to private transaction and has since completed 10 add-on acquisitions for the company, has generated total proceeds of £228m and a 2.1-times money multiple from the deal, according to a statement from 3i.

The business provides software systems, cloud-based IT services and technical outsourcing, primarily to public sector organisations such as local government, education, social housing, healthcare, and emergency services in the UK and around the world.

Private Equity News, a sister publication of Financial News, reported last week that Civica had also attracted bids from buyout firms Cinven and Apax Partners. Bain Capital, which expressed an early interest in Civica, earlier dropped out of the running, according to two people familiar with the matter.

Omers Private Equity said it will support the management team as they seek to capitalise on organic growth opportunities and make selective acquisitions. Civica’s management team will also reinvest and continue leading the business.

The deal represents Omers Private Equity’s fourth direct investment completed by its European private equity team since it set up its London office in September 2009.

The fund has since built up a London-based team of nine professionals led by senior managing director and former 3i dealmaker Mark Redman.

The team has completed deals including last year's acquisition of Lifeways from August Equity, the 2011 buyout of ship management firm V Group from Exponent Private Equity and a 2009 investment in Haymarket Financial, a provider of credit financing to mid-market businesses.

The Civica deal comes amid an increasing push by Canadian pension funds to invest directly in the UK.

Alberta Investment Management Corporation, the Canadian sovereign wealth fund which made headlines in 2010 with its attempt to buy Candover Investments, is in the process of finalising a move to London within the next six months.

Aimco intends to do all of its private equity investing directly and has previously said it is looking for deals with an enterprise value of between $200m and $500m.

Last year Teachers Private Capital, the private equity arm of Ontario Teachers’ Pension Plan, appointed the former head of venture capital at 3i, Jo Taylor, to head its London office.

The deal also highlights the increasing push by Canada's pension funds away from private equity fund investments and into direct investing. Canadian pension funds completed 27 deals worth $13.1bn globally last year, representing the most acquisitions ever completed, according to data provider Dealogic.

KKR has had a more stable Asia team than its peers since it came to Asia in 2005, with no departures among its partners, and has made fewer mistakes in its investment decisions, according to two investors considering participating in the firm’s second fund who asked not to be identified. KKR is also good at managing client relationships by keeping investors posted on its portfolios, they said.

Institutions certainly have the potential to go direct, the issue is whether they will perform. As you noted, no one can really tell, and the lack of disclosure probably tells you its still work in process. There have been glimpses of large full write-offs in this arena, which while perhaps are a nature of the business alsoare a reminder that taking higher operational and investment risk does not guarantee a superior return.

Rather than worrying about a bright line in the debate of in-house verses outsourced capabilities, large institutions should simply do both, and just make sure they get what they pay for. No business model is inherently better, it's how it's executed. Some smaller plans clearly demonstrate this.

Ron Mock has completed his rise from the ashes of collapsed hedge fund firm Phoenix Research and Trading Corp., putting a controversial failure behind him to become the new chief executive officer of the Ontario Teachers’ Pension Plan.

Mr. Mock, 60, was named Tuesday as the successor to Teachers CEO Jim Leech, who is retiring at the end of the year. Mr. Mock is currently Teachers’ senior vice-president of fixed income and hedge funds, heading the largest of the pension plan’s six major asset management groups.

The appointment makes Mr. Mock just the third CEO to lead the $130-billion fund since its creation in 1990 to manage pension assets for 303,000 current and retired Ontario teachers. The fund was initially headed by Claude Lamoureux, who was succeeded in 2007 by Mr. Leech.

“I am very excited, because it’s not every day that someone gets to lead an organization like this,” Mr. Mock said in an interview. “Teachers is a leader in this field, and to be the one chosen to lead it, I’m thrilled.”

Before joining Teachers in 2001, Mr. Mock was CEO and co-founder of Phoenix Research and Trading, a hedge fund management company that collapsed in 2000 with losses of over $125-million (U.S.).

The failure came after Mr. Mock discovered bond trader Stephen Duthie had secretly taken a massive and unapproved $3.3-billion position in U.S. benchmark Treasuries in 1999.

Mr. Mock notified the Ontario Securities Commission about the discovery and reached a settlement agreement with the regulator in 2003, accepting a six-year prohibition from acting as a director or officer of a public company, and a reprimand after acknowledging he did not do enough to supervise Mr. Duthie’s trading. The OSC settlement said Mr. Mock’s supervision was “wholly inadequate” and the trading scheme could have been detected with scrutiny.

Mr. Duthie, meanwhile, received a 20-year ban from trading securities or acting as a director or officer of a company after an OSC hearing panel ruled he mispriced and hid a huge volume of unauthorized trading. The panel ruled his conduct was “duplicitous.”

Mr. Leech said in an interview the Teachers board considered Mr. Mock’s role at Phoenix, but felt he had broken no laws and had been a highly respected leader in his 12 years at Teachers.

“Anybody who has been in the securities business for 25-plus years is going to have some scars – Lord knows, I’ve got mine,” Mr. Leech said. “The name of the game is to make sure you learn, and he learned that the buck stops at the top.”

One of the victims of the firm’s collapse was Teachers itself, which lost $10-million on investments, Mr. Lamoureux said.

Mr. Lamoureux, who was Teachers’ CEO at the time, said he was initially astonished when another Teachers executive suggested the pension plan hire Mr. Mock in its hedge fund division.

But after conducting an investigation, Mr. Lamoureux said he became convinced the failure was the fault of the bond trader and Mr. Mock was not to blame.

“I think he had a rough time for a couple of years after he was hired because the OSC was all over him, when in fact he went to them of his own free will – and many people don’t do that,” Mr. Lamoureux said. “But we kept him, and I knew that the board of Teachers was very pleased with him when I was there. He did a great job on fixed income when he took that over.”

Mr. Lamoureux said fixed income had not been generating high enough returns when Mr. Mock joined Teachers, and he helped turn around its performance.

Mr. Mock is one of five senior vice-presidents at Teachers who run different portions of the fund’s investment portfolio.

“He did a fabulous job. I’ve been at many meetings with him with these hedge funds and you can see that Ron knew more than a lot of people who came to visit us and were trying to sell their stuff.”

Mr. Mock said Tuesday he is ready to oversee a far broader portfolio of assets. But with Mr. Leech still in the top job for another seven months, Mr. Mock said it is too soon to talk about his vision for Teachers or any changes he would foresee.

Ron Mock, senior vice president of fixed income and alternative investments at Ontario Teachers’ Pension Plan, will succeed Jim Leech as chief executive officer and president next year.

Mock, 60, takes over Jan. 1 when Leech retires after 12 years with the plan and six years as CEO, the Toronto-based fund said today in a statement.

“I want to stay focused on ensuring we are the leader” in the pension plan industry, Mock said in a phone interview. “The world’s a changing place so you have to navigate the organization along the way. I’m comfortable with the team that’s here that we’ll be able to do it.” He declined to comment on his strategies or plans for Ontario Teachers.

Mock joined Teachers’ in 2001 as director of alternative investments and in 2008 was promoted to senior vice president, overseeing all fixed-income assets and hedge funds. He’s also a board member of Cadillac Fairview, which manages Teachers’ C$21 billion ($21 billion) commercial and retail real estate portfolio.

Mock was previously CEO of Phoenix Research and Trading Corp. and was responsible for all of Phoenix Canada’s fixed income business, including the Phoenix Fixed Income Arbitrage LP, a hedge fund. The hedge fund collapsed in 2000 when it lost $125 million in the U.S. bond market, according to an Ontario Securities Commission settlement document from 2003.

Probe Costs

The OSC ordered Mock to pay C$45,000 for investigation costs and banned him from being an officer or director for six years. The regulator said Mock failed to adequately supervise Stephen Duthie, a former Phoenix employee whose trading of U.S. government bonds was “directional, unhedged, and contravened” the company’s investment parameters. Mock’s failure to supervise Duthie was “material to the collapse” of the company, the OSC said.

“We were 100 percent aware of the OSC case and we are fully confident in his abilities and integrity,” Deborah Allan, spokeswoman for the pension fund said in an e-mailed statement. “What the OSC found was an oversight issue, however many years ago. We’re going into this with eyes wide open.”

Leech, 65, was chief executive of the pension fund during the financial crisis, raising net assets to C$130 billion. The fund manages money for 303,000 retired and active teachers in Canada’s most-populous province.

A committee made up of board members has been preparing for the succession since 2011.

Two decades on, Stan Hamilton and Robert Heinkel, both from the University of British Columbia, are working on a revised edition of what can be considered to have been a game changing book about pension fund management.

In 1993, the two finance professors and trustees of the faculty pension fund, penned a 165-page book, The Role of Real Estate in a Pension Portfolio. One of the key conclusions: “Having considered the liquidity and management issues relating to real estate, we conclude that real estate should compose between 5% and 15% of the pension portfolio.”

The two – Heinkel is still at it while Hamilton has retired – argued real estate ”is the only asset class that reacts significantly and positively to expected inflation changes.”

Reached Tuesday, the day after a column about the Canadian arm of LaSalle Investment management launching its fourth institutional real estate fund since 2003, Hamilton, said in the early 1990s it wasn’t that common for pension funds to give an allocation to real estate.

By his estimates, about 4% of the industry’s $250-billion in assets was in real estate — or about $10-billion in total.

“In the main it was really insignificant. The vehicles were not always as convenient as they might be,” said Hamilton. By 2011, according to Canada’s Pension Landscape Report, pension funds had doubled their allocation to real estate to 8.9% — or almost $100-billion.

Consulting firm API Asset Performance Inc. said its clients average an overall weight of 5.4% for real estate but it rises to 11.6% when only those with a dedicated real estate portfolio are considered.

Hamilton, as with Heinkel, is too modest to take credit.

“Maybe we were lucky with our timing,” said Hamilton, noting the growth of REITs, the rise of institutional pools of capital dedicated to real estate, the expansion of new ways to invest, and the further development of specialist real estate managers, has meant “the share of pension funds that has gone into real estate has changed quite significantly.

“It has changed dramatically,” said Hamilton, noting that some of the larger pension funds have more than 10% of their assets invested in real estate. A short while after the book, the UBC Pension Plan gave a major allocation to real estate.

The two made the argument for real estate largely on the grounds of portfolio diversification. “It was a great diversifier and fits into a portfolio. We never tried to sell it on rates of return because we thought that was a fool’s game, said Hamilton. “We said ‘if you approach it properly and not going for the hype on rates of return, it is a valuable tool.’ That message resonated,” said Hamilton, now chair of the B.C. Arts Council.

But real estate is different: it has to be considered as a long term investment. While owing REITs wasn’t similar to owning real estate directly, Hamilton said “we saw reasons to go up to 15% in real estate, but because of liquidity we recommended that mid-and large sized pension funds consider going to 10%.”

And 10% is an allocation that Hamilton feels is suitable today. “That story rings true [but] if you have any liquidity concerns, going much above 10% is probably uncomfortable.”

Along the way real estate has enjoyed a change in status: once considered an alternative asset, “it is now more like a mainstream investment,” said Hamilton.

A glitzy Manhattan real-estate crowd gathered in March to join Barry Sternlicht, chief executive of Starwood Capital Group, at a party celebrating the launch of condo sales at the Baccarat Hotel & Residences, a new development across from the Museum of Modern Art.

The 50-story glass tower, expected to open in 2014 and feature a five-star hotel and Baccarat chandeliers in each condo, is the sort of development rarely seen in the years after the financial crisis. But riskier projects are starting to move forward again, thanks in part to a resurgence of so-called opportunity real-estate funds.

These private-equity funds invest in riskier real estate, such as half-empty office buildings, distressed properties weighed down with debt, or pricey new construction that must find well-heeled buyers to profit. The Baccarat, which is being developed by Starwood and Tribeca Associates for $400 million, is counting on selling condos for as much as $60 million each.

For most of the downturn, these real-estate funds struggled to raise money because their main source, big pension funds, were risk-averse and still licking their wounds from when these bets went wrong. The California Public Employees' Retirement System, the largest U.S. public fund with $263 billion, lost nearly half the value of its real-estate portfolio between July 2008 and June 2009—more than $10 billion.

But these days, many pension funds are reconsidering—or trying for the first time—riskier real estate in an effort to boost returns at a time of low interest rates. These funds project up annual returns as much as 20%.

A pension fund has to "take more risk to get double-digit returns," says Bob Jacksha, chief investment officer of the New Mexico Educational Retirement Board. His $10 billion fund recently committed $50 million to Crow Holdings, which manages opportunity funds.

Pension funds also have been emboldened by the steady rise of commercial-property values since 2009 and a winnowing of some of the worst-performing funds. The economy shows signs of stabilizing after a rough period, and borrowing for real estate is cheap with rates so low.

"Many prices have fallen quite a bit, so there's now a lot of opportunity," says Edward Schwartz, a principal at real-estate consultant ORG Portfolio Management. But some pension funds, he adds, "also have short memories."

In recent months, a public-employees fund in Texas, Kentucky's main public fund and an Oklahoma City police fund all have made commitments to opportunity funds.

Such funds raised about $25 billion in 2012, nearly double the amount in 2009, according to research firm Preqin. Nearly half of pension funds and other large investors allocating to real estate expect to make commitments to opportunity funds in the next 12 months, Preqin said.

Private-equity giants KKR & Co. and TPG Capital also are in the early stages of raising their first real-estate funds, which will focus on riskier investments, say people familiar with the matter. Starwood last month closed a $4.2 billion fund, well ahead of its initial $2 billion to $3 billion target, say people familiar with the fund. Brookfield Asset Management has raised about $2.8 billion for an opportunity fund that is targeting $3.5 billion.

During the downturn, many pension funds largely spurned risk and focused their real-estate investments on the safest, well-leased properties in the healthiest markets. But now they are straining to make these strategies work as high demand for these properties drives up prices.

Calpers acknowledged last month that the shift it started in 2011 from risk and toward more-stable property investments is proving tougher than it expected. It is becoming "hard for Calpers managers to make [real-estate] investments in which they can reasonably expect to generate returns in excess of" liabilities, the pension's real-estate consultant wrote the Calpers board.

While some opportunity funds aim for gold with new projects, others try to profit by turning around troubled buildings. Blackstone Group, which recently raised a record $13.3 billion opportunity fund, last month bought London's Adelphi Building for about £265 million ($412 million). That is a 19% discount from what the building fetched in 2007, but with a tenant occupying half the building departing, Blackstone will have to find a replacement.

Pension-fund investors embracing opportunity funds say they know it isn't a risk-free bet.

"The biggest risk, of course, is the downturn in the economy," says Steven Snyder, chief investment officer for the Oklahoma City Police Pension & Retirement System, who made two recent commitments to opportunity funds. "That could be a negative for our investment."

Mr. Schwartz of ORG says he has put clients such as the Texas Municipal Retirement System and state funds in Maine, Indiana and Kentucky in opportunity funds in part because these funds responded to investor complaints that went beyond poor performance.

The Canada Pension Plan fund rode a wave of strong gains in foreign stock markets to push its investments up by 10.1 per cent last year and boost its assets to $183-billion.

While bonds and Canadian equity holdings posted slower growth in the year ended March 31, the Canada Pension Plan Investment Board, which manages the CPP’s assets, said its $64-billion portfolio of foreign equities had a stellar year.

Private equity holdings in foreign countries earned 17 per cent for the year, while publicly traded stocks in foreign countries posted 13-per-cent growth.

“That strength in global equity markets was the primary factor driving our solid returns for the year,” said Eric Wetlaufer, CPPIB’s head of public market investments.

The CPPIB’s overall returns were typical for a Canadian pension plan last year. A survey by RBC Investors Services Ltd. found that pension plans earned an average of 9.4 per cent on their investments in 2012, with the giant Caisse de dépôt et placement du Québec earning 9.6 per cent for the year ended Dec. 31, and the Ontario Municipal Employees Retirement System earning 10 per cent.

Over the past year, CPPIB has been threatening the Caisse’s long-held title as Canada’s largest investment fund. It has been difficult to directly compare the two fund managers, however, because they have different year ends, with the Caisse reporting assets of $176-billion as of Dec. 31, and CPPIB disclosing its assets hit $183-billion as of March 31, up from $162-billion a year earlier.

CPPIB said $5.5-billion of its asset growth in the past year came from net CPP contributions by employers and plan members, while $16.2-billion came from investment gains.

Chief executive officer Mark Wiseman told reporters Thursday the fund had “an excellent” year, but said his focus is not on annual returns but on an extremely long-term investment strategy to cover CPPIB’s long funding obligations.

Mr. Wiseman said CPPIB plans to become a public advocate for long-term investing around the globe, saying funds like CPPIB with a “natural multi-generational nature” don’t get enough credit for their beneficial impact on the economies.

By investing in companies for decades and funding innovation and growth, long-term investment funds spur long-term economic development, he said. Pension funds also act as a “shock absorber” during times of down markets when they become big buyers of stocks to maintain their investment weightings, he argued.

“You’re going to see us becoming increasingly vocal in encouraging market participants to adopt a more long-term lens, actually looking at value of stocks and not just looking at a stock as something that goes up and down on an individual day,” he said.

Mr. Wiseman said his proudest achievement in his first year as CEO of the fund is the 87 deals in 11 countries that CPPIB completed last year, including 36 that were worth more than $200-million each.

But André Bourbonnais, head of private investments, said deals appear poised to taper off this year as many more competitors are looking for bargains with plenty of available cash and cheap credit to fund their investments.

“If the environment remains as it is today, we’re going to be very selective,” he said.

The chief actuary of Canada has affirmed that the CPP is sustainable over the next 75 years if it earns an average of 4 per cent real annual returns after inflation. CPPIB said Thursday its 10-year real rate of return after inflation is 5.5 per cent, while it’s five-year rate of return is just 2.4 per cent, due mostly to large losses in fiscal 2009 when financial markets collapsed and CPPIB posted a 19-per-cent loss for the year.

Whether they like it or not, investors and company boards globally are going to hear a lot more from Canada’s biggest pension fund on the benefits of long-term thinking.

CPP Investment Board has a mandate to identify investments that earn returns over many years to help cover the future retirement benefits of Canadians, so the fact that it takes a long-term investment view isn’t surprising. But Mark Wiseman, chief executive of the 183.3 billion Canadian dollar ($180.2 billion) fund, had a broader message Thursday for corporate boards and investors–that a pervasive focus on short-term returns could jeopardize the global economic outlook.

Mr. Wiseman likely isn’t about to become Canada’s version of Bill Ackman, the brash U.S. activist investor who last year successfully agitated to replace much of Canadian Pacific Railway Ltd.'s board and install a new chief executive. But he’s speaking out publicly about the merits of a long-term investment horizon.

Currently, “you will see” companies decide against an investment despite its merits to ensure they meet quarterly profit numbers, Mr. Wiseman told Canada Real Time.

But that can be a “terrible decision for shareholders and a terrible decision for the overall economy,” if jobs that could have been created are not, he said.

Last month, CPPIB was part of a group of big institutional investors that opposed a $17 million pay package for Barrick Gold Corp.'s new co-chairman, John Thornton. Shareholders ultimately voted against the miner’s executive-compensation proposals, but that vote was non-binding.

Next week, Mr. Wiseman will speak to Canada’s Institute of Corporate Directors and he said he plans to discuss the importance of long-term thinking for boards.

The executive believes CPPIB and other multigenerational pension funds can make a particular difference beyond their own returns, through investments in infrastructure, private equity and real estate.

These types of investments over time help generate jobs, innovation and overall growth, Mr. Wiseman said. But many investors don’t have the capital that these asset classes often require, or are unwilling to risk an investment that can’t quickly be sold if necessary. In addition, the complexity of arranging and financing these projects is often a deterrent.

CPPIB’s large size, significant resources and long-term investment horizon allow it to overcome these hurdles. And those same qualities allow CPPIB, and funds like it, to act as “shock absorber(s)” for the global economy, Mr. Wiseman said. That was the case during the global credit crisis, when they were able to buy assets other investors were forced to sell, he said.

CPPIB measures its performance against a market-based benchmark, the CPP Reference Portfolio, representing a passive portfolio of public market investments that can reasonably be expected to generate the long-term returns needed to help sustain the CPP at the current contribution rate.

In fiscal 2013, total portfolio returns closely corresponded to the CPP Reference Portfolio with $204 million in gross dollar value-added. Net of all operating costs, the investment portfolio returned negative $286 million in dollar value-added.

“We have strong conviction that our private market assets will outperform the public markets equivalents of the CPP Reference Portfolio over the long term,” said Mr. Wiseman.“ This result will, however, not necessarily be demonstrated in the short term. Particularly when public markets have rapid moves up or down, our active private market strategies may show short-term underperformance or overperformance vis-à-vis the CPP Reference Portfolio, which does not accurately reflect our long-term value-add expectations for these strategies.”

Given our long-term view, we track cumulative dollar value-added performance since the inception of our active management strategy in fiscal 2007. The cumulative outperformance added $3.1 billion to the CPP Fund net of all operating costs.