Frederick Vettese, the former chief actuary of a large actuarial firm and the author of Retirement Income for Life: Getting More without Saving More, wrote an interesting opinion column recently, How does the Ontario Teachers’ pension plan stack up against the federal public servants version?:

As secure workplace pensions continue to die out across the Canada, the Ontario Teachers’ Pension Plan (OTPP) and the federal Public Service Pension Plan (PSPP) are two gold-plated retirement plans that remain intact. So just how good are they – and how do they compare with one another?

Size

These plans are large by any measure. At last count, the OTPP has 323,000 active members and pensioners while the corresponding figure for the PSPP is 590,000. Based on 2017 asset figures, that comes out to $587,000 per person in the OTPP and $327,000 per person in the PSPP.

Retirement age

Most Canadians think of age 65 as “normal retirement age.” In the public sector, there is nothing normal about retiring that late. The median retirement age in the public sector has been as low as 57.2 in the past, though it has since risen to 61.3.

In the case of the OTPP, teachers can retire without penalty once their age plus “qualifying years” total 85 or more. For example, a teacher with 32 qualifying years can retire without penalty at age 53.

The early retirement rules within the PSPP are also generous though they don’t quite match the OTPP. Civil servants used to be able to retire without penalty as early as 55 if they had 30 years of pensionable service. During the government of Stephen Harper, the age 55 condition was changed to 60 for new hires.

In both plans, members can retire even earlier subject to a modest penalty.

Pension benefits

When combined with CPP, the PSPP provides a pension of 70 per cent of the final five years’ average earnings if the member contributed for 35 years. After 65, the pension (including CPP) is actually a little more than 70 per cent because integration with the CPP is not perfect. In addition, members receive OAS pension.

The pension for OTPP members is virtually the same except that the pension payable after 65 is even higher than it is under the PSPP.

Members with 35 years of service under either plan will be very comfortable in retirement. For workers who were raising families or paying off mortgages, which means almost everyone, a 70-per-cent pension (plus OAS) translates into a standard of living in retirement that is significantly higher than what they enjoyed while they were working. With the CPP being enhanced, this can only go up.

Inflation protection

Both plans strive to provide 100-per-cent inflation protection of pensions, meaning that pensions rise each year in line with the annual change in the consumer price index (CPI). For convenience, this feature is referred to as indexation. The difference between the two plans is that indexation is guaranteed in the PSPP but conditional in the OTPP, depending on the funding level. The full, uncapped indexation within the PSPP is a rarity, even in the public sector.

Employee contributions

Cost-sharing in the public sector has been evolving in recent years. Most plans now split pension costs 50-50. This is one reason why employee contributions have been rising over the past decade. Another reason is to pay for the investment losses that occurred during the global financial crisis.

In the OTPP, employees contribute 10.4 per cent on their earnings below $57,400 and 12 per cent on earnings over $57,400 (which we refer to as 10.4/12). Contributions under the PSPP are a little lower at 9.49/11.67 (same threshold of $57,400).

When we add in the employer’s share, total contributions in both plans exceed 20 per cent of pay. In addition, employees can still contribute another 4 per cent or 5 per cent of pay to a registered retirement savings plan. Note that the federal government restricts tax-assisted saving by workers who are not in defined benefit plans (which describes 90 per cent of private sector workers) to only 18 per cent of pay. Another instance of “Do as I say, not as I do." The federal government should be called upon to explain this double-standard or better still, to level the playing field.

Even though the contribution formulas are similar, the 50-50 cost-sharing mentioned above is applied very differently in the two plans. In the OTPP, the active members and the employers share all costs 50-50. In the PSPP, the cost of deficits is borne purely by the government (i.e., the taxpayer). This can be a big deal since a federal plan deficit arising of $20-billion or more is not out of the question.

Approach to funding

In the OTPP, the actuary assumes that the fund will earn a nominal return of just 4.8 per cent. Under the PSPP, the assumed fund return is 6 per cent. The PSPP is thus taking a far more aggressive stance, which can become a problem if future returns are lower than past returns. (There are demographic reasons why this will actually be the case; aging societies – Japan, for example – tend to have lower interest rates.) This is largely why the PSPP’s assets per member are so much lower than under the OTPP.

Overall assessment

The two plans are fairly similar in most respects except for cost-sharing. The fact that PSPP does not extend the 50-50 cost-sharing principle to the sharing of deficits makes the PSPP considerably more generous overall.

In both plans, the contributions being made exceed what private sector workers can contribute to RRSPs or defined contribution pension plans.

In both plans, the early retirement rules are quite generous. This might have made some sense in a previous era when the country had more potential workers than the economy could absorb. That is no longer the case, and in fact, we are on the brink of a time when workers will be scarce, even with high levels of immigration. For at least the next two or three decades, it is in the public interest to encourage people to work longer. The PSPP and the OTPP do exactly the opposite.

This is a great comment by Frederick Vettese and I'd like to discuss it further.

According to Vettese, "the two plans are fairly similar in most respects except for cost-sharing. The fact that PSPP does not extend the 50-50 cost-sharing principle to the sharing of deficits makes the PSPP considerably more generous overall."

No doubt, Ontario Teachers' Pension Plan is a jointly-sponsored plan where the cost of the plan is equally borne by teachers and the government of Ontario. It's not the only jointly-sponsored in Ontario. The Healthcare of Ontario Pension Plan (HOOPP) and CAAT Pension Plan are also jointly-sponsored.

Interestingly, all three plans are fully funded plans which argues for a model where the costs of the plan are shared equally among employees and employers.

One thing Ontario Teachers' adopted a while ago was conditional inflation protection, allowing it to become young again. In a nutshell, because Ontario teachers live longer than most Canadians, there will soon be more retired teachers than active ones (click on image below, from page 11 of OTPP's 2017 Annual Report):


As the demographics of the Ontario Teachers' Pension Plan shifts to reflect an aging population, it makes sense to adjust inflation protection retired teachers receive for a period of time when the plan runs into trouble than asking active members to bear most of the cost of the plan (through higher contributions).

Typically, partial inflation protection is introduced when the plan runs into trouble, meaning instead of a guaranteed cost-of-living-adjustment (COLA), OTPP's pensioners receive 80, 70, 60% or less for a period until the plan's fully funded status is restored.

For pensioners, this is a small change to the benefits they receive but for the overall plan, it has a drastic effect on cutting down the pension deficit, and this will increasingly be the case as more Ontario teachers get set to retire, changing the ratio of active to retired teachers.

Conditional inflation protection is also a fair policy to adopt from an inter-generational view, sharing the risk of the plan between retired and active members. The more retired members there are, the more risk they can collectively assume relative to active members (without hurting them as much as active members).

None of this risk-sharing is present in the federal Public Service Pension Plan (PSPP). Federal public-sector employees have guaranteed inflation protection (like OMERS and OPTrust) and if the plan runs into trouble, the federal government (ie. Canadian taxpayers) is on the hook.

According to Vettese, "the fact that PSPP does not extend the 50-50 cost-sharing principle to the sharing of deficits makes the PSPP considerably more generous overall."

You'll recall, this is what Malcolm Hamilton and Philip Cross called the dirty secret behind Canada's pensions. That comment generated many more comments from my readers and ultimately led me to write a lengthy comment on retirement security in Canada.

After writing that last comment, Malcolm Hamilton came at me hard in an email exchange stating this:

So here's the problem with your position. You compare Target Benefit Plans to Defined Benefit Plans that cost twice as much. It's like comparing a Pontiac to a Porsche (I'm dating myself).

Properly priced, a public sector DB plan costs 40% of pay. By changing the guaranteed benefit to a target benefit that will be adjusted as circumstances require (by changing the level of the benefit or the indexing), we reduce the cost of the pension plan to 20% of pay. So yes, the DB pension is much more valuable. But it is much more valuable because it is much more expensive, not because it is a better plan design. I see no evidence that members will voluntarily pay the extra 20% of pay. I believe that most public sector employees would rather pay 20% of pay for the Target Benefit Plan than pay 40% of pay for the Defined Benefit Plan. In other words, the Target Benefit Plan is better value.

In support of my position, I draw your attention to the behavior of employees in DC plans that allow them to choose between safe investments (long term government bonds) and more risky ones. Virtually no retirement saver voluntarily invests all of their money, or even half of their money, in government bonds. When employees retire, few decide to buy annuities. They prefer to take investment risk and, by so doing, to strive for higher returns and, eventually, higher incomes. They could save twice as much and take less risk, but they choose not to do so.

I believe that the same will happen in Target Benefit Plans. The plans will invest in balanced portfolios that will typically deliver good returns and good pensions, but with no guarantees. The plans will take less risk than today's public sector DB plans because employees will no longer be able to pocket the reward for risks borne by the public - hence risk-taking will be less advantageous to plan members.

You may not understand this. You may not want to understand it. But this is how things work. If you feel differently, explain how the public is now rewarded for the investment risks it bears. Or perhaps you think that public employees deserve a free ride? As I wrote earlier, the federal government's DB plan is no different than telling federal employees that they can use 20% of their compensation to buy long term RRBs with 4% real interest rate while offering other Canadians a 1% real interest rate on the bonds they buy.

I have tremendous respect for Malcolm, think he's one of the best-retired actuaries in the country but I'm not in full agreement with his proposed Target Benefit Plan because it leaves retired members of a plan vulnerable to the vagaries of markets.

I shared his comment with HOOPP's CEO, Jim Keohane, who shared this with me:

This is a bit of a “glass half empty “ view. You could also view it that prudent risk-taking, scale, good governance and good management allow Canadian model plans to provide good pensions for 20% of pay which would otherwise cost 40% of pay thus saving taxpayers 20% of pay.

The Federal Public service plan is unique in Canada in that the employer assumes all of the downside risk. Virtually every other public sector plan is a shared risk plan with contingent benefits. In the case of HOOPP, neither the employers or the province guarantee the pension. The only obligation the employer has is to pay their share of the annual contributions as long as they remain members of the plan (which is voluntary). When you consider that COLA is not guaranteed and can be reduced or eliminated should plan funding be insufficient, employees accept most of the risk of underfunding. The notion that taxpayers are taking all the risk and that plan members are getting all the benefit is simply not true.

What we should be focusing on is the efficiency of the conversion of pension savings into pension payments. Our recent research paper “The Value of a Good Pension” shows the efficiency of moving from individual savings plans to collective plans. If more Canadians were fortunate enough to be members of Canada model plans there would be a much larger pool of savings to pay pensions which would benefit all of Canadian society and taxpayers.

I couldn't agree more with Jim on this last point. Jim was actually in Washington D.C. last week where he spoke at conference held by the National Institute on Retirement Security. You can find details of that event here and download Jim's presentation here.

Below, I share the key findings (click on image):


Back to Fred Vettesse's comment above. It's true that OTPP uses a lower discount rate than PSPP and pretty much all other large Canadian public plans but that's because it's a more mature plan and the demographics are different (more retired members).

Other key differences that Vettesse doesn't highlight is OTPP is a pension plan that manages assets and liabilities of just one client, Ontario teachers, whereas the federal Public Service Pension Plan's (PSPP) assets are managed by an independent Crown corporation, PSP Investments which is the investment manager for the pension plans of the Public Service, the Canadian Armed Forces, the Royal Canadian Mounted Police and the Reserve Force.

What OTPP, PSP Investments and other large Canadian pensions have in common is world-class governance, allowing them to manage assets in the best interests of the members of their plan.

And that, in my humble opinion, is the most important point to get across when comparing large Canadian public-sector plans.

Below, last year, Ontario Teachers’ net assets reached $189.5 billion, up tenfold since the Plan’s inception; the Plan was 105% funded as at Jan. 1, 2018.

I expect OTPP's 2018 results which come out in early April will be more challenging but the funded status will remain largely unchanged and that's the most important measure of success.

Fred Imbert of CNBC reports, Stocks post 5-day losing streak, notch worst week of 2019 after anemic jobs report:

Stocks fell for a fifth straight day on Friday after the U.S. government released employment data that badly missed expectations, adding to growing concerns that the global economy may be slowing down.

The Dow Jones Industrial Average pulled back 22.99 points to 25,450.24 as Exxon Mobil and Pfizer lagged. The S&P 500 fell 0.2 percent to 2,743.07 as the energy and consumer discretionary sectors declined. The Nasdaq Composite slid 0.2 percent to close at 7,408.14.

Equities fell sharply at the start of the session before paring losses. At its low of the day, the Dow was down 220.77 points while the S&P 500 had lost nearly 1 percent.

The indexes posted their biggest weekly declines of the year. The major indexes all dropped more than 2 percent this week. The Nasdaq snapped a 10-week winning streak, while the Dow notched its second weekly decline of the year.

The U.S. economy added just 20,000 jobs in last month, marking the weakest month of jobs creation since September 2017. Economists polled by Dow Jones expected a gain of 180,000.

“February’s anemic 20,000 new jobs will inevitably exacerbate widespread fears of slowing economic growth, making it harder to be optimistic about corporate earnings,” said Alec Young, managing director of global market research at FTSE Russell. “All in all, there’s little in this report to excite investors.”

The data come amid growing concerns about the global economy possibly slowing down. Data out of China showed its exports slumped 20.7 percent from a year earlier, far below analyst expectations and wiping out a surprise jump in January.

Analysts cautioned that data from China at the beginning of the year may be distorted by week-long Chinese New Year public holidays, which started in early February this year. In 2018, Chinese New Year holidays started in mid-February.

The weak data all come less than 24 hours after the European Central Bank slashed its growth forecasts for the euro zone and announced a new round of policy stimulus.

“Most investors would agree we are late in the cycle,” said George Schultze, founder of Schultze Asset Management. “Having said that, GDP growth remains pretty solid. We’ve had about 10 years of solid growth. … There are also a lot of things pushing it along, including accommodative monetary policy.”

Friday’s losses come amid growing fears that most of the positive news on the U.S.-China trade front may be baked in. At this point, most investors expect the two countries to strike a trade deal later this month. There are also worries that a deal may not be sure thing.

CNBC learned through sources that China and the U.S. have talked about holding further discussions in Beijing after the National People’s Congress concludes on March 15. This was first reported by The New York Times.

“A pullback in risk assets was needed, but underlying technical and fundamental conditions are positive,” Peter Perkins, partner at MRB Partners, wrote in a note to clients. “The global growth outlook remains mixed, but there are signs that economic growth momentum in China and the euro area is bottoming, while the U.S. economy continues to chug along at a moderately above-potential pace.”

Last week, I discussed whether a bubble in stocks is brewing and said even though it's unlikely, with the Fed out of the way for now, you can't discount the possibility and some red hot sectors like biotech were getting bubbly.

In fact, this is what I stated:

My own view is following a disastrous Q4, it was a time to make stocks great again, and the world's most influential allocators stepped in and rebalanced their portfolios into equities. When the Fed hit the pause button, they bought more equities.

Now we are at a point where people are wondering, with the Fed out of the way, for now at least, are we going to have another bubble in stocks like 1999?

As it stands, I wouldn't get too carried away but have a look at the year-to-date performance of the S&P500 sectors (click on image):

As you can see, the S&P 500 is up close to 12% and the leading sectors are cyclical sectors like Industrials (XLI) and Energy (XLE), followed by Technology (XLK) and Consumer Discretionary (XLY).

Conversely, the lagging sectors are defensive like Consumer Staples (XLP), Utilities (XLU) and Healthcare (XLV).

Importantly, if we are at the late stages of an economic rally, this isn't what you should be seeing, so either the stock market is high on cannabis stocks or the bond market has it all wrong.

But if you look at US long bond prices (TLT), they're rolling over here as yields back up (click on image):

Again, this isn't indicative of a global slowdown, quite the opposite, so maybe there is a renewed economic uptrend taking place.

Or maybe not, it could be just another buying opportunity for bonds and come the end of Q1 at the end of March, if we don't get any clear signs of a trade deal with China, I'm willing to bet the world's most influential allocators are going to rebalance yet again but this time take money out of stocks and into bonds.

It won't be a major rebalancing but enough to stall this impressive rally in stocks, so don't get too excited, nothing goes up in a straight line.

When stocks are up over 10% in two months, a lot of investors rebalance, locking in some gains, and wait for a better opportunity to reenter the stock market.

This is especially true in this enironment where there's a lot of unceretainty over Brexit, China-US trrade talks, etc.

This morning's US jobs report was abysmal, way below what most economists were expecting. In fact, it was a very weird report and it's hard to read too much into one month, but it's clear if this continues, it will confirm a US slowdown is underway.

What's even weirder, in Canada, we added 56,000 jobs last month, so either the BLS has it wrong or Statistics Canada has it wrong because these red hot Canadian job figures don't jive with a lot of headlines we are seeing in the news (I expect major downward revisions in subsequent Canadian jobs reports).

Anyway, back to the US jobs report. From the key takeaways, the weaker sectors of the job market last month included construction, mining and retail, while the healthcare and business services industries created jobs in February. Despite job creation stalling last month, figures from the two prior months were revised higher.

While a lot of attention has been given to the weak US jobs report, I don't think it had anything to do with the stock market's weak performance this week. Like I said, smart investors are locking in some gains, waiting for a better time to reenter the market.

After the surge in stocks in January and February, it's only normal we see a pullback as investors wait for a catalyst to send stocks and other risk assets higher (click on image):


Can US stocks go lower? Sure they can, especially in the short-run, but I wouldn't be surprised if this is just a pullback, for now.

Just like we need a catalyst to propel stocks higher, with the Fed out of the way, we need one to sink them much lower.

Can the S&P500 give back its gains from the first two months? Absolutely possible but I'm not convinced it will. Can it revisit December lows? It can if all hell breaks loose but again, with the Fed on pause mode, I don't see this as a likely outcome, at least not now.

Some think the Fed is getting wonky here, signalling the possibility of more QE and negative rates if needed:

10 years ago markets made their crisis lows.
For 10 years the Fed was "accommodative"
For 3 months last year they weren't & everything fell apart.
After markets dropped 20% they went back to accommodative by stopping rate hikes.
Now they're signaling QE & neg rates.
¯\_(ツ)_/¯

— Sven Henrich (@NorthmanTrader) March 6, 2019

Maybe that's what is unnerving investors but if this happens, it will only raise the risk of another stock market bubble down the road.

As far as I'm concerned, we're just entering March Madness, stocks will be choppy, you need to pick your spots carefully.

Have a look at the how the S&P sectors performed this week, courtesy of barchart (click on image):


As shown, the S&P 500 was down over 2%, Utilities and Real Estate were the only sectors posting gains, up 0.7% and 0.5% respectively, while Financials (-2.69%), Industrials (-2.86%), Energy (-3.86%) and Healthcare (-3.87%).

The outperformance of stable sectors like Utilities and breakdown in cyclical sectors like Financials, Industrials and Energy, is normal if we are entering a slowdown, but I'm a bit perplexed as to why healthcare stocks got slammed so hard.

Part of it is the biotech component as biotechs (XBI, IBB) got slammed this week, but the other part of it is maybe healthcare stocks are "feeling the Bern" of top Democratic presidential candidates calling for universal healthcare and calling for more regulations on big pharma and big tech.

I don't know, it's a bit weird but that's how these algo-driven markets are, very weird, it's hard to make sense of them when you analyze them rationally, especially over a short period.

Anyway, here are the top-performing US stocks for this past week, courtesy of barchart (click on image):


As you can see, even though the broader biotech indexes (XBI, IBB) didn't perform well this week, pulling back, some of the top-performers were small-cap biotechs.

I was tracking the action on one of them, Seelos Therapeutics (SEEL) as investors got very excited after Tuesday's announcement that the small biotech had exclusively in-licensed a family of peptide inhibitors from The Regents of the University of California.

The peptide inhibitors, which were developed by a research team at the University of California, Los Angeles, target the aggregation of alpha-synuclein. Alpha-nuclein is a major component of Lewy bodies, protein clumps that are a hallmark of Parkinson's Disease.

Anyway, the stock was up 70% yesterday and opened up close to 80% today on hige volume before ending the day up 11% (click on image):


No doubt, big biotech funds bought in but people are getting excited over nothing and if you look at the long-term chart of Seelos, you'll see that it's been a total disaster, but speculators hear about a licensing agreement and potential cure for Parkinson's and they jump all over it (I feel sorry for retail suckers who bought in at the open today).

We shall see what next week brings us but right now, I wouldn't get too nervous about the pullback in stocks this week, think it's perfectly normal.

Below, CNBC commentators discuss February's dismal jobs report.

And, as stocks see their worst week of the year, utilities just hit a new high while energy stocks got slammed. With CNBC's Scott Wapner and the Options Action traders, Carter Worth, Mike Khouw and Dan Nathan.

As I said above, the breakdown in cyclical sectors like Energy and outperformance of Utilities and other high-yielding sectors like Real Estate and Telecoms, suggests there is a slowdown happening and US long bond yields are headed lower.

James Comtois of Pensions & Investments reports, Healthcare of Ontario Pension Plan posts annual return of 2.17%:

Healthcare of Ontario Pension Plan, Toronto, returned a net 2.17% on its investments in 2018, with the pension fund's assets reaching C$79 billion ($57.9 billion) as of Dec. 31, according to an announcement Monday.

HOOPP's funding ratio was 121%, vs. 122% the previous year. The 2018 return was below the previous year's return of 10.88% but exceeded the 2018 custom benchmark return of 0.01%.

The pension fund's assets were up 1.5% from the end of 2017. Investment income for 2018 totaled C$1.7 billion, down from C$7.6 billion in 2017.

"To ensure we deliver on our pension promise to members, our investment strategy takes a very long-term view while anticipating and adapting to market changes," said Jim Keohane, HOOPP's president and CEO, in a news release announcing the annual results. "Our approach allows us to preserve value even during turbulent and challenging investment environments."

HOOPP's liability hedge portfolio — nominal bonds, real estate and real-return bonds — generated 0.43% of value added, with a significant contribution coming from short-term, nominal bonds and real estate. Meanwhile, HOOPP's return-seeking portfolio generated 1.73% of value added with large contributions from private equity, credit and absolute-return strategies, according to the pension fund's annual report.

For the 10 and 20 years ended Dec. 31, the pension fund returned an annualized net 11.19% and 8.52%, respectively.

An asset allocation as of Dec. 31 was not provided.

On Monday morning, HOOPP put out a press release, Funded status is 121% and net assets increased to $79B:

The Healthcare of Ontario Pension Plan (HOOPP) announced today that its net assets reached $79.0 billion at the end of 2018, up from $77.8 billion at the end of 2017. Funded status at the end of 2018 remained strong and stable at 121% compared to 122% the prior year.

Investment return for 2018 was 2.17% compared to 10.88% in 2017. Of the 2.17% return in 2018, 0.01% was benchmark return and 2.16% came from value-added from active management decisions. The investment environment was very challenging in 2018 so we are pleased to have been able to produce a positive return.

Investment income was $1.7 billion for the year compared to $7.6 billion in 2017. The liability hedge portfolio generated a return of $1.1 billion (real estate and fixed income strategies were the main contributors), while the return seeking portfolio generated a return of $0.6 billion (private equity and other alternative strategies were the main contributors).

The Fund’s 10-year annualized return is 11.19% and its 20-year annualized return is 8.52%.

“To ensure we deliver on our pension promise to members, our investment strategy takes a very long-term view while anticipating and adapting to market changes,” said HOOPP President and CEO Jim Keohane. “Our approach allows us to preserve value even during turbulent and challenging investment environments.”

“Looking ahead, HOOPP continues to explore new and effective investment opportunities and strategies,” he added.

Other Highlights

• In November 2018, HOOPP released groundbreaking research that looked at the most efficient ways for individuals to save for retirement and what can be done to reduce the cost of retirement for more Canadians.
• In 2019, HOOPP will welcome more than 14,000 new members following the merger of six healthcare pension plans into HOOPP, pending regulatory approval.
• As a result of HOOPP’s strong funded status, we were able to provide the maximum increase in the cost of living adjustment (COLA) allowed under the Plan.
• Contribution rates have remained unchanged since 2004.

For more information about HOOPP’s financial results please view the 2018 Annual Report.

About the Healthcare of Ontario Pension Plan

Created in 1960, HOOPP is a multi-employer contributory defined benefit plan for Ontario’s hospital and community-based healthcare sector with more than 570 participating employers. HOOPP’s membership includes nurses, medical technicians, food services staff and housekeeping staff, and many other people who work hard to provide valued Ontario healthcare services. In total, HOOPP has more than 350,000 active, deferred and retired members.

As a defined benefit plan, HOOPP provides eligible members with a retirement income based on a formula that takes into account a member's earnings history and length of service in the Plan. HOOPP is governed by a Board of Trustees with representation from the Ontario Hospital Association (OHA) and four unions: the Ontario Nurses' Association (ONA), the Canadian Union of Public Employees (CUPE), the Ontario Public Service Employees' Union (OPSEU), and the Service Employees International Union (SEIU). The unique governance model provides representation from both management and workers in support of the long-term interests of the Plan. 

This press release was made public at 11 a.m. sharp this morning. An hour earlier, I had a chance to talk to HOOPP's CEO Jim Keohane about the 2018 results.

Let me first thank Jim for taking the time to talk to me and also thank James Geuzebroek, HOOPP's Senior Manager, Public Relations & Corporate Communications, for arranging this call and for sending me an embargoed press release on Friday, effectively giving me time to prepare for my call with Jim.

As I stated, I've been covering HOOPP's annual results for years with Jim so by now I pretty much know what he's going to tell me before he says it but I always learn something new and today wasn't any different.

Jim began by telling me 2018 was "a very tough year." He said over 90% of the assets classes were down and they were very happy to eke out a positive return, especially after a brutal Q4.

They began last year by thinking equities were overvalued and that hurt them in the first half of the year as they hedged and went underweight.

Come Q4, however, this proved to be the right call and it really helped them weather the storm.

I was actually suprised and asked: "Isn't 50% of HOOPP"s portfolio basically in Fixed Income, so didn't nominal US Treasuries protect you and give you some positive returns?".

Surprisingly, Jim said US Treasury spreads widened last year whereas Canadian one narrowed (I'm pretty sure he was referring to the 30-year bonds but on page 17 of the 2018 Annual Report, they discuss both 10-year and 30-year bonds ).

I was surprised to hear this and referred him to a recent comment of mine, Are US Public Pensions Cooked?, where one of the best bond traders I know here in Montreal (should put him in touch with HOOPP) told me told me that right now his conviction trade is to go long the 5-year US bond and to short the 10-year Canadian bond.

That bond trader also told me "a big fund keeps buying Canadian long bonds, much to his amazement."

Jim too was a bit perplexed as to this outperformance of Canadian long bonds relative to US telling me: "The US Treasurys market is the most diversified and liquid market in the world, so we were surprised to see this discrepancy."

Anyway, what's interesting is how HOOPP does its strategic asset alocation. By the end of October, they were "significantly underweight equities" and they go overweight/ underweight using put-call spread strategies, hedging just in case they're wrong.

Remember, HOOPP is a derivatives powerhouse, they use derivatives extensively to leverage and to express tactical calls because they are always looking to mitigate downside risk if they're wrong.

Now, let me go into a bit more detail on the 2018 annual results from pages 17-25 of HOOPP's 2018 Annual Report.

First, the overall results from page 17 (click on image):

As you can see, HOOPP gained 2.2% in 2018, in line with what OMERS delivered last year, but the interesting thing is unlike OMERS, HOOPP doesn't have almost half its portfolio in Private Markets and it fully hedges foreign exchange risk.

More interesting, that 2.17% gain is all value-added return (2.16%) over HOOPP's benchmark which "isn't easy to beat" making these results very impressive during a year when US long bonds didn't do particularly well.

Keep in mind, HOOPP's value-added and overall results were better in 2017 but it was an easier year, but over a 10 and 20- year period the value-added over benchmark is very impressive, and all this while keeping expenses at the lowest level relative to its larger peers (click on image):


Digging deeper on active management, on page 20 of the Annual Report, we see HOOPP's Liability Hedge Portfolio generated 0.43% of value-added, with a significant contribution coming from Short-Term, Nominal Bonds and Real Estate, while the Return Seeking Portfolio generated 1.73% of value-added with large contributions from private equity, credit and absolute return strategies (click on image):


On page 23 of the Annual Report, we see that HOOPP Capital Partners had a great year (click on image):

HOOPP Capital Partners (HCP) selectively invests globally in three key areas: (i) privately held businesses that offer the potential for equity or near equity returns, (ii) private equity funds, and (iii) other private capital opportunities such as private debt. Through the work of skilled teams, private capital provides an opportunity for pension funds to earn attractive risk-adjusted returns.

At the end of 2018, HCP had $9.4 billion invested, with a further $6.1 billion committed to private investments. The portfolio generated a currency-hedged return of 13.7% for the year compared to 19.6% in 2017 (the return on an unhedged basis was 20.8% in 2018 compared to 18.2% in 2017), exceeding its benchmark by $651 million. HCP’s invested capital has increased by over $7 billion since 2012 and now includes a larger proportion of direct and co-investments as well as credit and structured investments with lower risk/return attributes.

The fair market value of the invested portfolio represents 12% of the total Fund.

Equally impressive was the "Other Return Seeking Strategy" and how it performed in 2018. From page 24 of Annual Report:

Asset Allocation Strategies

HOOPP engages in the strategic re-weighting of major asset class risks (equities, fixed income and corporate credit) in order to manage the risk and return of the Fund. In 2018, this program generated a profit of $285 million, compared to a loss of $28 million in 2017.

Absolute Return Strategies

Absolute return strategies are designed to earn positive returns with minimal sensitivities to interest rates, credit or equities. These strategies contributed $233 million in investment income in 2018, compared to $158 million in 2017.

As I mentioned above, HOOPP got its asset allocation strategy (tactical asset allocation) right and this was a significant contributor to value-added as were its absolute return strategies which it does internally, forgoing paying any fees to outside managers.

[Note: See my recent comment on IMCO and why the Canadian pension model must evolve, the optimal rebalancing strategy, as well as a recent Man-AHL study on Strategic Rebalancing which Cam Harvey co-authored. ]

Interestingly, I asked Jim Keohane about where HOOPP's valuation models stand now after the big bounce in US equities this quarter and he told me "they're back close to fair value whereas at the end of December they were at a 5-year low in terms of valuations."

Another interesting tidbit is HOOPP's Long-Term Option Strategy (from page 23 of the Annual Report):

The Long-Term Option Strategy combines equity index exposure with equity index options and was successfully positioned to reduce HOOPP’s aggregate equity exposure during 2018. This portfolio had a gain of $1.2 billion during the year, compared to a loss of $496 million in 2017.

We also discussed HOOPP's Real Estate portfolio but before getting to that, from page 21 of the Annual Report:

In 2018, the HOOPP Real Estate Portfolio produced a return of 8.88% on a currency hedged basis. This represents an outperformance of 135 basis points relative to the benchmark MSCI Canadian Real Estate Index.

At year-end, the portfolio was valued at $14.3 billion on a gross market value basis (versus $13.4 billion at the end of 2017). A total of more than $1.4 billion in investments or investment commitments were made during the year, offset by just under $0.5 billion of property sales.

Recent investments position the Real Estate Portfolio well for future positive returns and include the following:

• the start of construction on office development projects in Toronto (a 460,000-square-foot building at 25 Ontario Street) and Vancouver (the 370,000-square-foot phase two of Vancouver Centre), and the substantial lease-up of Creechurch Place, a newly built 276,000-square-foot office tower in London, England;
• the continued expansion of the Industrial Portfolio with the completion of major distribution facilities for Amazon in Germany and in Vancouver, and the commencement of construction for buildings in Doncaster, England (for Amazon) and in the Greater Toronto Area (for Mars Canada); 
• in the residential sector, the acquisition of an interest in a 1,209-unit residential project in Denver, Colorado, and completion of a 507-unit apartment complex in Hollywood, California; and
• successfully gaining control of the former Sears premises in a number of Canadian shopping centres within the portfolio, and achieving good progress in implementing plans to backfill the vacant space.

Now, you'll notice HOOPP"s Real Estate Portfolio is benchmarked relative to MSCI Canadian Real Estate Index and that's because almost 70% of its real estate portfolio is within Canada (click on image):


Still, with 32% of the Real Estate invested in the US and Europe (15% and 17% respectively), you wonder how much of the 135 bps outperformance in that asset class came from these regions and whether the benchmark needs to be a regional mix (maybe not yet as 70% is invested in Canada).

Anyway, more interestingly, was the conversation I had with Jim on HOOPP's Real Estate portfolio. He told me that HOOPP is underweight retail for some time and while this turned out to be the right strategic decision given the plight of malls, he said it was because "all peers own the best retail properties around the country."

He said "Amazon is their single biggest tenant" and they are working with the company in the UK and Canada on industrial warehouses where they sign 20-year leases at very attractive rents (rents are cheaper than class A office buildings but they have grown the most recently because of the rise in  e-commerce).

In Vancouver, things are moving along nicely with the Brentwood Town Center (click on image):


Jim told me they have high-end tenants making up restaurants and shops. It's in Burnaby, right outside Vancouver, but "you can see downtown Vancouver" and "the Skytrain passes through it and it takes four or five stops to get to downtown."

He said 5 of the 11 condo buildings have been built and they're selling within a week as they're reasonably priced so young professionals can afford them (probably, with a huge mortgage).

Our conversation then moved to Infrastructure. Unlike its peers, HOOPP hasn't invested in any infrastructure but as the plan grows, it needs to start thinking about scale and Jim told me they're preparing the infrastructure for infrastructure so they can capitalize as opportunities arise in the future.

Importantly, he still thinks Infrastructure is expensive, said some of his peers like OMERS "haven't done a major infrastructure deal in a long time" and he thinks it's because the multiples don't justify the investment. "It's hard to make money when you pay too much upfront."

True, but I told him there may be structural reasons to worry that high valuations are here to stay in all private markets and you need to focus on realizing on your value creation plan, ie. work the asset, to realize gains.

I took the opportunity to plug Andrew Claerhout, the former head of Infrastructure and Natural Resources at OTPP, and told Jim I think HOOPP should definitely be one of his anchor investors in his new infrastructure fund because in my opinion, Andrew is one of the best infrastructure investors in Canada, he really knows the asset class well and he's the person I trust the most when it comes to making money in this asset class when the going gets tough. He's also the reason why his former team at Ontario Teachers' (which he hired) was recently awarded 2018 Infrastructure and Transport Investor of the Year, North America.

Anyway, it's true HOOPP isn't as invested in private markets as its larger peers but as the Fund grows, it won't have a choice but to invest in infrastructure. And with just over 25% in Real Estate and Private Equity, HOOPP still has an important exposure to private markets.

But Jim told me "privates aren't cheap" and it's getting tougher to make money as valuations remain high. Again, I totally agree but I'm not so sure there will be a big unwind any time soon and even if there is, institutional investors will be buying up assets like crazy.

If there are structural reasons to believe valuations will remain high, competition ferocious, then you have no choice but to buy high, work the asset in order to  realize a gain (ie., stick to a solid value creation plan and have the right partners to guide you through it).

What else? Jim and I spoke about the funded status of the plan which remains unchanged at 121%. Remember, by law -- a very dumb law in my opinion -- HOOPP (and other Canadian pension plans) cannot be more than 125% funded so when it approaches this level, it has to give some back to its members a 2% increase in their pension to reflect the full cost of living adjustments.

#HOOPP's cost of living adjustment (COLA), approved on an annual basis, safeguards the buying power of members'#pensions. Learn more about inflation protection: https://t.co/sePppQIULD#HOOPPFactFridaypic.twitter.com/dRXkjhBEzY

— HOOPP (@HOOPPnow) March 8, 2019

Importantly, even though COLA increases are not guaranteed (HOOPP has a shared-risk model and adopted conditional inflation protection), its Board has been able to grant a rate of 100% of the CPI since 2014, thanks to the Plan’s strong performance.

That's a nice problem to have, a lot of US public pensions which they had this problem.

Jim told me even though the Plan is fully funded, HOOPP lowered the discount rate from 5.5% to 5.3% to "have an extra cushion," which shows you they are being wise and cautious, preparing for lower returns ahead.

We also discussed how the Government of Ontario pads its books by using pension surpluses to make its public finances look better. Jim assured me "in the case of HOOPP, it's the opposite, they only account for deficits, not surpluses but I don't think the government should use pensions on its books." I couldn't agree more and hopefully the Ford Government will put a stop top this practice.

That brought our conversation to public policy on pensions. Last week, when I compared OTPP to PSPP, I stated this:

You'll recall, this is what Malcolm Hamilton and Philip Cross called the dirty secret behind Canada's pensions. That comment generated many more comments from my readers and ultimately led me to write a lengthy comment on retirement security in Canada.

After writing that last comment, Malcolm Hamilton came at me hard in an email exchange stating this:

So here's the problem with your position. You compare Target Benefit Plans to Defined Benefit Plans that cost twice as much. It's like comparing a Pontiac to a Porsche (I'm dating myself).

Properly priced, a public sector DB plan costs 40% of pay. By changing the guaranteed benefit to a target benefit that will be adjusted as circumstances require (by changing the level of the benefit or the indexing), we reduce the cost of the pension plan to 20% of pay. So yes, the DB pension is much more valuable. But it is much more valuable because it is much more expensive, not because it is a better plan design. I see no evidence that members will voluntarily pay the extra 20% of pay. I believe that most public sector employees would rather pay 20% of pay for the Target Benefit Plan than pay 40% of pay for the Defined Benefit Plan. In other words, the Target Benefit Plan is better value.

In support of my position, I draw your attention to the behavior of employees in DC plans that allow them to choose between safe investments (long term government bonds) and more risky ones. Virtually no retirement saver voluntarily invests all of their money, or even half of their money, in government bonds. When employees retire, few decide to buy annuities. They prefer to take investment risk and, by so doing, to strive for higher returns and, eventually, higher incomes. They could save twice as much and take less risk, but they choose not to do so.

I believe that the same will happen in Target Benefit Plans. The plans will invest in balanced portfolios that will typically deliver good returns and good pensions, but with no guarantees. The plans will take less risk than today's public sector DB plans because employees will no longer be able to pocket the reward for risks borne by the public - hence risk-taking will be less advantageous to plan members.

You may not understand this. You may not want to understand it. But this is how things work. If you feel differently, explain how the public is now rewarded for the investment risks it bears. Or perhaps you think that public employees deserve a free ride? As I wrote earlier, the federal government's DB plan is no different than telling federal employees that they can use 20% of their compensation to buy long term RRBs with 4% real interest rate while offering other Canadians a 1% real interest rate on the bonds they buy.

I have tremendous respect for Malcolm, think he's one of the best-retired actuaries in the country but I'm not in full agreement with his proposed Target Benefit Plan because it leaves retired members of a plan vulnerable to the vagaries of markets.

I shared his comment with HOOPP's CEO, Jim Keohane, who shared this with me:

This is a bit of a “glass half empty “ view. You could also view it that prudent risk-taking, scale, good governance and good management allow Canadian model plans to provide good pensions for 20% of pay which would otherwise cost 40% of pay thus saving taxpayers 20% of pay.

The Federal Public service plan is unique in Canada in that the employer assumes all of the downside risk. Virtually every other public sector plan is a shared risk plan with contingent benefits. In the case of HOOPP, neither the employers or the province guarantee the pension. The only obligation the employer has is to pay their share of the annual contributions as long as they remain members of the plan (which is voluntary). When you consider that COLA is not guaranteed and can be reduced or eliminated should plan funding be insufficient, employees accept most of the risk of underfunding. The notion that taxpayers are taking all the risk and that plan members are getting all the benefit is simply not true.

What we should be focusing on is the efficiency of the conversion of pension savings into pension payments. Our recent research paper “The Value of a Good Pension” shows the efficiency of moving from individual savings plans to collective plans. If more Canadians were fortunate enough to be members of Canada model plans there would be a much larger pool of savings to pay pensions which would benefit all of Canadian society and taxpayers.

I couldn't agree more with Jim on this last point. Jim was actually in Washington D.C. last week where he spoke at a conference held by the National Institute on Retirement Security. You can find details of that event here and download Jim's presentation here.

Below, I share the key findings (click on image):

You should all take the time to watch a replay of that conference by clicking here. Jim Keohane was the first speaker (fast forward to minute 12) and he did a wonderful job.

Along with OPTrust's Hugh O'Reilly, Jim has been an outspoken defender of well-governed defined-benefit plans and thinks we need to expand the Canadian model of pensions to all Canadians.

I asked him why he's so outspoken and he told me it's because "it's in the Plan members' best interests" and it simply makes sense to expand coverage to all Canadians in a cost-effective and collective way.

Lastly, we discussed some organizational changes. In 2018, HOOPP hired Michael Wissell to be Senior Vice President, Portfolio Construction and Risk doing a lot of the same work he was doing at Ontario Teachers'. You can view HOOPP's Executive Team here.

I commend all the employees at HOOPP for delivering decent returns in a very difficult year. Jim told me it was a very challenging year so he's happy they had a positive return and more importantly, remained fully-funded.

I look forward to meeting with Jim, Michael Wissell and others at HOOPP and other large Canadian pensions when I make it back to Toronto later this month (need to plan my trip).

Anyway, please take the time to read HOOPP's 2018 Year in Review and the 2018 Annual Report.

A couple of minor things I think are missing in the Annual Report is asset class weightings and a full and transparent discussion on compensation along with the total compensation of the top five officers. I realize HOOPP is a private, not a public plan, but I'm a stickler for transparency and it can into more details in all areas, including compensation (according to Jim, it's in line with others but not as generous and they make it up to their employees by giving them more breadth and responsibilities).

Below, HOOPP's President & CEO Jim Keohane discusses the Plan’s 2018 performance and explains how the Plan performed in 2018.

Earlier today, Jim joined Amanda Lang of BNN Bloomberg to discuss the Plan's 'home country bias'. Can't say I agree with him there, I'm still short the Canadian economy (our day of reckoning is approaching fast) and prefer US equities to all other stock markets on the planet, especially the S&P/ TSX which is primarily banks, energy/ mining and telecoms.

Lastly, Jim answers questions from HOOPP members. These members can rest assured they are more than lucky to be part of one of the best pension plans in the world no thanks to Jim Keohane and the rest of the professionals working at HOOPP.

I thank Jim for taking the time to cover HOOPP's 2018 results in detail, hope you all enjoyed reading this comment and thanks to James Geuzebroek for keeping me in the loop.

I attended a CFA Montreal luncheon today at the Sheraton titled Resilience According Pierre Boivin and Peter Letko:

How investment pros navigate challenging situations, manage change and bounce back from setbacks.

Learn from the personal experience of Pierre Boivin and Peter Letko, CFA; how they mitigate risks, react to adversity, overcome challenging setbacks.

• How they survived financial crises and other professional or personal challenges.
• How they manage stakeholders.
• How they manage risks.
• What are their coping strategies to face setbacks and stress.

Here were the panelists and moderator (click on image):

Let me first thank Christelle Lenoir of National for sending me an invitation to this event.

I typically don't go to these events but this one intrigued me because I've never heard or seen Peter Letko and Pierre Boivin, only heard of them by reputation.

The topic, resilience, also intrigued me not because I'm a stranger to it. I can easily write THE book on resilience given all my life experiences but I wanted to hear perspectives from more experienced pros.

This was a more intimate affair and what I liked about it was these two classy gentlemen shared a lot of personal experience, values and some professional insights on how they learned all about resilience from their parents and mentors and through their unique experiences at work.

The best way I can describe it to you is let's say you were going to have dinner and wanted to invite interesting people with a wealth of knowledge and experience, these two would be at the top of my list.

Before the event started, I met a very nice lady who now runs her own family office. She impressed me with her investment knowledge and basically figured out on her own most private wealth outfits at the big banks are "full of it" as are many investment managers.

She told me over 95% of investment managers can't beat the S&P 500 over a three-year period and when she sees Canadian brokers investing primarily in Canada, charging outrageous fees, she's hardly impressed.

Moreover, she told me "it's all about matching assets with liabilities," I like to travel and the "Canadian peso" hasn't been a good currency these last few years.

I told her Canadian equities are mostly cyclical in nature -- big banks, energy, mining and industrials -- so unless you have a very favorable view of global growth, stay away. I much prefer US stocks and the US dollar over the long run and any broker who tells me "I don't invest in technology" has significantly underperformed the market no matter what they claim.

I can't say I disagreed with her observations on how the investment industry is full of charlatans, seen plenty of them over the years, but what I told her is Letko, Brosseau & Associatesis the real deal, they have a very long and enviable track record and I wouldn't flinch one second recommending them to her or any other high net worth individual looking for professional money managers to manage their assets.

In fact, since its inception in 1987, LBA has delivered $13.5 billion of value added to its clients (click on image):


You'll be hard-pressed  to find any other investment manager in Canada with such a track record spanning over decades.

Are they perfect? No, nobody is, and what I liked about Peter Letko is his honesty in sharing some of the more difficult times.

For example, when Nortel hit 40% of the Toronto Stock Exchange capitalization, he said it was stressful visiting clients explaining why they didn't own any. "We looked at the numbers and the company wasn't making any money and we saw insiders selling their shares in droves so resisted buying any shares. In the end, Nortel went bankrupt and we went on to manage billions."

I grinned because that whole Nortel saga brought back haunting memories. At the time, I remember taking part in a meeting at the Caisse when then-president and vice-president, Jean-Claude Scraire and Michel Nadeau were asking senior VPs whether they should add to Nortel as shares fell to $60.

I remember the Caisse's then CIO, Pierre Lussier, was pounding the table to buy but Adel Sarwat who was the senior VP of global equities was much less enthusiastic and reluctantly agreed.

I myself made money on Nortel buying call options early on, kept buying calls and amassed an over $50,000 position in Nortel calls in my late twenties and thought I was going to retire stinking rich.

That didn't pan out so well for me, the Caisse and millions of Canadians who got royally screwed investing in the Nortel mania (till this day, my father keeps cursing "Frank Dunn and the Nortel thieves" and thinks the stock market is nothing but speculation).

Anyway, back to Peter Letko, he talked about the 2008 crisis and said they thought they were in pretty good shape, selling cyclical shares prior to the crisis because the "US savings rate hit zero" as the housing frenzy hit a peak and buying solid companies like Pfizer at $25 a share and some German utility company, but they too got clobbered during the crisis.

He said "all you could do is sit and wait" but he called it the "investment opportunity of a century" and in retrospect, it was, with a lot of help from Hank "the Tank" Paulson, Ben Bernanke and Tim Geithner and a whole lot of quantitative easing (QE which I predict is coming back soon).

What I remember from back then is that it was insane, unlike anything I've seen before. The dot.com meltdown was nothing compared to 2008, there was real tangible fear, unlike anything you can possibly imagine unless you lived through it.

For his part, Pierre Boivin talked about his life experience and it's quite an interesting life.  At the age of 25, he founded Norvinca Sports which would become the largest sporting goods distributor in Canada. In later years, he would become the CEO for Canstar Inc., the company which owned the Cooper and Bauer sports equipment brands.

From September 1999 to June 2011, he was the President of the Montreal Canadiens, succeeding Ronald Corey.

Mr. Boivin spoke of "having a long-term plan" and "executing on the plan." He said after accepting the job for the Canadiens, he took six months to visit other sports franchises to benchmark best practices in everything including managing real estate.

He said some of the most incredible influences in his life was his stepfather who helped him set up his first business and hockey legends Jean Beliveau and Bob Gainey. "I admired both of them, Jean was a class act till the day he died and Bob was the epitome of resilience. When he lost his daughter and later his wife to cancer, he went through a very difficult time and yet he always remained strong."

One thing I liked about what Pierre Boivin said is when you succeed, you have a responsibility to help others. "Those were the values instilled in me at a young age and those are the values that guide me today." And he added: "Helping isn't just about writing a cheque, it's about rolling up your sleeves and doing anything you can to help charities and organizations in need."

Mr. Boivin had a few choice words about the younger generation and that included his children who are adults now: "Analysis, paralysis. You spend too much time analyzing something and take no decisions."

In terms of dealing with stress, he said he trains every day and sleeps like a baby, a full eight hours a night. He added "I'm not stressed but others say I stress the hell out of them!" which made the audience laugh.

He alo shared a story about when Bob Gainey brought up Carey Price from the minors at a young age of 19 after stunning the world when he drafted him. "Bob told me he's dominating the minors, it's time for himto play with men. He's going to screw up in the first three years so it's best to get the criticism out now (as Montreal fans are notoriously critical of their hocvket team):


Anyway, Pierre Boivin struck me as a very smart and classy man with great business and life experience. He said he's surrounded by a great team at Claridge and his job is to be "le chef d'orcheste" (ie. the composer).

At the end, Peter Letko spoke very kindly of his partner, Daniel Brosseau. He called him "a true renaissance man, an engineer/ MBA student who reads on many subjects, loves arts and is a great partner and friend."

He said the two met working at CN Investment Division, they used to travel together for work, and decided to open their own firm in 1987.

When asked if his partner ever stressed him, Mr. Letko said: "Only once, a long time ago, when I walked into the office early one morning and saw Daniel on the floor with what was our server in pieces. He said 'don't worry, Peter, I'm fixing the DRAM47 and it will be up and running before the market opens."

I remember seeing Daniel Brosseau many times on the train as I headed home, always reading something.

Mr. Letko also spoke highly of his mentor at work, Ron Woods, "a man who taught me how to interview companies."

In terms of investments, he still likes airlines stating "as people make money, they travel more" and he said they still own Air Canada shares after amassing a 20% stake in the company when shares were cheap."

He said he likes their portfolio more now since "the multiples came down significantly at the end of last year and are now at 12 or 13 times earnings."

[Note: I track LBA's portfolio every quarter when I go over top funds' activity.]

In terms of his investment outlook, he ended it on an optimistic note saying there are almost 8 billion people on earth, most of them are starving but over a billion live in the developed world and secular economic growth will continue, companies are managed much better nowadays."

Interestingly, before that comment, he said how he admired his parents who fled Czechoslovakia during the second world war with "nothing but me on their back" and came to Canada. "Their resilience shaped me and led to my success" which explains his optimistic outlook.

At the end, the moderator, Ludovic Dumas, VP Direct Investments at Claridge, asked both men which books they recommend.

I can only remember the one Peter Letko recommended, Back to Beer...and Hockey: The Story of Eric Molson, because it was written by a family friend, Helen Antoniou who is married to Andrew Molson.

Mr. Letko said: "It's a great book because it shows you how even blue-chip companies can have major board dysfunctions. In fact, I liked the book so much, I bought copies for all my board of directors."

I'm biased because Helen is a friend and I know she put her heart and soul into writing that book, but truth be told, it really is a great book about a very interesting, successful and humble man, her father-in-law, Eric Molson.

Last year, I was invited to Eric and Andrew Molson's birthday party and the story that stood out to me was something Geoff Molson shared with family and friends. It was about how as kids they were once walking with their father and saw a man who seemed homeless and down and out. Eric, their father, turned to them and said: "You see that man, be nice to him, he might be a customer of ours."

I don't know why but that story stuck with me and if you ever meet the Molson family, you'll see the sons are like their father, engaged with the community, low key and humble.

Anyway, I've shared enough. I was surprised I didn't see many people I knew at this event because it really was a great one. The next CFA Montreal event is on March 28 featuring Bob Woodward discussing the age of American presidency.

That should be a great one too, over 600 people are attending it, but I'm going to be in Toronto that day attending a CFA Toronto conference on pensions and looking forward to a panel discussion featuring Marlene Puffer, Jean Michel, and James Davis.

I did get to meet someone from the Caisse at this lunch, Frédéric Godbout, Senior VP Strategic Partnerships which is a new group headed up by my former boss, Mario Therrien. Frédéric handles partnerships with large family offices and the Caisse struck a deal with Claridge which I discussed when I went over pensions and cybersecurity.

I told Frédéric I'll put him in touch with Joseph Kruger and Greg Doyle, VP Investments at Kruger, since they are one of the most sophisticated private company investment shops I know in Montreal and Mr. Kruger and Greg are extremely impressive, they really know their stuff.

That's all from me, hope you enjoyed reading this comment, I enjoyed writing about it and enjoyed hearing Pierre Boivin and Peter Letko speak.

In the end, I introduced myself to Mr. Letko and told him one of my mentors at McGill, Tom Naylor, is a long-time investor in his fund and was always very pleased. I also told him liked his story about his parents and how it shaped his resilience and optimistic outlook on life.

Below, the trailer of the movie The Martian featuring Matt Damon. Peter Letko referred to it a couple of times when discussing resilience so I'll watch it because I haven't seen it yet.

I embedded the trailer from my favorite movie of all-time, all about resilience, as well as my favorite speech on resilience from Rocky Balboa to his son. "It's all about how hard you get hit and keep moving forward!".

Lastly, my family friend and author Helen Antoniou discussing her book Back to Beer...and Hockey: The Story of Eric Molson, on Breakfast Television Montreal.

Helen did a great job writing this book and it definitely doesn't read like a sterile business book, I was very engaged from the first pages. You will learn a lot about the resilience, intelligence, generosity and humility of Eric Molson and you will learn a lot about what it takes to manage a successful business through many generations.

Real Estate News EXchange reports, BCI, RBC, Quadreal partner on record $7B investment portfolio:

The British Columbia Investment Management Corporation (BCI) will move over 40 Canadian real estate assets into a $7-billion fund in partnership with RBC Global Asset Management Inc. and Quadreal Property Group. The partnership, according to RBC’s Michael Kitt, is the largest CRE transaction in Canadian history.

RBC GAM considers small and mid-level pension funds and other institutional investors its key target market for the fund, which will launch during Q3 2019.

“(Investors) know that here’s a $7-billion diversified core real estate portfolio that I believe is Canada’s largest real estate transaction ever,” Kitt told RENX in an interview following Tuesday’s announcement. He said BCI retaining a 50 per cent interest in each of the assets is a critical aspect of the partnership.

“(Investors) know that BCI will care about the performance, they will care about long-term decision-making and the long-term future of how the partnership and the fund will grow,” he said. “That’s what makes it unique.”

The partners are: RBC GAM, Canada’s largest fund manager and one of the largest managers of Canadian pension assets; BCI, a global investment manager and one of Canada’s largest pension plan managers; and real estate service providers and developer QuadReal, established by BCI to expand and manage its portfolio.

Institutional investors will be able access the portfolio through the RBC Canadian Core Real Estate Fund, which will be established and managed by RBC GAM. It is expected to be open for investment in the third quarter of 2019. Investment will take place in four tranches through 2022 and RBC GAM will become a 50-50 partner in the properties.

About the portfolio

Kitt said the portfolio will include a diverse mix of assets from the office, industrial, retail and residential sectors, with about half of the total properties being office. He said it is focused exclusively in eight of Canada’s largest cities, with about 60 to 70 per cent of the properties in Toronto and Vancouver.

“We love the industrial and residential sectors today,” he said. “They form a significant component of this portfolio. But, so does every other investor love those.

“The retail . . . we’ve got a nice mix of enclosed and open-air,” Kitt added. “We’ve really attempted to diversify the portfolio across asset class, cities and the locations within those cities to make sure we are not making any large, specific bet. We’ve really stayed away from taking development exposure, this is a well-leased, income-producing portfolio.”

Among the properties which will be included in the fund are:

* PwC Tower in Toronto, part of BCI’s Southcore Financial Centre office development;

* Marche Central shopping centre in Montreal;

* 745 Thurlow in Vancouver;

* Bayview at Cole Harbour multi-residential development in Vancouver;

* and several industrial properties in north Mississauga (just north of Toronto).

BCI diversifying internationally

From BCI’s perspective, the initiative supports its objective to internationally diversify its real estate portfolio while maintaining a strong domestic core. QuadReal will continue to manage the properties on behalf of BCI and the fund.

“Over many years, we have diligently acquired and developed a portfolio of premium Canadian properties on behalf of our pension and accident fund clients,” said Gordon J. Fyfe, CEO and CIO of BCI, in the Tuesday release.

“BCI’s real estate portfolio now exceeds $27 billion in value and as we diversify into global markets, its Canadian core will always be the foundation of our clients’ portfolio. The opportunity to partner with a like-minded, long-term focused institution such as RBC Global Asset Management is extremely compelling.”

The most recent statistic available on BCI’s website show its total real estate portfolio was comprised of about 43 per cent office, 27 per cent residential, 15 per cent retail and 14 per cent industrial holdings, in addition to a small amount of hospitality assets.

The agreement is subject to the completion of definitive agreements and certain conditions including capital commitments to the strategy.

The RBC Canadian Core Real Estate Fund will initially be open to institutional and other qualified investors. RBC GAM is actively exploring opportunities to bring the fund and related strategies to market to serve the needs of other client segments including individual accredited investors and advisors.

About RBC Global Asset Management

RBC Global Asset Management is the asset management division of Royal Bank of Canada and includes institutional money managers BlueBay Asset Management and Phillips, Hager & North Investment Management.

RBC GAM is a provider of global investment management services and solutions to institutional, high-net-worth and individual investors through separate accounts, pooled funds, mutual funds, hedge funds, exchange-traded funds and specialty investment strategies. The RBC GAM group of companies manages approximately $425 billion in assets and has approximately 1,400 employees across Canada, the United States, Europe and Asia.

About BCI

With $145.6 billion of managed assets, British Columbia Investment Management Corporation is a leading provider of investment management services to British Columbia’s public sector. It offers investment options across a range of asset classes: fixed-income; mortgages; public and private equity; real estate; infrastructure; and renewable resources.

About QuadReal

Headquartered in Vancouver, QuadReal Property Group is a global real estate investment, operating and development company. The company’s $27.4-billion portfolio spans 23 cities across 17 countries.

QuadReal was established to manage the real estate program of BCI, one of Canada’s largest asset managers with a $145.6 billion portfolio.

QuadReal aims to deliver prudent growth and strong investment returns, and to create and sustain environments that bring value to the people and communities it serves.

BCI put ot a press release on this partnership stating this:

RBC Global Asset Management Inc. (RBC GAM) today announced an agreement with British Columbia Investment Management Corporation (BCI) and QuadReal Property Group (QuadReal) to make one of Canada’s most diversified commercial real estate portfolios available to institutional investors.

This venture will combine the strength and expertise of three market leaders:

• RBC GAM, Canada’s largest fund manager and one of the largest managers of Canadian pension assets1 through its Canadian institutional business, PH&N Investment Management;
• BCI, a global investment manager and one of Canada’s largest pension plan managers; and
• QuadReal, one of Canada’s most respected real estate service providers and developers, established by BCI to expand and manage its global real estate portfolio.

This initiative will create a portfolio of over 40 of BCI’s existing Canadian real estate assets, with a total value in excess of $7 billion. Institutional investors may participate by investing in an income-producing Canadian commercial real estate strategy through the RBC Canadian Core Real Estate Fund (“the Fund”). The Fund will be established and managed by RBC GAM and is expected to be open for investment in the third quarter of 2019. The Fund will aim to deliver an attractive income stream and total returns with limited volatility, along with inflation protection and low correlation to other asset classes.

The Fund is expected to become an equal owner with BCI in all of the portfolio’s properties through a multi-stage vend-in process. The initiative supports BCI’s objective to internationally diversify its real estate portfolio while maintaining a strong domestic core. QuadReal will continue to manage the properties on behalf of BCI and the Fund, ensuring a seamless continuity of management and a disciplined focus on asset level performance.

“Institutional clients are increasingly looking to alternative investment opportunities, and especially private market assets, to help them meet their long-term goals,” said Damon Williams, CEO of RBC GAM. “With the needs of clients in mind, we are excited to partner with BCI and QuadReal to open to investors a truly exceptional portfolio of Canadian real estate assets. Moreover, BCI’s commitment to the retention of a 50 percent interest in each asset ensures their full alignment with investors, which we believe is fundamental to the long term success of this opportunity.”

“Over many years, we have diligently acquired and developed a portfolio of premium Canadian properties on behalf of our pension and accident fund clients,” said Gordon J. Fyfe, CEO/CIO of BCI. “BCI’s real estate portfolio now exceeds $27 billion in value and as we diversify into global markets, its Canadian core will always be the foundation of our clients’ portfolio. The opportunity to partner with a like-minded, long-term focused institution such as RBC Global Asset Management is extremely compelling.”

“QuadReal is an active global real estate manager and developer for BCI and its clients, and partnerships are vital to the successful execution of our strategy,” said Dennis Lopez, CEO of QuadReal. “This includes globally diversifying our real estate portfolio. In Canada, we look forward to working side by side with RBC Global Asset Management. Fundamental to our business strategy is providing a market leading service experience for our tenants and residents and a devotion to exemplary advisory management.”

This unique opportunity is subject to the execution of definitive agreements and certain conditions including capital commitments to the strategy.

The RBC Canadian Core Real Estate Fund will initially be open to institutional and other qualified investors. RBC GAM is actively exploring opportunities to bring the Fund and related strategies to market to serve the needs of other client segments including individual accredited investors and advisors.

This information is not intended to be an offer or solicitation to buy or sell securities. The Fund is intended for qualified investors only and not to any other category of investor. The Fund will be offered by RBC Global Asset Management Inc. RBC GAM Inc. is a member of the RBC GAM group of companies and an indirect wholly owned subsidiary of Royal Bank of Canada.

Investments in alternative investment funds are speculative and involve significant risk of loss of all or a substantial amount of your investment. Investors should consult their professional advisors and consultants regarding any tax, accounting, legal or financial considerations before making a decision as to whether the fund mentioned in this material is a suitable investment for them.

This is a huge deal for BCI and its real estate subsidiary, QuadReal, and a good deal for RBC GAM and its smaller and mid-sized pension clients.

First, a little background information. For a long time, I've been covering BCI's investments, I noted the Fund is way too concentrated in Canadian commercial real estate.

This goes back to the Doug Pearce days, Gordon Fyfe's predecessor, and he and I discussed this overweight Canada in commercial real estate on a few occasions. Back then, Doug was telling me BCI's liabilities are in Canadian dollars, which is true, so it made sense to only have Canadian commercial real estate and that's where the focus lied but I wasn't in full agreement.

Don't get me wrong, BCI has some great properties across Canada but even back then I was telling Doug it's too big and should diversify outside Canada in real estate just like the Caisse, OTPP, CPPIB and others.

Then Gordon came in, BCI created QuaReal in 2016 to diversify its real estate holdings internationally, but more needed to be done, and this deal was needed to diversify illiquid holdings geographically. And it's a smart partnership.

Why? Because BCI will retain a 50% stake in its Canadian real estate portfolio and other smaller Canadian pensions will be able to invest in the other 50% of the portfolio through RBC GAM's Canadian Core Real Estate Fund.

In turn, this frees up a lot of money for BCI's QuadReal to invest more internationally in various real estate sectors. And that's a more prudent approach for a pension fund the size of BCI to take.

And why would smaller Canadian pensions invest in this new partnership with RBC GAM? Why not? They'd be foolish not to as they will get access to BCI's Canadian core real estate portfolio knowing BCI still has a material stake (50%) providing them reassurance that alignment of interests are there above and beyond what RBC GAM will do to properly manage these assets.

In short, I've always maintained for a pension fund the size of BCI, they were way too concentrated in Canadian real estate and needed to diversify globally.

I believe BCI and HOOPP are the two large Canadian pensions that are the most concentrated in Canada when it comes to real estate but BCI is much larger than HOOPP (and HOOPP is expanding its European real estate holdings and is more weighted in industrial real estate).

But if you look at BCI's larger peers, their focus is definitely on international real estate.

For example, PSP Investments which Gordon used to head and is now headed by Neil Cunningham, the former head of PSP's Real Estate division, just took a bigger stake in London student housing:

As part of an ongoing joint venture, the Public Sector Pension Investment Board is purchasing a purpose-built student accommodation in London, England.

Together with Greystar Real Estate Partners and Allianz Real Estate, the PSP is taking on the property, called Paul St. East, from Apache Capital Partners for more than $241 million. The acquisition is part of the Chapter joint venture, a real estate agreement the PSP joined in 2018 that focuses on expanding student housing options in the U.K.

London continually attracts more international students than its current rental stock can accommodate, ensuring the investment strategy benefits from high demand, noted a press release. This latest investment moves the joint venture closer to its aim of providing 10,000 beds for students in the U.K. within five years. The Paul St. East building project adds 458 bedrooms to the venture’s portfolio.

“We strongly believe Paul St. East has significant long-term potential through integrating the asset with our Chapter brand to offer students the services and experiential living enjoyed at Greystar’s other Chapter residences,” said Troy Tomasik, Greystar’s managing director of investments in the U.K. and Ireland.

Student housing is huge, it's virtually recession-proof and it's one area Canada's large pensions are focusing on but most of the best opportunities lie outside Canada.

I've written about the Canadian student housing market, it's growing and is interesting but it's small fries for these huge funds like CPPIB and GIC which invested big in US college housing.

For its part, the Caisse just announced it's financing a Chinese institutional apartment operator:

The Caisse de dépôt et placement du Québec has led a series D financing totalling US$150 million for Mofang Apartments, an institutional rental company based in Shanghai, China.

“As a long-term investor, [the Caisse] seeks to be a constructive shareholder, working together with the management and partners to build good companies,” said Meng Ann Lim, head of private equity for Asia Pacific at the Caisse, in a press release.

As a Chinese domestic institutional rental company, Mofang is present in 20 of the country’s urban centres.

“This latest round of financing enables Mofang to augment the brand’s market presence, extend its operational capabilities, enhance the IT system and loyalty programme, pursue [mergers and acquisitions] and further expand the franchise business,” said Kitty Liu, chief executive officer of Mofang.

You can read the Caisse's press release here. Again, just like PSP, CPPIB and others, it's partnering up with the right outfit in China to do this deal and since that is where long-term growth lies, it makes sense over the long run to strike more real estate deals in China and elsewhere in Asia.

All these are examples of why I think BCI did the right move with this $7 billion partnership because in essence, it's playing catch up to its larger peers which are a lot more diversified in commercial real estate across the world, especially in the US.

In other real estate news, OPTrust is partnering with several investment firms to buy three buildings in the downtown Toronto financial district:

The properties are anchored to the Dynamic Funds Tower, the OPTrust’s current corporate headquarters. The other investors include the Great-West Life Real Estate Fund, the London Life Real Estate Fund and I.G. Investment Management Ltd. as trustee for Investors Real Property Fund.

“As a pension management organization, it’s critical we find income-generating assets that align with our members’ requirements of providing plan sustainability and security,” said Rob Douglas, managing director of real estate investments at OPTrust, in a press release. “With strong demand and historic low vacancy rates for Toronto office space and the shared interest of trusted strategic partners, this property presented a unique and valuable opportunity to invest in a high-profile property in the heart of Toronto’s downtown core.”

The Dynamic Funds Tower is a 30-storey LEED Gold certified office tower. The other two buildings are a nine-storey boutique office building and a three-storey retail space.

“In today’s competitive market where there are limited opportunities to acquire Class A office buildings in core markets, we’re pleased to have completed this transaction,” said Ralf Dost, president of GWL Realty Advisors, which will be managing the buildings. “This acquisition adds another high-quality asset to our clients’ real estate investment portfolio and fits within our downtown strategy.”

Previously, the Canada Pension Plan Investment Board and Oxford Properties Group, the real estate investment arm of the Ontario Municipal Employees Retirement System, co-owned the properties.

Indeed, a LEED Gold certified office tower in downtown Toronto's financial district is a high-quality asset and nowadays everyone wants LEED Gold or even better, LEED Platinum certification like HOOPP's One York Street.

Lastly, since I am talking about investing in commercial real estate outside of Canada, take the time to read how Oxford Properties Group, the real estate subsidiary of OMERS, made a risky bet on an uninspiring rail yard in the Far West Side of Manhattan that has paid off handsomely, and it’s just getting started in New York and other gateway cities:

Oxford Properties Group, the real estate arm of the Omers pension fund for retired police officers and city clerks in Ontario, teamed up with Related on the risky Hudson Yards project in 2010, in the midst of the real estate crash. Related’s previously partner Goldman Sachs had just changed its focus from long-term plays and backed out.

“Those did not feel like cheap decisions. They all felt like we were paying too much and maybe the world was ending,” Oxford president Michael Turner told Bloomberg. “We happened to be able to be there as a sponsor of quality, with fortitude and a balance sheet to make a decision.”

Jay Cross, Related’s president of Hudson Yards, is a Canadian who knew Oxford’s former president Blake Hutcheson. He worked with Cross on the deal, in which Oxford and Related are 50-50 partners on the general group that oversees the entire development.

Last year, Omers reported returns of 8.7 percent on real estate investments. The Hudson Yards project is part of the Oxford’s push to become an increasingly global presence, Bloomberg reported.

A decade ago, Omers had 96 percent of its assets in Canada. Now, more than 55 percent is invested abroad, with total assets approaching $45 billion. Oxford is looking to boost its exposure in the industrial and multi-family space — and it’s targeting cities that attract technology and talent like New York, London, Sydney and Toronto.

Last year, Oxford bought the southern portion of St. John’s Terminal in Manhattan for $700 million and is planning a 1.3 million-square-foot office to be anchored by Google.

Now that's a great real estate bet, one that you can read a lot more about here. Let me just quote this passage:

They’re not the only ones looking to reap greater returns by looking outside Canada. For the past five years, publicly recorded commercial real estate investments abroad by Canadian pension funds was $84.6 billion, compared with $19.8 billion invested domestically, according to CBRE research. Ivanhoe Cambridge Inc., a unit of Caisse de Depot et Placement du Quebec, bought IDI Logistics in the U.S. in a US$3.5 billion deal last year and has recruited Oxford as a partner.

So, the next time anyone asks you why BCI entered into this partnership to effectively open up half its Canadian real estate portfolio to smaller pensions and diversify its real estate holdings internationally, please refer them to this comment. It's simply a prudent and responsible long-term portfolio move.

One last note, yesterday after the CFA luncheon where Pierre Boivin and Peter Letko shared their views on resilience, a Greek money manager I know saw me and pulled me aside at the end and somewhat concerned, he asked me: "How did the Caisse manage to gain 4.2% last year?".

I asked him what's the problem? He said the problem is he was down 1% last year and his clients are wondering how come the Caisse managed to gain 4%.

I said "unlike you and other smaller funds, the Caisse and other large Canadian pensions are invested across public and private markets all over the world" and that allows them to smooth their returns when public markets are getting whacked on any given year.

So he started: "I knew it, they're fudging their numbers, these private markets are all marked to myth/ model, blah, blah, blah!".

I said, "no, that's not true because over the long run, diversifying into private markets and doing it intelligently through more co-investments to lower fees has proven to be the winning strategy to add significant value over public market benchmarks over a five or ten-year period."

I added: "You simply can't argue with the success of the Canadian model over the long run and remember, these pensions have long-dated liabilities, they don't care about one or three years, they have a long investment horizon and are mostly compensated on value added over a long period.

Anyway, it irks me how some very smart people who are CFAs don't get private markets, they think it's all accounting gimmicks. Sure, there are some years where pension funds mark assets down or up but again, it's the long-term performance that counts.

I just wanted to get that off my chest because public markets are tough, very tough to add value, which is why I believe the public versus private markets battle will continue and the latter will gain over the former.

On that note, it was interesting to see today how Brookfield Asset Management agreed to buy a majority stake in Howard Marks's Oaktree Capital, a combination that would create one of the world’s largest alternative money managers. Brookfield is incredibly impressive and this says it all:

Shares of Brookfield have been a stellar performer for decades, posting a 21 percent annual return since 2009, double the gain of the S&P/TSX Composite Index, Canada’s main equity gauge.

Below, founded in 2016 and headquartered in Vancouver, Canada, QuadReal Property Group is a commercial real estate group aiming to double the value of its real estate portfolio in the next five years. Watch this video to hear how IBM Analytics is helping QuadReal’s decision-makers get timely, accurate insight into portfolio data scattered across many disparate source systems to meet their business objectives.

And CNBC's David Faber reports that Brookfield Asset Management will buy a 62 percent stake in Oaktree Capital. BN's Vincent Bielski also reports on this deal on "Bloomberg Markets." Look out Blackstone, Brookfield just took a giant leap forward and will become the next alternatives juggernaut.

Reghu Balakrishnan of the Economic Times reports, CPPIB, Allianz-led InvIT in talks to acquire Sadbhav Infra’s 12 road assets:

Mumbai: Canada’s largest pension fund manager Canada Pension Plan Investment Board (CPPIB) is in advanced talks to acquire 12 operating road assets of Sadbhav Infrastructure Project Ltd (SIPL), in a deal worth $400-500 million (Rs 3,000 crore), according to two persons aware of the development.

CPPIB, which has entered into exclusive talks with SIPL, will acquire Sadbhav's road assets through the infrastructure investment trust (InvIT), floated by L&T Infrastructure Development Projects Ltd, said one of the persons cited above. CPPIB and Allianz Capital Partners own about 55 per cent of the InvIT units. InvIT was created after CPPIB bought into L&T toll road portfolio and subsequently hived it off into the independent vehicle, which is also the first private infrastructure investment trust called IndiaIndInfravit Trust.

As on December 2018, listed company Sadbhav Engineering Ltd holds about 69 per cent of SIPL, which is involved in the development, operation and maintenance of national and state highways and roads in Maharashtra, Gujarat, Rajasthan, Karnataka, Haryana and Telangana, besides border check posts in Maharashtra.

Negotiations are currently on over the quantum of units Sadhvav will also own in the InvIT, said sources directly involved in the proceedings. A decision over the semifinished assets is also part of the bilateral negotiations that are to end by this month-end.

SIPL has a portfolio of 23 roads & highways build operate-transfer (BOT) and Hybrid Annuity Mode (HAM) projects of which 12 are fully operational with total lane kms of 3,338, as on March 31, 2018.

Strategic investors such as Italy’s Autostrade, Cube Highways, Canadian pension funds such as CDPQ are in talks to acquire stake in Sadbhav Infra, ET had first reported in August. Morgan Stanley is the advisor in the sale process.

In a conference call with analysts in November, Nitin Patel, ED, SEL, had mentioned the company is open to sell a majority stake in SIPL.

Mails sent to Shashin Patel, chairman, Sadbhav Engineering, did not elicit any response till press-time, while spokesperson with CPPIB declined to comment.

Sadbhav Infra posted a revenue of Rs 2,276 crore in FY18 with a market cap of Rs 3,296 crore as on March 8. The company has a total debt of Rs 8,407 crore and enterprise value of Rs 12,987 crore as on March 31, 2018.

Overall cost of the operational project and under construction projects (2,457 km) stood at Rs 21,900 crore. In November, SIPL had received a debt financing worth Rs 600 crore to complete the underlying road projects from Ajay Piramal-led Piramal Group. As the only listed road and highways BOT company in India, SIPL had raised Rs 492 crore through listing on BSE and NSE in September 2015.

In May 2018, CPPIB and German insurer Allianz Group had acquired a combined 55 per cent in the InvIT, where CPPIB had invested approximately $156 million for 30 per cent of units in IndInfravit Trust (IndInfravit) while Allianz Capital Partners acquired 25 per cent stake. L&T Infrastructure Development Projects Ltd (L&T IDPL), the trust sponsor, holds 15 per cent stake.

OMERS Infrastructure Management, another leading Canadian pension fund, had acquired a 22.4 per cent interest in the same infrastructure investment trust (InvIT) for Rs 870 crore ($122 million) last month.

Canadian investors have been actively pursuing opportunities in Indian road assets. According to media reports, several investors, including CDPQ, are also interested in buying road platform – Highway Concessions One (HC1) – owned by US-based Global Infrastructure Partners (GIP) which recently bought IDFC Alternatives Ltd’s infrastructure investment business. HC1comprises seven road assets in various states in India.

These funds have shown interest in buying out equity stakes in 22 road assets of around 12,000 kms owned by debt-ridden IL&FS Group.

Rouhan Sharma of the Financial Express also reports, Sadbhav to sell 12 road projects:

Sadbhav Engineering (SEL) confirmed it is expecting to sell a chunk of its roads portfolio in its subsidiary Sadbhav Infrastructure Project (SIPL), with sources indicating to FE due diligence with respect to traffic growth is in advanced stages for 12 of its toll road projects. According to sources, the Canadian Pension Plan Investment Board (CPPIB) is among those locked in discussions with SEL.

CPPIB declined to comment, saying they do not remark on market rumour or speculation.

In a recent call with analysts, Nitin Patel, ED & CFO, SEL, confirmed the company is open to parting with a majority stake but said it will retain some of its holding, without giving further details. “The enterprise value is more than `10,000 crore, and the projects are largely constructed by Sadbhav. There are no legal or any other issues with them. We are going to remain in the platform,” Patel said.

SEL will also continue to provide the operations and maintenance after disposing the projects. Sources said SEL is creating a separate platform for the purpose which will also help in further asset monetisation.

While SEL’s debt rose to Rs 1,510 crore at the end of the first half this fiscal, up from Rs 1,400 crore a year ago (partly in order to support its vendors and sub-contractors), the company expects to be able to cut its debt to about Rs 1,250-1,300 crore by the end of this year. While analysts said the rise in debt was “discomfiting”, they expect the company to garner a significant amount of money as mobilsation advances from the government, for about five new projects worth `4,693 crore that are set to start construction in the current quarter. “Any success with the asset monetisation plan would only further aid deleveraging and afford access to growth capital,” analysts from Anand Rathi said in a recent note. Further, SEL also has pending receivables of `1,200 crore from the National Highways Authority of India (NHAI).

However, Patel cautioned that NHAI, as well as lenders to projects, have begun insisting on the acquisition of at least 80% unencumbered land before signing off the starting date for construction, potentially delaying the start dates for projects. Consequently, he expects an year-on-year revenue growth of about 12% for the full year. Analysts said this pegs revenue at ` 3,900 crore, slightly lower than the previous guidance of `4,100 crore. However, Patel believes the pace of execution will increase in the remaning half of the year, helping revenue growth. SEL won new orders of `11,700 crore over the last year and is expecting to win another `4,000 crore worth of orders by March 2019.

For the first half, SEL reported a 2.61% increase y-o-y in earnings before interest, tax, depreciation and amortisation (ebitda) to `190 crore while ebitda margins expanded 55 basis points to 11.88%. On Monday, the stock closed down 2.39% at `194 on the BSE.

And Joseph Rai of VCCircle reports, CPPIB front runner for Sadbhav Infra assets:

Canada Pension Plan Investment Board (CPPIB), the North American country’s biggest public pension fund, has entered into exclusive talks with Sadbhav Infrastructure Project Ltd to acquire the company's 12 operating road assets, according to a media report.

The deal is likely to be worth $400-500 million, The Economic Times reported, citing two people it didn't identify.

Last year, the newspaper had said that other investors such as Canadian pension fund CDPQ and I Squared-backed Cube Highways were also separately in talks for the deal.

CPPIB plans to buy the Sadbhav assets through an infrastructure investment trust (InvIT) launched by L&T Infrastructure Investment Development Projects Ltd. CPPIB and Allianz Capital Partners, the in-house alternative investment firm of Munich-headquartered financial services firm Allianz, own a stake in the InvIT.

CPPIB has invested over $5 billion in India since it entered the country a decade ago.

Sadbhav Infrastructure, a subsidiary of Sadbhav Engineering Ltd, was incorporated as an asset holding company for road and other infrastructure build-operate-transfer (BOT) projects in 2007. It has a portfolio of 11 BOT projects and 12 hybrid annuity projects.

The company posted consolidated revenue of Rs 2,322.48 crore for the year ended 31 March 2018 as compared with Rs 1,403.89 crore the previous year. Its net loss narrowed to Rs 329 crore from Rs 353 crore.

If this deal goes through, it will be yet another major investment in India for CPPIB.

#Exclusive | Sadbhav Infrastructure Projects Ltd owned by parent Sadbhav Engineering is in fund raising mode & ET NOW learns that top global funds are making a beeline for the company's assets which have been put on the block. @ashwinmohansays joins in with details. Watch! pic.twitter.com/L7TwIMS1r4

— ET NOW (@ETNOWlive) August 23, 2018

So why invest in India's toll roads. A friend of mine, an expert on toll roads, shared this with me:

"In developed countries,  your toll roads and other infrastructure projects typically grow with GDP, so your gross return will be GD growth + CPI inflation. In developing countries like India where demographics are still favorable and lots of people still don't own cars, you can still collect very nice returns on toll roads. You will get GDP growth + CPI inflation + increases from tolls + as more people begin one or two cars, it will generate more traffic on these highways and profits will increase commensurately. It's a long-term project in a growing economy with great demographics."

I told my friend that's why India's airports are also a hot commodity, as more people enter the middle class, they travel more.

I said that was Peter Letko's thesis at the CFA luncheon a couple of days ago which is why he's bullish on Air Canada and other airlines.

My friend who's more cynical than me replied: "Letko is right, for the next 15 years, after that the industry will get clobbered once again." I asked him why and he said "because the baby boomers who are traveling will be dead."

Anyway, back to Sadbhav Infrastructure, last October, Nitin Patel, director of Sadbhav Infra, spoke to CNBC-TV18 about the company's business plans and shared this outlook:

“The revenue that we are seeing considering the traffic growth for the six months, we are expecting that this year we should get at least around 7-7.5 percent in an absolute volume growth. In terms of revenue, we are seeing almost around 12-13 percent on an yearly basis as compared to the previous years. So on absolute numbers we can say that the 10 operation toll road will generate almost more than 1,150 crore for the year,” Patel said.

“There is a substantial reduction in the loss main reason is the refinancing and also the tremendous growth in the traffic volumes and traffic growth. This will continue. Last year we have made a repayment of almost around Rs 145 crore, this year we are going to make a repayment of Rs 180 crore. So this will also give further uptick,” he added.

These are the type of long-term infrastructure projects Canadian pension funds love, they're still priced right and the potential growth is incredible compared to what you get in developed countries.

Are there risks? There are always risks with large infrastructure projects especially in a country like India, regulatory, currency and political risks are among a few. But India is a growing democracy and it has plenty of characteristics that attract Canada's pensions to the country.

Last week, I discussed the Caisse's $250 million investment in ECL Finance Ltd, the non-banking financial company affiliated with Indian financial services provider Edelweiss Group.

This week, I read that Ontario Teachers' Pension Plan is part of a consortium looking to buy a stake in Anil Ambani’s Reliance Capital:

Beleaguered business tycoon Anil Ambani, who is struggling to pay off mounting debts, has broadened his search for a buyer of his stake in Reliance Nippon Life Asset Management (RNAM).

Initially, Anil Ambani’s Reliance Capital had approached its Japanese partner Nippon Life Insurance Company to buy its 42.88% stake in RNAM, which manages mutual fund business.

Though the Japanese asset manager is yet to make an offer, Reliance Capital has begun talks with the Abu Dhabi Investment Authority (ADIA), Singapore-based Temasek, Ontario Teachers’ Pension Plan, and private equity funds Blackstone and The Carlyle Group, Business Standard reports.

Nippon Life has the “first right to offer”, but Reliance Capital can choose to ignore it if an offer from a third party is more attractive.

The company has ruled out mergers with domestic mutual fund players as the procedures in accordance with Indian laws could make a merger a long drawn out affair.

RNAM ranks fifth by way of assets under management in the mutual fund industry. As of January, RNAM was managing assets worth 2.43 trillion rupees (US$34.75 billion). In the last fiscal year, it made a net profit of 5.22 billion rupees ($74.64 million).

Reliance Capital wants to get out of the mutual funds business in order to reduce Ambani’s debts. For Reliance Capital the debt exposure is pegged at 180 billion rupees ($2.57 billion).

Anil Ambani’s fortunes began to decline soon after he parted ways with his elder brother Mukesh Ambani, currently India’s richest man, in 2006 and they divided their father’s business empire.

In 2007 Anil’s net worth was $45 billion, according to the Forbes Rich List, while his brother’s was $49 billion. In 2019, Mukesh ranked 13th in the Forbes Billionaire list with a net worth of $50 billion, while Anil’s fortunes had fallen to $1.7 billion, placing him a distant 1,349 in the same list.

Anil's troubled fortunes are creating big opportunities for OTPP and this consortium of sophisticated investors. We shall see if they end up with a stake in Reliance Capital.

The more important message is Canadian pensions are increasingly looking to make large deals in India and I don't blame them. CPPIB is still under-exposed to the country and so are many others and over the long run, big projects in infrastructure and private equity deals in the country's financial services are where you want to be.

This is especially true now that private markets in developed countries are fully or over-priced but the risks you take in developing countries (political, regulatory, currency, etc) are not trivial so you need to have the right partners on these massive deals.

Below, road construction and infrastructure firm, Sadbhav Engineering Ltd, recently said it's on track to achieve its topline guidance of over Rs 3,800 crore in FY19.

I also embedded Anil Ambani’s full speech on Reliance Capital from 5 months ago. Reliance was approached by its Japanese partner Nippon Life Insurance Company to buy its 42.88% stake in RNAM but don't count out Ontario Teachers' and that consortium just yet.

Fred Imbert of CNBC reports, Dow rises more than 100 points, S&P 500 posts best weekly gain since November:

Stocks posted strong weekly gains, led by tech shares, as investors cheered renewed optimism on the U.S.-China trade front on Friday.

The Dow Jones Industrial Average climbed 138.93 points to 25,848.87 as Boeing shares turned around to close 1.5 percent higher. Boeing’s turnaround was sparked by a report saying the company planned to roll out a software upgrade for its 737 Max aircraft. The stock had been under pressure all week after an Ethiopian Airlines flight using a 737 Max plane crashed on Sunday, which prompted several countries to ground flights involving the plane.

Gains in the tech and consumer discretionary sectors pushed the S&P 500 up 0.5 percent to 2,822.48. Tech shares also bolstered the Nasdaq Composite, which climbed 0.8 percent to 7,688.53.

The S&P 500 and Nasdaq Composite both rose at least 2.9 percent, though the laggard Dow gained only 1.7 percent amid Boeing’s troubles. The S&P 500 also posted its biggest one-week gain since November.

Stocks have been on a tear this year, with the three major indexes rising more than 10 percent each in 2019.

“Coming off the lows in December, we thought that was a volatility event. We thought we could get back to those all-time highs by about late March to early April,” said Craig Callahan, president at Icon Funds. Valuations “still backs up that view.”

This week’s gains were largely led by tech shares, as the sector surged 4.9 percent. The tech sector also became the best-performer of 2019. Nvidia was the best-performing stock in the sector, rising more than 12 percent while fellow semiconductor stocks like Broadcom and Lam Research also rose sharply this week.

Semiconductor shares rose broadly on Friday, as the VanEck Vectors Semiconductor ETF (SMH) climbed 2.7 percent. Broadcom shares led the gains, rising more than 8 percent after the company reported better-than-expected quarterly earnings.

“There’s less of a reason to sell; it’s more of a reason to just sit tight and see which way things go,” said Michael Katz, managing partner at Seven Points Capital. “Everybody is looking for a dip that’s not really coming.”

“Barring any macroeconomic news, any North Korea-related news, any negative news coming out of the China trade deal, I think the momentum is still just holding,” Katz said. “At the same time, [the market] is getting up there.”

Chinese Vice Premier Liu He spoke via telephone with U.S. Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer, Xinhua news agency reported Friday. The report, according to The South China Morning Post, said: “The two sides have further made concrete progress on the text of the trade agreement between the two sides.”

The news comes after CNBC reported Thursday that Chinese negotiators suggest combining a state visit to the U.S. with the signing of a trade deal. Beijing wants a deal to be fully ironed out before President Xi Jinping meets with U.S. President Donald Trump.

“US-China trade negotiations will likely reach a temporary deal, transforming future negotiations into a framework to monitor China’s compliance with trade and intellectual property policies,” Alberto Gallo, head of macro strategies at Algebris Investments, wrote in a note. He added, however, that “binary events” like this “may not translate into tail risks.”

AT&T shares rose 1.3 percent after Raymond James upgraded the telecommunications giant to outperform from market perform, citing an attractive valuation relative to rival Verizon. “We believe that the combination of positive earnings growth and delivering over the course of the year will being investors back to AT&T,” analyst Frank Louthan said in a note.

Ulta Beauty surged 8.3 percent on the back of better-than-expected quarterly earnings. The company’s same-store sales also rose 9.4 percent, topping an estimate of 7.9 percent.

Tesla shares fell 5 percent after investors were left disappointed with the unveiling of the Model Y, the car company’s latest electric vehicle.

Bob Pisani of CNBC also reports, Now that the market has broken through key resistance, here’s what’s next:

The S&P 500 closed up 2.9 percent for the week, its best so far this year. It’s now at the highest level since early October, after breaking through key resistance levels near 2815, where it failed several times.

The S&P is now less than 4 percent from the old historic closing high (2,930 on September 20).

Key observations:

1) Traders increasingly believe global central banks have their backs.

2) With the CBOE Volatility Index at 12, its lowest level since October, strategies driven by volatility would likely add to stock exposure.

3) Bond yields continue to drop, remaining near the lows of the year. The new-high list this week was littered with interest-rate sensitive stocks (utilities, REITs) that rally when rates remain low.

4) Quadruple witching (quarterly expiration of index options and futures, and stock options and futures) has added a lot of volume this week and likely contributed to the upside rally. But the question is whether the expiration exhaust near term demand. The S&P 500 tends to be lower in the week after quadruple witching.

5) Europe (and the U.K.) have outperformed the U.S. this month. There are some hopes for a bottom in the recent poor economic data.

6) Downward earnings revisions are slowing to a crawl. The rate of downward earnings revision for the first quarter was intense from January into mid-February, slowed in the next several weeks and has essentially stopped this week. First-quarter earnings are now expected to be down 1.5 percent for the S&P 500, according to Refinitiv. If it stays in that range, there is a good chance earnings will be positive for the first quarter (companies tend to beat analyst estimates), and we will avoid an earnings “recession,” at least one that began in the first quarter.

7) The key to a further rally: positive comments on global growth. The two key names next week are Micron and Federal Express, which are both scheduled to report earnings. Both had big drops last quarter and saw lower earnings estimates on concerns over China and (for Micron) increasing competition.

I agree, the key to a further rally is signs of global growth which is why I'm tracking Global M-PMIs and other manufacturing indexes and emerging market stocks (EEM) very closely (click on images):



As you can see, Global M-PMIs are still deteriorating for developed markets but improving for emerging markets. The Emerging Markets ETF just broke above its 50-week moving average which is good news for global growth, as long as it continues. And with the Fed out of the way for now, it should continue.

Nevertheless, looking at the Purchasing Managers Indexes, you see there is weakness in some developed markets (Eurozone, Japan) and the US and UK are decelerating. Among the BRICS, India and Brazil are doing well but Russia and China are weak (click on image):

What we don't know is whether all those rate hikes over the last two years are finally catching up to the real economy, and if so, how extensive the damage will be.

That's why everyone is looking for a confirmation that global growth is picking up, it will give investors a sigh of relief.

It's too early to tell but one thing which is encouraging is the absence of inflation, allowing bond yields to go lower and long bond prices (TLT) to go higher (click on image):


In turn, lower bond yields have helped push the S&P 500 (SPY) higher (click on image):


The breakout in stocks has been nothing short of spectacular which is why at the beginning of the month, I said don't discount the possibility of another bubble, especially if the Fed stays on the sidelines longer than anticipated.

Sure, stocks have entered March madness, it will be volatile especially after quadruple witching, but if stocks keep grinding higher, it could cause all sorts of problems for active fund managers who trail the S&P 500 for the ninth year in a row:

It’s the triumph of indexing: Fund managers continue to trail their benchmarks.

Active managers who claim that they would do better during periods of heightened volatility are going to have to find another argument.

This week, S&P Dow Jones Indices released its annual report on how actively managed funds performed against their benchmarks. The conclusion is that active managers continue to show dismal performance against their passive benchmarks. For the ninth consecutive year, the majority (64.49 percent) of large-cap funds lagged the S&P 500 last year (click on image).

 “The figures highlight that heightened market volatility does not necessarily result in better relative performance for active investing,” the report said.

“What’s different about 2018 was the fourth quarter volatility,” Aye M. Soe, a managing director at S&P and one of the authors of the report, told CNBC. “Active managers claimed that they would outperform during volatility, and it didn’t happen.”

The study will bolster the claims of many financial advisors, who say that investing in low-cost, passive funds remains the soundest long-term investment.

This is not a one-year phenomenon. S&P has been doing this study for 16 years, and the long-term results only strengthen the claims for index investing. Indeed, while a fund manager may outperform for a year or two, the outperformance does not persist. After 10 years, 85 percent of large cap funds underperformed the S&P 500, and after 15 years, nearly 92 percent are trailing the index (click on image).

Long-term, the numbers were not much better in other categories like small-cap stocks or fixed income: “Over long-term horizons, 80 percent or more of active managers across all categories underperformed their respective benchmarks,” the report concluded.

Looking at managers’ overall record last year versus the broader S&P 1500 Composite, 2018 was the fourth-worst year for stock managers since 2001 (click on image).

Critically, the study adjusts for “survivorship bias.” Many funds are liquidated because of poor performance, so the survivors give the appearance the overall group is doing better than it really is.

“The disappearance of funds remains meaningful,” the report notes. Over 15 years, 57 percent of domestic equity funds and 52 percent of all fixed income funds were merged or liquidated.

Unless we see a prolonged bear market, and even then, I just don't see what is going to change US active managers' fortunes.

Picking stocks is a very, very, very difficult game. Very few managers have a long-term stellar track record, and if stocks continue melting up, a lot of active managers worried about career risk are going to jump on the bandwagon or risk underperforming for another year.

Let me end with some US stock market data.

Have a look at the how the S&P sectors performed this week, courtesy of barchart (click on image):


As you can see, all the major sectors were up this week with Technology (XLK), Healthcare (XLV), Energy (XLE) and Financials (XLF) leading the way. Industrials (XLI) were the weakest sector but that was because of Boeing (BA) which got hit hard this week following concerns with its 737 Max planes.

And here are the top-performing US stocks for this past week, courtesy of barchart (click on image):


Once again, small cap biotechs led the way, with incredible action on some of these stocks, like  Atossa Genetics (ATOS) which was up over 300% yesterday and down 50% today but still managed to clinch top spot for the week following an FDA special approval for its breast cancer drug Endoxifen.

Also, here are the top large cap stocks year-to-date, courtesy of barchart (click on image):


No wonder active managers are having a very hard time beating the S&P 500 and why most large global asset allocators are indexing their large cap US exposure.

Below, CNBC's Rick Santelli and David Bailin, Chief Investment Officer at Citi Private Bank discuss the future path of the markets. I agree with Santelli, if rates keep going lower for bad reasons, it will hit stocks hard.

Second, Chief U.S. Economist at J.P. Morgan Michael Feroli discusses why he believe the Fed will not raise interest rates this year. Again, if yields keep going lower for all the wrong reasons, the Fed might cut rates this year.

Third, is a Fed rate cut looming, and what does that say about the economy? With CNBC's Melissa Lee and the Fast Money traders, Steve Grasso, Brian Kelly, Steve Chiavarone and Guy Adami.

Lastly, ECRI's Lakshman Achuthan builds his bearish case on a chart of falling semiconductor shipment demand. If he's right, get ready for a second half global slowdown.

Elizabeth Bauer wrote a comment for Forbes, 'Go North, Young Man,' To The Wisconsin Public Pension System:

To parapharase Horace Greeley in his Manifest Destiny exhortation, but for those seeking out well-funded public pension plans, it's time to go north -- northwards from Illinois, that is, to the greener pastures of the Wisconsin Retirement System.

Let's start with some charts:  first, the funded ratio.  (This and the following charts come from data extracted from PublicPlansData.org, which includes the years 2001 through 2017, as well as the Wisconsin 2017 actuarial report.  For Illinois, the three major public plans for with the state bears funding responsibility are combined and, where applicable, weighted averages calculated; for Wisconsin, the WRS already includes the three categories of state employees, teachers, and university employees, as well as most municipal employees except for those of Milwaukee city and county.)

Yes, that's correct.  The Wisconsin funded ratio hovers at or just barely below 100% for this entire period.  What's more, regular readers will recall that in my analysis of Chicago's main pension plan, I did the math to demonstrate that even if the city had made the contributions as calculated by its actuaries during this time frame, they would have been insufficient to have kept the plan funded, and even so, would have increased dramatically.  Is Wisconsin keeping its plan funded only by means of unsustainably-increasing contributions?  Let's compare (click on image):

To be sure, the scale required for Illinois' contributions makes interpreting Wisconsin's contributions difficult.  For reference, Illinois' contributions increased from $1.4 billion in 2001 to $7.6 billion in 2017, a 450% increase.  Wisconsin's contributions increased from $411 million to $1.0 billion in the same time frame, an increase of 150%.

The Public Plans Data site also provides payroll data, which means we can view change over time in the contributions as a percentage of total payroll.  That's easier seen as a table (click on image).

Finally, the Wisconsin actuaries are not hoodwinking us by means of artificially-high valuation interest rates; during this time period, the weighted-average Illinois discount rate dropped from 8.5% to 7.3% (it is now somewhat lower in the plans' most recent valuations), and the Wisconsin plan's rate was consistently lower, from 8.0% to 7.2%.  (Remember that lower discount rates result in higher liabilities and relatively lower funded ratios.)

So what is the secret sauce to Wisconsin's full funding?

A small piece of the puzzle is the much-restrained growth in benefits during this timeframe:

The much larger piece of the explanation, though, is this:  Wisconsin's public pension system, unique among not just public pensions but among any defined benefit pension in the United States, is designed to share risks between participants and the state, through two key mechanisms.

First, the contribution each year is recalculated as needed to keep the plan properly funded, and that contribution equally split between workers and the state.

Second, unlike Illinois' retirees, who are guaranteed a 3% benefit increase each year, no matter what, Wisconsin's cost-of-living adjustments are dependent on favorable investment returns, and, far more crucially, retirees' benefits are similarly reduced in down years. The gains and losses are smoothed on a five-year basis to reduce the impact any given year, but, despite fears by many retirement experts that, when it comes down to it, plan administrators would chicken out on benefit reductions, in Wisconsin, these benefit reductions really have been applied just as consistently as the benefit increases. What's more, the adjustments take into account not just investment returns but also mortality improvements and other plan experience/assumption impacts.

(For more information, see "Wisconsin's fully funded pension system is one of a kind" from 2016 at the Milwaukee Journal-Sentinel as well as Mary Pat Campbell's analysis on her blog last summer; also, note that the Wisconsin actuarial valuation, as do all plans valued in accordance with actuarial standards of practice, already assumes future improvements in life expectancy over time; benefit adjustments reflect the degree to which actual mortality matches this expected improvement over time.)

Of course, the increasing plan contributions during this time frame, from 4.1% to 7.3% of pay, suggest that it's not all magic.  And as the Journal-Sentinel reports, lawmakers succumbed to the temptation to boost benefits in 1999, and, as Campbell reports, they then resorted to a Pension Obligation Bond and its "beat the stock market" gamble, to fill a budget hole, which, again per the J-S, has worked out in their favor.

Nonetheless, in my article earlier this week on the Aspen Institute's report on non-employer retirement plans, I wrote that they sought the "holy grail of retirement policy" -- risk pooling as a replacement for the risk protection that employer-sponsored retirement plans had formerly provided. If we want to analyze prospects of risk pooling, collective defined contribution, defined ambition -- however we wish to label this sort of plan, there is no better place to start than the Wisconsin Retirement System.

There's no doubt about it, while I'm very worried about most US public pension plans, Wisconsin Retirement System isn't one of them.

Why? As the author states above, they have adopted conditional inflation protection and a shared-risk model, the two key elements which have led to the success of Canada's pension titans.

Are they the only one? Apparently not. If you read the comments to this article here, you will read this comment from Keith Brainard:

The Wisconsin Retirement System is a terrific pension plan, but is not unique in sharing risk between employers and employees. In addition to Wisconsin and South Dakota, many other public pension plans also contain risk-sharing arrangements. These arrangements are described in this recent paper: https://bit.ly/2T51HMa and in this short video: https://bit.ly/2F3M8iG

And this one from Doug Fiddler:

See also the South Dakota Retirement System. Very similar concept but different mechanics. Fixed contribution rates (split 50/50 member/employer) and variable benefits (mostly through COLA like Wisconsin) designed to keep plan 100% funded at current assumed 6.5% discount. Full details in winning paper from SOA Retirement Section’s Retirement 20/20 contest at https://www.soa.org/sections/retirement/retirement-landing/

There are some states striving to do what’s right for all stakeholders. They just don’t get the amount of press that plans in crisis get.

Fair point, reporters love to report doom & gloom on state pensions -- and to be sure, most are in dire shape -- but some are doing just fine, having adopted a shared-risk model similar to the ones Canada's successful large public have adopted so they can achieve fully funded status.

Remember, pension plans are all about matching assets with liabilities. You can have the best investment managers in the world but if liabilities start soaring, mainly because rates keep declining, then your pension plan is going to be in trouble.

In terms of investments, the Wisconsin Retirement System's assets are maanged by the State of Wisconsin Investment Board, and by all accounts, they're doing an decent job investing in the Core Fund and the Variable Fund (click on image):


I say decent, not spectacular, because, over a long period, it has basically matched the benchmark, but not added significant added value over the benchmark (it's basically all beta).

What is noteworthy, however, is the SWIB manages 62% of the assets in-house, saving the system over $400 million over the past 10 years (click on image):


I also like how transparent SWIB is in terms of its investments. You can see the full list for calendar year 2017 here, including investment partnerships. It also has public records on board meetings but no videos like CalPERS and CalSTRS.

Anyway, the reason it's important to bring up the Wisconsin Retirement System is that it (and other like South Dakota) are obviously doing something right in terms of maintaining their fully funded status and that something right is adopting a shared risk model.

In an era where defined-benefit (DB) plans are being attacked all over the United States, I think this is the standard all states should aspire to, not the silly things Kentucky and other states are doing or trying to do by cutting DB plans to replace them with cheaper defined-contribution (DC) plans (cheaper is a matter of debate when you add all the long-term costs and DC is definitely not better than DB).

Below, Michael Williamson, the former Executive Director of the State of Wisconsin Investment Board, gave an excellent speech at the Milwaukee Rotary Club in August 2017 before he retired. Listen carefully to what he says about their exceptional funded status, the shared risk model and more.

I also embedded another clip where Michael Williamson and others at SWIB discussed why they chose Citisoft for their technological needs.

Lastly, let me share with you my favorite thing about Milwaukee. Giannis Antetokounmpo, aka the Greek Freak, recorded a career-high 52 points on Sunday (including a career-half-high 35 points in the 2nd half), with 16 rebounds and 7 assists as the 76ers defeated the Bucks in Milwaukee by a final score of 130-125. They lost the game but that dunk over Ben Simmons was priceless!

PSP Investments put out a press release yesterday, Unibail-Rodamco-Westfield forms partnership with PSP Investments and QuadReal for a €750Mn (£670Mn) Private Rented Sector scheme in London:

Unibail-Rodamco-Westfield announces today that it has signed a conditional agreement with a wholly owned subsidiary of the Canadian public pension fund the “Public Sector Pension Investment Board” (PSP Investments) and global real estate company QuadReal Property Group (QuadReal), to form the “Cherry Park Partnership”. The Partnership will deliver the development and management of a €750Mn (£670Mn) Private Rented Sector (PRS) residential scheme, adjacent to Westfield Stratford City in London. It will be one of London’s largest single-site PRS schemes.

PSP Investments and QuadReal will each take a 37.5% share in the Cherry Park Partnership, while Unibail-Rodamco-Westfield will retain a 25% share and be appointed as the development and asset manager.

Olivier Bossard, Group Chief Development Officer, Unibail-Rodamco-Westfield, said: “This new residential quarter in the heart of Stratford City is an example of the Group’s strategy to significantly increase the densification of exceptional and highly connected retail destinations by adding offices, residential, hotels and other uses, where relevant. With the Cherry Park Partnership, we are leveraging our unique know-how and joining with strategic capital partners to reinvent city districts.”

Stéphane Jalbert, Managing Director Europe and Asia Pacific, Real Estate, PSP Investments, added: “London’s residential sector is chronically undersupplied and Cherry Park supports PSP’s broader long-term sectorial strategy to develop professionally managed residential assets alongside best-in-class investment partners. Once completed, this will be one of central London’s largest residential rental schemes and will offer future residents an incredible level of connectivity in an exciting and unique mixed-use location.”

Jay Kwan, Head of Europe, International Real Estate, QuadReal, said: ”This Partnership fits squarely into our investment strategy to densify successful retail destinations alongside world-class development and operating partners. We are excited to launch this new relationship with Unibail-Rodamco-Westfield whilst extending our long-standing and successful relationship with PSP.”

Construction work is set to start in Q2 2019, with a phased completion and a delivery expected post 2023. The Cherry Park Development will feature approximately 1,200 new homes benefitting from a suite of amenities including a residents’ gym, swimming pool, workspace and high-quality public areas.

Completion of the formation of the Cherry Park Partnership is subject to customary conditions precedent.

Unibail-Rodamco-Westfield also put out a press release on this deal:

On March 18, 2019, Unibail-Rodamco-Westfield announced the signing of a conditional agreement with a subsidiary of the Canadian public pension fund PSP Investments and global real estate company QuadReal Property Group, to form the "Cherry Park Partnership".

The Partnership will deliver a €750 Mn (£670 Mn) Private Rented Sector (PRS) residential scheme, adjacent to one of the Group’s London flagship destinations, Westfield Stratford City. It will be one of London's largest single-site PRS schemes. Construction work is set to start in Q2 2019, with a phased completion and a delivery expected post 2023. The Cherry Park Development will feature approximately 1,200 new homes benefitting from a suite of amenities including a residents' gym, swimming pool, workspace and high-quality public areas.

This new residential quarter in the heart of Stratford City is an example of Unibail-Rodamco-Westfield’s strategy to significantly increase the densification of exceptional and highly connected retail destinations by adding offices, residential, hotels and other uses, where relevant. With the Cherry Park Partnership, we are leveraging our unique know-how and joining with strategic capital partners to reinvent city districts.

Learn more about mixed-used projects and our vision of urban development in the URW 2018 Report.

Last week, I discussed BCI's record $7 billion partnership with RBC Global Asset Management and Quadreal Property Group, BCI's real estate subsidiary.

I explained why the deal made sense for everyone, allowing BCI to geographically diversify its real estate holdings outside Canada.

This week we find out BCI's QuadReal and PSP signed a deal with Unibail-Rodamco-Westfield to deliver a €750 Mn (£670 Mn) Private Rented Sector (PRS) residential scheme, one of London's largest single-site PRS schemes.

It's not by accident that PSP and QuadReal teamed up on this deal. Gordon Fyfe, BCI's President and CEO, and Neil Cunningham, PSP's President and CEO, go back years as Neil was the Head of PSP's Real Estate under Gordon's watch.

Neil is an expert in commercial real estate and he has a solid team backing him up at PSP. Gordon set up QuadReal back in 2016, shortly after joining BCI, and that company is headed by Dennis Lopez, a seasoned real estate investment professional with over 30 years of industry experience in real estate acquisition, development, M&A, financing and investment trusts, and someone who has worked in the Americas, Asia and Europe (note his international experience).

Mr. Lopez relies on Jonathan Dubois-Phillips, QuadReal's President of International Real Estate, to focus on the management and expansion of the company’s international assets. Mr. Dubois-Phillips was formerly a Managing Director of Nomura International, one of Asia’s largest Investment Banks, and also worked in a senior role with Lehman Brothers in the Global Real Estate Group where he invested on behalf of the bank and its private equity funds across Asia, as well as in Europe and North America.

Jay Kwan, Head of Europe, International Real Estate at QuadReal reports to Mr. Dubois-Phillips, and this partnership with PSP and Unibail-Rodamco-Westfield to build  London's largest single-site PRS schemes fits perfectly in PSP's and QuadReal's multi-family portfolios.

Interestingly, institutional involvement in the UK's private rented residential property only recently took off due to a long-standing fear of rent control and other reputational concerns related to the ownership of rented residential. Since 1990, the percentage of UK housing stock in the private rented sector has grown from 9% to 19% but mostly due to the growth in the private “Buy to Let” investor.

It's also worth noting that PSP and QuadReal's partner on this deal, Unibail-Rodamco-Westfield, is Europe’s largest property firm and it specializes in shopping centers (click on image):


This shift to a residential (with some retail) is something new for this firm as far as I can tell, but given its track record of success, I wouldn't bet against this deal.

Now, you might be asking, why are these two large Canadian public pensions investing in a huge project in London with all the uncertainty surrounding Brexit?

My answer to this is they're obviously looking way beyond Brexit and no matter what happens, this is a great long-term project.

Brexit or no Brexit, London is the financial capital of Europe and it will remain so. As more and more people will move to live in London, property prices are going to continue going through the roof and young adults and older pensioners will opt to rent (touches on rising inequality theme), so this is a great project over the long run.

Moreover, with the British pound well off its 5-year high relative to the Canadian dollar, and some saying to keep selling it versus the CAD (I don't agree), now is as good a time as ever to take currency risk to invest in this London project (click on image):


If a favorable Brexit deal is struck, these assets will increase in value significantly.

Right now, it looks unlikely the UK will leave the EU on the 29th of March and all indications are that Prime Minister Theresa May is going to ask for a delay.

The situation is one big mess and the EU can't seem to give the UK too much leeway or else its members will reject any deal.

Still, Brexit or no Brexit, London will thrive as a cosmopolitan global city and that's why PSP and BCI's QuadReal invested in this multi-million-pound project.

Interestingly, exactly one month ago, CPPIB signed a partnership with La Française and its shareholder CMNE to develop Grand Paris investment vehicle:

La Française and Canada Pension Plan Investment Board (CPPIB) announce the signing of a strategic partnership for the launch of a real estate investment and development vehicle: Société Foncière et Immobilière du Grand Paris. The joint venture between CPPIB (80%) and Caisse Fédérale du Crédit Mutuel Nord Europe (CMNE) (20%), La Française’s shareholder, will invest in major real estate projects linked to the Grand Paris infrastructure in the Greater Paris area.

Paris, February 15, 2019 - With over C$368 billion in assets under management worldwide, CPPIB continues to expand its investment program and has formed a joint venture with CMNE, La Française’s majority shareholder, to focus on Grand Paris related real estate projects – one of the most significant and prestigious regeneration projects in Europe. The parties will initially allocate €387.5 million in equity to the venture.

With €19 billion in real estate assets under management and over 40 years of investment experience, La Française has seized the real estate investment and community development opportunities offered by the Grand Paris Express transit project over the past several years. Early on, and in order to capture substantial value, the group has positioned itself on several strategic locations that are part of a broader urban regeneration initiative and close to hubs that will be serviced by the Grand Paris Express.

La Française’s expertise and longstanding reputation have enabled Société Foncière et Immobilière du Grand Paris, managed by Guillaume Pasquier, Head of Real Estate Business Development Grand Paris Project, and Anne Génot, CIO, Grand Paris and European Real Estate Business Development Director, to secure two flagship projects: Saint-Denis-Pleyel (mixed use) and Villejuif-Gustave Roussy (office buildings).

“This new partnership in France with a leading real estate manager and investor like La Française and its parent company CMNE allows us to invest in a strategically important development in Paris,” says Andrea Orlandi, Managing Director, Head of Europe, Real Estate Investments at CPPIB. “Through this partnership, we will target regeneration and infrastructure-led investments, and we expect the Grand Paris Express to significantly transform the Greater Paris market over the next decade and beyond. We look forward to growing the venture anchored by the significant development opportunities in Paris and its Grand Paris Express project.”

The joint venture will look to grow the partnership through additional development projects beyond Saint-Denis-Pleyel and Villejuif-Gustave Roussy that are consistent with its overall investment strategy.

“This partnership with a leading institutional investor will enable La Française, with the support of its shareholder, CMNE, to step up its real estate business development and participate, along with other public and private stakeholders, in making Paris a “Global City,” concludes Xavier Lépine, Chairman of La Française Group.

I guess CPPIB isn't too perturbed by Les Gilets Jaunes and the ongoing protests in Paris, they're taking a very long view on this city and rightly so.

I mention this because an astute reader of my blog who is long European shares relative to US sent me a tweet from Callum Thomas, Head of Research at Top Down Charts:

8. Speaking of global... when/will this mean revert? h/t @alexgt1234c$SPX$SPYpic.twitter.com/p9HikOHBID

— Callum Thomas (@Callum_Thomas) March 16, 2019

His reasoning is everyone is so bearish on Europe that any good news will propel these stocks higher, much higher, and he may be right but I don't rely on mean reversion to make money in these markets.

Below, Unibail-Rodamco-Westfield's CFO, Jaap Tonckens, spoke to CNBC in August after the firm  reported a jump in first-half profits. Very sharp guy, listen to what he says about retailers bucking the trend and doing well.

Next, following the successful acquisition of Westfield Corporation by Unibail-Rodamco, the new Group has been listed on the 5th June 2018 on Euronext Amsterdam and Euronext Paris. The new Group opened the trading day in both Euronext marketplaces. Christophe Cuvillier, CEO of Unibail-Rodamco-Westfield, opens the trading day in Paris and discusses the merger.

Next, BBC's Newsnight discusses why Brexit has thrown the UK into a constitutional crisis and BB's political correspondent Jonathan Blake explains why it now looks unlikely that the UK will leave the EU on the 29th of March. Like I said, anyway you slice it, Brexit is a complete mess!

Lastly, since I'm talking about real estate, take the time to watch this interview (in French) with the President of Ivanhoé Cambridge, Natalie Palladitcheff, on Gérald Filion's show:

Présente partout dans le monde, Ivanhoé Cambrige part à la conquête des marchés émergents. Entrevue avec Nathalie Palladitcheff, présidente d'Ivanhoé Cambridge. @IC_Comms#RDIéconomiepic.twitter.com/tXLSfW1bcT

— Gérald Fillion (@geraldfillion) March 18, 2019

Very impressive lady who along with Daniel Fournier is in charge of one of the most important institutional real estate portfolios in the world.

I was particularly struck by the demographics statistics she cited on India (half the population is younger than 25) and Mexico which explains why the Caisse and others are investing heavily in these emerging markets (but the bulk remains in developed markets).

Valerie Jones of Rigzone reports, Williams, CPPIB to Form $3.8B Shale Gas JV:

Williams and Canada Pension Plan Investment Board (CPPIB) have entered into an agreement to create a $3.8 billion joint venture which will expand CPPIB’s exposure in the North American natural gas market.

CPPIB will invest $1.34 billion into the joint venture, which will give it 35 percent ownership. The joint venture will include Williams’ owned Ohio Valley Midstream system and its newly fully-owned Utica East Ohio (UEO) Midstream system.

“This joint venture will provide CPPIB additional exposure to the attractive North American natural gas market, aligning with our growing focus on energy transition,” Avik Dey, managing director, Head of Energy and Resources for CPPIB,” said in a company statement. “The joint venture complements our recent investment in Encino Acquisition Partners, an anchor customer on UEO and other Williams gathering assets. Through these unique operations in highly attractive basins, we will further our strategy to establish U.S. midstream exposure alongside highly regarded and experienced operating partners such as Williams.”

Williams’ CEO Alan Armstrong believes the joint venture will advance an “already strong position in the Northeast.”

CPPIB’s investment in the joint venture is expected to occur in the second or third quarter of 2019.

JWN also reports, Williams and Canada Pension Plan Investment Board forming US$3.8B Marcellus/Utica joint venture:

The Canada Pension Plan Investment Board has formed a US$3.8-billion joint venture with Tulsa-based Williams Co. to optimize its midstream operations in the western Marcellus and Utica Basins.

CPPIB will invest approximately $1.34 billion to acquire a 35 percent stake in Williams' Ohio Valley and Utica East Ohio midstream systems.

Concurrent with signing the agreement , Williams purchased the remaining 38 percent stake in Utica East Ohio from Momentum Midstream.

Williams will retain 65 percent ownership of both systems and will operate the combined business on behalf of the joint venture with CPPIB.

The deal is expected to close in the second or third quarter of 2019.

On Monday, CPPIB put out a press release, Williams and Canada Pension Plan Investment Board to form a US$3.8 Billion Strategic Joint Venture Partnership in the Marcellus/Utica Basins:

• Strategic partnership between Williams and CPPIB to support ongoing growth and Northeast region optimization
• Williams consolidates 100% interest in Utica East Ohio Midstream (“UEO”) and assumes operatorship
• Williams expects to receive approximately $1.34 billion in exchange for a 35% interest in a combined UEO-Ohio Valley Midstream (“OVM”) joint venture, providing Williams with a net of approximately $600 million, after transaction fees and paying for the UEO interest, allowing for debt reduction and funding of Williams’ attractive growth capital in the region
• Enables synergies from common UEO-OVM operatorship

Tulsa, Okla./Toronto, Canada - March 18, 2019 - Williams (NYSE: WMB) today announced a series of transactions that will establish a new platform for the optimization of its midstream operations in the western Marcellus and Utica basins through a long-term partnership with Canada Pension Plan Investment Board (CPPIB).

Williams and CPPIB have entered into a definitive agreement to establish a US$3.8 billion joint venture that will include Williams’ 100 percent owned Ohio Valley Midstream system (“OVM”) and 100 percent of Utica East Ohio Midstream system (“UEO”). CPPIB will invest approximately $1.34 billion (subject to closing adjustments) for a 35 percent ownership stake in the joint venture. Williams will retain 65 percent ownership, will operate the combined business, and will consolidate the financial results of the joint venture in Williams’ financial statements.

Concurrent with signing the agreement with CPPIB to purchase a 35 percent interest in the joint venture, Williams purchased the remaining 38 percent stake in UEO from Momentum Midstream and will take over operatorship. The UEO acquisition was signed and closed today. UEO is involved primarily in the processing and fractionation of natural gas and natural gas liquids in the Utica Shale play in eastern Ohio.

Williams expects synergies through common ownership by combining UEO and OVM to create a more efficient platform for capital spending in the region, resulting in reduced operating and maintenance expenses and creating enhanced capabilities and benefits for producers in the area.

“Acquiring the remaining interest in UEO and forming a partnership with CPPIB continues to advance our already strong position in the Northeast,” said Alan Armstrong, president and chief executive officer of Williams. “These transactions create a platform for continued optimization and growth, provide deleveraging, reduce capital spending on processing and fractionation capacity for OVM, and unlock further synergies through combined operatorship of the systems.”

“This joint venture will provide CPPIB additional exposure to the attractive North American natural gas market, aligning with our growing focus on energy transition,” said Avik Dey, Managing Director, Head of Energy & Resources, CPPIB. “The joint venture complements our recent investment in Encino Acquisition Partners, an anchor customer on UEO and other Williams gathering assets. Through these unique operations in highly attractive basins, we will further our strategy to establish U.S. midstream exposure alongside highly regarded and experienced operating partners such as Williams. We look forward to expanding this new joint venture over time.”

“We’ve seen first-hand the focus of the UEO employees on delivering safe, environmentally compliant and reliable results, and we are excited to welcome these employees to Williams,” said Micheal Dunn, chief operating officer of Williams. “Williams looks forward to helping Encino and CPPIB maximize their important investment in the basin through safe, reliable and cost-efficient services.”

The cash proceeds to Williams from the purchase by CPPIB of its 35 percent interest in the joint venture will be used to offset the purchase price of the UEO acquisition, with the balance of proceeds used to fund Williams’ extensive portfolio of attractive growth capital and for debt reduction.

Closing of CPPIB’s investment in the joint venture, which is expected to occur in the second or third quarter of 2019, is subject only to customary closing conditions, including regulatory approvals.

Williams plans to provide updated 2019 financial guidance with its first-quarter 2019 earnings release.

The joint venture excludes Williams’ ownership interests in Flint Gathering, Cardinal Gathering, Marcellus South Gathering, Laurel Mountain Midstream and Blue Racer Midstream.

For the combined transactions, Morgan Stanley and CIBC Capital Markets acted as financial advisors to Williams. Gibson Dunn served as legal counsel to Williams.

About Williams

Williams (NYSE: WMB) is a premier provider of large-scale infrastructure connecting U.S. natural gas and natural gas products to growing demand for cleaner fuel and feedstocks. Headquartered in Tulsa, Oklahoma, Williams is an industry-leading, investment grade C-Corp with operations across the natural gas value chain including gathering, processing, interstate transportation and storage of natural gas and natural gas liquids. With major positions in top U.S. supply basins, Williams owns and operates more than 30,000 miles of pipelines system wide – including Transco, the nation’s largest volume and fastest growing pipeline – providing natural gas for clean-power generation, heating and industrial use. Williams’ operations handle approximately 30 percent of U.S. natural gas. www.williams.com.

About Canada Pension Plan Investment Board

Canada Pension Plan Investment Board (CPPIB) is a professional investment management organization that invests the funds not needed by the Canada Pension Plan (CPP) to pay current benefits in the best interests of 20 million contributors and beneficiaries. In order to build a diversified portfolio, CPPIB invests in public equities, private equities, real estate, infrastructure and fixed income instruments. Headquartered in Toronto, with offices in Hong Kong, London, Luxembourg, Mumbai, New York City, São Paulo and Sydney, CPPIB is governed and managed independently of the Canada Pension Plan and at arm's length from governments. At December 31, 2018, the CPP Fund totalled C$368.5 billion. For more information about CPPIB, please visit www.cppib.com or follow us on LinkedIn, Facebook or Twitter.

This is a huge deal even by CPPIB's standards, one that will provide it with more exposure to the North American natural gas market.

CPPIB will invest approximately $1.34 billion to acquire a 35 percent stake in Williams' Ohio Valley and Utica East Ohio midstream systems. Williams will retain 65 percent ownership, will operate the combined business, and will consolidate the financial results of the joint venture in Williams’ financial statements.

When doing a deal of this size, you want to first find the right partner, second take a minority stake in the joint venture and third have the partner own the majority stake and continue to operate the business.

Avik Dey, Managing Director, Head of Energy & Resources at CPPIB and his team structured this deal and they should be commended for this mammoth undertaking. I can't begin to imagine the amount of due diligence required to enter into this joint venture.

For its part, Williams (WMB) gets a nice infusion of cash to expand its operations and a great long-term partner with an extensive global network which comes in handy should it decide to eventually sell these assets down the road.

Judging by its stock performance, investors like this deal a lot and if the stock price breaks above $30 a share, it could be headed for a new high (click on image):


Alright, I'm being optimistic and it will help if natural gas prices pick up from here like they did in Q4 2018 (click on image):


Anyway, this is a long-term deal, one that will benefit CPPIB and Williams.

In another major deal, Reuters reports, CPPIB, Ontario Teachers’ join $3.3 bln offer for Inmarsat:

Inmarsat Plc said on Tuesday it has received a cash takeover offer from a private equity-led consortium, a deal that would value the British satellite company at about US$3.3 billion and take it private.

The consortium, which includes U.K.-based Apax Partners, U.S.-based Warburg Pincus and Canada Pension Plan Investment Board (CPPIB), offered US$7.21 per share on January 31 and the proposal remains under discussion, Inmarsat said in a statement.

The US$7.21 (543 pence) per share offer is at a premium of about 24 percent to Inmarsat’s Tuesday close of 437.8 pence on the London Stock Exchange. The offer price represented a premium of about 47 percent when the proposal was made on January. 31.

The company said it is not certain the discussions will lead to a formal offer.

Ontario Teachers’ Pension Plan Board would also be supporting the proposal as part of the consortium, Inmarsat said.

The group is required to make a formal offer by April 16, the FTSE 250 company said. The offer values Inmarsat at US$3.3 billion, according to Refinitiv Eikon data.

An external representative for Warburg Pincus declined to comment. Apax and CPPIB did not respond to requests for comment.

Last year, U.S. satellite group EchoStar Corp walked away from discussions to acquire Inmarsat after it rejected a US$3.25 billion cash and stock offer.

A takeover of the company could be closely scrutinized by the British government because of the satellite company’s position as a strategic asset.

Founded in 1979, Inmarsat was set up by the International Maritime Organization as a way for ships to stay in communication with shore and make emergency calls.

The company sees a growing opportunity to supply in-flight broadband services to commercial aircraft, having partnered with Japan’s Panasonic Avionics in September last year.

If it passes regulatory approval, this will be one of the biggest PIPE deals since CPPIB and GIG took Ultimate Software private in a deal led by Hellman & Friedman.

What else? Greg Zochodne of the National Post reports, How CPPIB is tapping ‘alternative data’ to refine its investment processes:

There was a time when the Canada Pension Plan Investment Board didn’t even make “alternative” investments. Now, Canada’s biggest pension fund says it is sifting through “alternative” forms of data to try to improve its investment decisions.

CPPIB has assembled what it calls a “data-driven edge” team, a small group of investors and data scientists that are experimenting with different kinds of information in making longer-term investment decisions, says Deborah Orida, senior managing director and global head of active equities at CPPIB.

“As we look to enhance that decision-making, one of the things that we’ve been focused on for the last couple of years is being able to use not only the traditional financial data that we get from the traditional sources like Bloomberg in making our investment decisions, but also the increasing volume of alternative data that is available,” Orida told the Financial Post in a phone interview from Hong Kong.

One example of how it is already putting alternative data to use that Orida provided was the fund’s recent analysis of a pair of real-estate companies, one public and one private, for which CPPIB used a public registry of realtors in the U.S. to study their movements between firms. The data would be one piece of a bigger puzzle that the fund would be trying to solve in order to make its investment decisions.

“But by looking at this additional source of data, and being able to analyze that trend, we could gain insights about what was attracting agents to different companies,” Orida said.

It’s unlikely CPPIB is the only Canadian pension fund tapping into emerging forms of data either.

The Ontario Teachers’ Pension Plan recently posted a job opening for a director of analytics platforms, the duties for which include maintaining “industry knowledge on data science, machine learning, data engineering, alternative data, data visualization and other relevant Advanced Analytics topics.”

Teachers’ posting said the director would be leading a team of five to 15 employees.

CPPIB, which invests the funds of the Canada Pension Plan, is also diving deeper into new innovation-related ideas and technologies.

The fund recently advertised that it was looking to hire a director of innovation to help test out “emerging concepts and ideas” and expand CPPIB’s advanced analytics capabilities.

Along the same lines, CPPIB said recently that it was seeking a head of data and advanced analytics, billed as “a transformative role.”

CPPIB says the two jobs are new ones, as the fund tries to ensure that its talent and technology keep pace with its growth.

The price for all this remains to be seen; CPPIB will reveal its costs in an upcoming annual report.

But while CPPIB already has certain advantages over other investors — such as the steady flow of contributions and a much longer-term outlook — it’s always looking to make decisions on the basis of the best-available information, Orida said.

Reams of data can also be used to feed various artificial intelligence technologies, and Orida said that CPPIB does employ machine-learning in its research. The example she gave for this was their thematic investing group researching automobility, such as trends around consumers moving from buying cars to buying rides off an app instead, or the evolution towards electric and autonomous vehicles.

Orida said the existing research had taken a more regional approach, but CPPIB, a global investor, had wondered if it made more sense to analyze the adoption trends based on certain characteristics, such as density or wealth. The fund used a machine-learning algorithm to group cities around the various attributes, which is insight it could also apply across its portfolio.

“So for example,” Orida said, “when you think about that evolution of moving from buying a car as a capital investment to consuming rides as a service, that’s going to impact how we think about long-term projections for toll roads, for airports that make a lot of their money from parking revenue, in our infrastructure team.”

Again, however, alternative data is not the be-all-end-all for CPPIB, as Orida noted when it came to their research of real-estate companies. The fund was not using the analysis alone to make an investment decision; rather, it was trying to respond to a question humans were asking and supplementing its other work.

“Ultimately, our investment decisions are still captured in making a financial forecast about a company and then discounting the cash flows back to figure out what price we would pay for it,” Orida said. “But when you’re forecasting those cash flows, the more information you could have about the industry trends and how they might impact the future of that company, my own view is that the better investment decision that you’ll make.”

Indeed, I agree with Deborah Orida, when making significant investment decisions, it's best to use all the available data including alternative data sources.

A former colleague of mine, Derek Hulley, who is now the Director, Data Science at Sun Life, went back to school in his forties to complete a Masters of Science in Predictive Analytics from Northwestern University while he was working.

Derek is a big-time data geek and one of the smartest and nicest modelers I know. Here he is proudly displaying his certificate from Sun Life after winning some predict modeling compeition in 2017:


When it comes to making money in markets, everyone wants "edge", hedge funds pay big bucks for "edge" and they will go at lengths to buy the best and most expensive alternative and traditional data for this edge so why shouldn't CPPIB, OTPP and others do the exact same thing?

I'm a big believer in data but my intellectual mentor at McGill University was a political philosopher, Charles Taylor, and my philosophy is simple: you can have access to all the data in the world but if you can't connect the dots across geographies, sectors, asset classes, etc., your data is pretty much useless and your investment decisions will suffer the consequences. That's why I'm more of a macro guy.

An example? I don't know, how about this, how will tight monetary and fiscal policy in China and a crackdown on capital flight impact the residential real estate markets in developed nations? This is just an example, not what is going on right now, but you need people at these large pension shops who can sit down with the guys and gals in Public and Private Equities, Fixed Income, Infrastructure, Real Estate and other teams to connect the dots.

And trust me, having worked at these large pensions, there is a lot of work that needs to be done to share information across business lines (some are much better at it than others but nobody has perfected it).

Another example? Well, the 2008 financial crisis. A lot of people couldn't believe it but some of us were very worried about the record issuance of CDO-squared and cubed and the rise and fall of esoteric credit structures and all that counterparty risk. Nobody could have predicted the scale of that crisis but some of us were definitely warning about the system reaching an important inflection point long before 2008 came around.

I'm bringing this up because data sources are all about managing risks and here I'm referring to downside risks. There are a lot of moving parts at these huge pension funds and it typically falls on the Risk groups to manage the risks of these moving parts, hopefully warning senior managers long before something blows up and contagion spreads across all asset classes.

Anyway, CPPIB, OTPP and others are right to focus on data. Today I read another interesting article on how OPTrust is staying ahead of the curve on artificial intelligence:

At a time when making money in the markets is increasingly difficult, technology can provide an edge, says James Davis, chief investment officer at the OPSEU Pension Trust.

“You need to have an edge, and the edge historically has been relationships and information asymmetry,” Davis says. “Now you’re going to need an edge in the technology space to be able to identify the kinds of themes or the kinds of relationships that you, before this technology existed, would never have been able to identify.”

The OPTrust’s focus on innovation allowed it to beat stiff international competition to take home an award for innovation in institutional investments at the 2019 volatility and risk premia awards.

I will let you read the rest of the article here and I'm lookng forward to seeing James Davis in Toronto next week where he will take part in a panel discussion with Marlene Puffer, President and CEO of CN Investment Division, Jean Michel, CIO of IMCO and Francois Bourdon, CIO of Fiera Capital. They will be discussing the top challenges and opportunities facing pension investors in 2019 and beyond (see details here).

Lastly, Vinicy Chan of Bloomberg reports, Canada's biggest pension fund considers opening its first office in China:

Canada Pension Plan Investment Board, which manages around $368.5 billion (US$277 billion), is considering opening its first office in China as it seeks greater exposure to the world’s second-largest economy.

Canada’s largest pension fund investor could open an office in Beijing as soon as next year, Hong Kong-based head of Asia Pacific Suyi Kim said in an interview this month. Staff there would then work closely with CPPIB’s 130 employees in Hong Kong, which have helped to invest $42 billion in Greater China so far, she said.

“As we’re also growing our portfolio in China, which is around 10 per cent of our total fund, it makes a lot of sense for us to consider expanding our footprint there,” said Kim, adding that one of the firm’s key investment themes is China’s rising middle class and its burgeoning consumer consumption story.

CPPIB has already invested US$4 billion in a China logistics venture with Australia’s Goodman Group as e-commerce rises, creating the need for more large-scale storage facilities. It also owns shares in Alibaba Group Holding Ltd., Meituan Dianping, Midea Group Co. and Tencent Holdings Ltd., plus it has invested in funds run by Citic Capital, FountainVest and Hillhouse Capital.

CPPIB can invest in those private-equity firms’ buyout funds, giving it the opportunity to look at deals alongside them, or make direct investments in its own right, Kim said. The pension fund expects its total net assets will grow to $800 billion by 2030.

Kim, 46, who built CPPIB’s Hong Kong office from scratch, is “mindful” of the growing competition from buyout firms and deep-pocketed tech companies in pursuing deals. “Having a lot of capital isn’t our competitive advantage here, our competitive advantage is having high quality talent and strong partnerships,” she said.

The fund’s China push comes as CPPIB aims to improve its track record of gender diversity globally. It made a commitment to hire equally by gender by 2020 and 47 per cent of new hires last year were women, Kim said.

The Toronto-based company’s senior management team is currently 35 per cent female, while there are seven women on its 11-person board. That compares with a 16.4 per cent female board representation for companies listed on the Toronto Stock Exchange.

Prior to joining CPPIB in 2007, Kim worked at Ontario Teachers’ Pension Plan and Carlyle Group LP, where she never had a female boss. “When I started at Carlyle Asia buyout fund in 2002 at the Seoul office, I was the only female professional,” Kim said. “There was no other female working in private equity in the country at the time.”

While that’s changed in the years since, Kim says gender bias is still quite common in the region.

“When I go to a business presentation with my team, the counter party very often would look at another male, thinking he must be my boss,” the Stanford Business School graduate said. “As I start to introduce myself and talk about CPPIB’s expertise as well as what my team has done, their faces change.”

Hah! I can just picture the faces of these Asian counter parties which are mostly men when they realize she's the boss and is doing a great job expanding CPPIB's imprint in China and the rest of Asia.

Below, Mark Machin, president and CEO of the Canada Pension Plan Investment Board, joins BNN Bloomberg to discuss his current market strategy and his outlook for the global economy. He also states the Fund is looking to grow China exposure despite trade uncertainty with US.

I've said this before, Mark is a great leader and he and the rest of the team at CPPIB are doing an outstanding job bringing Canada's pension fund to another level altogether.

Earlier this week, the Caisse put out a press release, CDPQ Expands Its Artificial Intelligence Offering:

Caisse de dépôt et placement du Québec (CDPQ) has announced the creation of a fund dedicated to Québec businesses with a proven track record in artificial intelligence. Funded with a $250-million envelope, the CDPQ–AI Fund aims to ramp up growth in businesses whose product offerings are based on the development of AI, and to accelerate the commercialization of artificial intelligence solutions.

This fund, managed by CDPQ’s Venture Capital and Technology team, will serve technology companies that have developed demonstrably sound business models and shown a capacity for continued strong growth. They will need to have a well-established management team as well as a dedicated team with AI experience.

Over the years, CDPQ has invested in many venture capital firms (1) that target artificial intelligence companies in the startup phase. The CDPQ-AI Fund’s objectives include supporting the development of the most promising businesses to emerge from these funds, once they have reached their growth phase.

Note that in 2018 this co-investment strategy, combined with a CDPQ-sponsored venture capital fund, has resulted in CDPQ making direct investments in AI businesses, such as Hopper (fund: BrightSpark), TrackTik (fund: iNovia), or even Breather (fund: Real Ventures). The CDPQ-AI Fund will be used for new transactions of this kind.

In addition to this new fund for growing technology companies, CDPQ has recently announced a series of initiatives and partnerships targeting young AI companies in the startup phase.

CDPQ, in collaboration with Mila – Quebec Artificial Intelligence Institute, created Espace CDPQ | Axe IA to house nine startups from innovative sectors. They will also have access to Mila’s academic resources and advice, coaching and a network of experts from la Caisse and Espace CDPQ, to accelerate the commercialization of their AI solutions. Furthermore, CDPQ will soon have a laboratory, on Mila’s premises, that it can make available to certain businesses in the portfolio that have clearly defined AI integration programs.

Espace CDPQ, a CDPQ subsidiary, is also a founding partner of the Creative Destruction Lab Montréal which, through its extensive academic and business networks, is driving the development of AI technology companies with strong growth potential.

It should also be noted that NextAI, an innovation program designed to create artificial intelligence companies and commercialize technologies, is a new Espace CDPQ collaborator. Active in both Montréal and Toronto, NextAI accelerates and develops businesses in the seed capital and startup phases. NextAI works with teams that are commercializing research on AI and are interested in building global businesses.

______________

1 iNovia, Real Ventures, BrightSpark, White Star Capital, Relay Ventures, Georgian Parners, RV Orbit, Luge Capital, InnovExport, Anges Québec Capital, CTI Life Sciences and Lumira Ventures.

The CDPQ–AI Fund is a new fund but from an experienced team which has a track record investing in many venture capital firms that target AI companies in the startup phase.

Some of these companies have been very successful. For example, the Caisse booked a huge gain when Montreal's Lightspeed IPOed, a rare Canadian IPO success story:

When Dax Dasilva rang the opening bell at the Toronto Stock Exchange on Friday morning, the company he founded 14 years ago, Montreal-based Lightspeed POS, was officially worth almost $1.4 billion.

By the end of the day, as shares (TSX:LSPD) that were sold at an initial public offering price of $16 rose to $18.90, was worth more than $1.65 billion.

It was one of the 10 largest tech IPOs in the history of the Toronto Stock Exchange — and may be the largest ever by a Montreal-based tech company.

“A couple of years ago, people would have said, you’re not going to get American-level valuations, or interest, or volume on the Toronto Stock Exchange, and hopefully we’ll show that that’s just not true,” Dasilva said. “We’ve been able to attract as many American investors as Canadian investors by going public, and also by going public in Canada.”

The IPO raised more than $240 million for the company, which develops point-of-sale software for small and medium-sized retailers and restaurants.

Originally, the company had sought to raise $200 million through the share sale, with shares valued at between $13 and $15. Dasilva said the increased price was the result of “overwhelming demand.”

IPOs are uncommon among Canadian venture-backed companies. Promising firms are often acquired by larger players before they get to the point where they can go public.

“It’s rare that you are able to be in this position, we were lucky because we had long-term Canadian-based investors,” Dasilva said. Montreal-based venture capital firm “iNovia, the Caisse de dépôt, Investissement Québec and myself are the biggest shareholders, so keeping the company independent and keeping it Canadian and headquartered in Montreal, being a tech anchor in this province, that was important to everybody that’s involved.”

Around one-fifth of the company was sold to investors through the IPO. Dasilva remains in control, with the majority of voting shares.

Now, instead of being acquired, Lightspeed plans to start doing more acquisitions as it looks to become a global brand.

“We bought five companies, in the U.S., in Canada and in Europe, and we want to continue to do that and build the company globally,” Dasilva said. “So, rather than having a mindset of being an acquisition target, which is often the case of a VC-backed company, because VCs would like their return, we were able to graduate from the VCs, to long-term holders like the Caisse, and pursue this vision of being a public company.”

Lightspeed had revenue of $57 million during its 2018 fiscal year, which ended on March 31, 2018. It had an operating loss of $21.922 million.

Dasilva said he sees Lightspeed consolidating its market.

“Our market is very fragmented with lots of different, smaller players that are selling to the same set of customers, retail and restaurant SMEs,” Dasilva said.

Currently, Lightspeed has 47,000 customers in 100 countries. But, Dasilva said, there are 47 million businesses around the world in its target market.

Being public will help his company sell to more of those businesses, he said.

“We’ll have greater visibility, we’ll be able to do strategic (mergers and acquisitions), we’ll be able to grow globally,” he said. “We’re going to invest in developers, we’re going to invest in our go-to-market teams. There’s an enormous opportunity to capture more of these 47 million potential customers that could be Lightspeed customers, globally. This kind of event, where you raise this amount of capital, gives you the funding you need to apply to a model that’s already working.”

Remember the name Lightspeed POS (ticker symbol: LSPD.TO). Its shares were up 5% today to close at $21.50 and the company is run by a great entrepreneur, Dax Dasilva, a man with a clear long-term vision who is looking to be the acquirer, not the acquiree.

Why is the Caisse investing in Quebec tech startups? First, unlike other large Canadian pensions, the Caisse has a dual mandate which includes investing in Quebec's economy in public and private markets. It even has a private equity team dedicated to Quebec private companies.

Second, as demonstrated above, the Caisse's venture capital investments are risky but they can be enormously profitable.

Third, I refer you to an article by Don Wilcox I read last month on Real Estate News Exchange, Tech likely Canada’s saviour if recession hits: Morassutti:

If executives arrived at Tuesday’s RealCapital conference in Toronto with concerns about a downturn, CBRE’s Paul Morassutti likely put a bit more spring into their steps.

His annual state-of-the-economy presentation focused on Canada’s booming tech sector, and how innovation could be an economic — and commercial real estate — saviour when recession arrives.

“Some say a recession is looming, sounds ominous,” he said during a keynote address. “This morning, we’re going to explain why there may be less to fear in the Canadian commercial real estate market than many would have you believe. We will also discuss why we believe Canada’s most valuable resource has nothing to do with energy, minerals or anything else that comes from the ground.

“In real estate, identifying areas of growth is fundamental. Increasingly, the areas of growth in Canada are all about technology and our growing knowledge economy. Technology is the catalyst, change agent and king-maker and its impact is rippling through every sector of our market.”

Canada well-positioned if recession hits

Morassutti, CBRE’s vice-chairman of valuation and advisory services, said the rising interest rate environment, combined with historically high global debt, will undoubtedly lead to a reckoning. However, he said economies positioned to benefit from new technologies and lifestyle trends should weather the worst of whatever storms are coming.

He noted the innovation sector extends well beyond what many people think of as traditional “technology” into virtually every aspect of Canadians’ lives.

“Tech has become so ubiquitous across Canadian industries the true impact the tech sector has on Canada’s economy has been understated. CBRE research estimates that for every tech employee hired at a tech firm between 2012 and 2017, there were three more tech employees hired by non-tech firms.

“Loblaws for example, a grocer, employs almost a thousand people in its AI digital division.

“When you look at it this way, Canada’s tech sector is exceptionally diverse and has a multiplying effect on the economy. But even more important is the rate of growth. Over the past 10 years, tech has grown at more than 2.5 times the pace of the energy sector and three times the overall economy.”

Support for innovation from both the private sector and governments has made Canada a true leader in technology and innovation — and that is driving many of the commercial real estate trends today across the country. He pointed out Canada was the first country to create a national artificial intelligence strategy, and the creation of incubators such as MARS district in Toronto opened the door for innovators to become established and grow.

Toronto a “global tech powerhouse”

“In 2017, Toronto produced more tech jobs than San Fran, Seattle and Washington, D.C. combined,” he said. “Toronto has emerged as the undisputed tech capital of Canada and is a global tech powerhouse and it is no coincidence that our downtown office vacancy rate now sits at a 26-year low.

“In Ottawa, tech companies are now the biggest (private sector) tenants, second only to the federal government, occupying more space than the accounting and legal sectors combined.”

Toronto’s office development pipeline of 10 million square feet under construction is 58 per cent pre-leased. Twenty per cent of that is tech sector space, despite the sector historically accounting for only four per cent of total occupancy. Microsoft is moving into the downtown core, taking a landmark 132,000-square-foot lease at the new CIBC Square.

“Tech companies anchoring new buildings is something we have virtually never seen before,” he said.

That expansion is occurring across the GTA and surrounding areas.

“Waterloo region and Toronto form the second-largest tech cluster in North America. This corridor, dubbed Silicon Valley North, encompasses 15,000 tech companies, 200,000 tech workers, and over 5,0o0 tech startups and 16 universities and colleges and is a testament to our tech strength.”

Vancouver and Montreal have also taken great strides, and other Canadian cities have been creating niches for themselves.

He said the good news doesn’t stop there. Canadian immigration policies are welcoming thousands of international students into our universities and colleges, and highly skilled workers into the labour force.

“Capital follows talent, and capital-backed talent produces innovation that will define the future,” he said.

Industrial sector also benefits

Tech is also having a major impact in another outperforming sector of CRE, the industrial market. The impact of e-commerce is driving demand for logistics, and pushing rents higher.

“It is not a stretch to say that we have never seen a better market than the 2018 industrial market. The lowest availability we have ever tracked. Rising rents. In some market, rising dramatically,” Morassutti said.

And while markets like Toronto, Vancouver, Montreal and even Calgary get much of the attention, this trend isn’t focused in a few large centres.

“Demand has outstripped supply for the last 10 years and the new supply pipeline is still low relative to fundamentals.

“Once again, technology is the driver here. The ongoing shift to e-commence remains the primary tailwind. Here in Toronto it represents roughly 85 per cent of all occupier demand and there is more of it to come.”

But, what happens if, or when, the economy begins to slow down?

“All of that sounds great but it raises an obvious question: If tech is having an outsized impact on our market, how durable is that demand? And what happens when we hit a slowdown?”

Apple investors lost $70 billion in value in one day recently, tech stocks have fallen from historic highs, privacy concerns abound and increasing government regulation is in the offing in many sectors.

“Are we in a tech bubble?”

Morassutti also raised the spectre of declining venture capital for startups and rapidly expanding firms.

“Are we in a tech bubble?” He asked, proceeding then to address the possible fallout.

Morassutti said we live in a very different world from two decades ago when the first dot-com crash caused severe economic upheaval. He agreed there will be a “scaling back” of demand, but he does not see the same kind of traumatic impact.

“Fears of a dot-com-style crash appear to be unfounded. First of all, the extremes are not the same. The last dot-com crash was based mainly on hot air and hype.

“As (futurist) David Houle says, tech continues to push into new areas of our lives at a rate that most of us just can’t fathom.

“We can debate current-day tech valuations, even with the decline it may still be overvalued. But when you consider where tech is going; cyber security, health care, fintech, clean energy, proptech, it becomes clear that if anything they are just getting started and the ecosystems around them are not going anywhere.

“Despite softening economic conditions fundamentals at the property level remain incredibly strong. Technological change, and tech business growth and tech talent are the dominant factors driving demand.”
Canada can’t become “complacent”

In keeping with his upbeat presentation, Morassutti said there are many reasons to take heart.

“Real estate is cyclical, always has been and that hasn’t changed,” he said. “We should be aware of those cyclical factors just as we should be aware that our fundamentals as we enter this slowdown are, on average, as good as they have ever been. That is cyclical as well.”

But Canada’s diverse population, safe banking structure, high standing in international “freedom” rankings, and world-leading tech sectors are all huge positives.

“The biggest challenge we have is that this is a race with no end, and there is no room for complacency because we are competing with everyone,” he said.

“Rather than obsess over when the next downturn will hit, I take comfort in knowing the Canadian market is well positioned not only to weather it, but to continue to flourish.”

I don't share Morassutti's enthusiasm for the Canadian economy, think our day of reckoning will come and it won't be pretty, but he raises many excellent points and makes me think long and hard about  the tech sector as a creator of jobs and its ability to mitigate the impact of a recession.

Importantly, if CBRE research estimates are correct and for every tech employee hired at a tech firm between 2012 and 2017, there were three more tech employees hired by non-tech firms, then that definitely argues for the Caisse and others to invest in emerging technology companies.

And others are investing in them, including OTPP, CPPIB and OMERS which last month tapped ex-CPPIB exec Mark Shulgan to lead new growth-equity strategy:

OMERS appointed Mark Shulgan to head the Canadian pension fund’s new growth-equity platform, PE Hub Canada has learned.

OMERS announced Shulgan’s hire as a managing director in September, though at the time did not mention the new strategy.

He will now run OMERS Growth Equity, recently set up for long-term investing in high-growth companies committed to innovation in sectors like healthcare and tech, according to OMERS’ site.

The platform’s strategy is to partner with entrepreneurs as a minority investor, deploying equity of $50 million to $250 million and taking board seats.

Previously, Shulgan was a senior portfolio manager in Canada Pension Plan Investment Board’s thematic investing group.

He co-founded the CPPIB group, an investor in private and public companies in North America and Asia, a decade ago.

Before then, Shulgan spent nearly three years as a vice president at Fortress Investment Group.

Shulgan could not be immediately reached for comment.

OMERS Growth Equity represents a third division of OMERS Private Equity, filling a space between the PE group and OMERS Ventures, both of them pioneers of in-house direct investing by a major pension fund.

You'll recall when I covered OMERS's 2018 results, I discussed how OMERS Ventures hired Michael Yang and opened two offices in Silicon Valley and San Francisco as part of an expansion aimed at investing in US startups.

I believe Mark Shulgan is going to invest in late-stage tech companies that need to financing and OMERS will be taking a minority stake in them.

Not sure if his focus is on the US or Canadian market but unlike the Caisse, OMERS, CPPIB and OTPP don't have to invest in Ontario or Canada, their focus is squarely on finding the best investments all over the world.

Still, as the article above states:

“In 2017, Toronto produced more tech jobs than San Fran, Seattle and Washington, D.C. combined,” he said. “Toronto has emerged as the undisputed tech capital of Canada and is a global tech powerhouse and it is no coincidence that our downtown office vacancy rate now sits at a 26-year low.

“In Ottawa, tech companies are now the biggest (private sector) tenants, second only to the federal government, occupying more space than the accounting and legal sectors combined.”

All this to say, there's no reason to ignore Canadian tech companies, especially if they're successful and growing fast (like Lightspeed POS).

Is Venture Capital easy? Of course not, it's exceedingly difficult, need I remind you of what Sequoia Capital's Doug Leone told me back in 2004 right before I managed to persuade him to take a meeting with Gordon Fyfe and Derek Murphy: "My best advice to your pension fund is don't get into venture capital, you will lose your shirt!".

But these big pensions would be foolish to ignore this space altogether, especially if they can partner up with the right VC firms to identify the next key growth areas and growth companies. It is far from easy but it's definitely an exciting area to invest in.

Below, former OMERS CEO Michael Nobrega, chair of the Ontario Centres of Excellence, joined BNN Bloomberg's Amanda Lang from the OCE Discovery 2018 conference with his take on Canada's current competitiveness, stating Canadian pensions should invest in tech startups. Listen carefully to what he said (in May, 2018).

Next, Jim Orlando, managing director at OMERS Ventures, came out with his 2019 Canadian tech predictions that include a warning. He says the most recent wave of tech innovation may be coming to an end. Orlando also talked about the importance of artificial intelligence and why he predicts a rise in bitcoin. Not sure about bitcoin but agree with him on entering a period of tech malaise and that AI is where you want to be.

Lastly, Dax Dasilva, founder and CEO of Montreal software firm and Caisse-backed Lightspeed POS, recently joined BNN Bloomberg as they begin their first day of trading on the Canadian public markets. Like I said above, keep tracking this company, it has a great future ahead of it.

Earlier today, IHS Markit released its preliminary results for the March US manufacturing purchasing managers’ index, with the reading falling to a 21-month low of 52.5. This was below expectations for 53.5, and February’s reading of 53. Service-sector PMI slipped to 54.8 from 56, and came in below expectations of 55.5. Each reading, however, held above the key level of 50, indicating expansion.

“A gap has opened up between the manufacturing and service sectors ... with goods-producers and exporters struggling amid a deteriorating external environment and concerns regarding the impact of trade wars,” Chris Williamson, chief business economist at IHS Markit, said in the statement Friday. “The survey is consistent with the official measure of manufacturing production falling at an increased rate in March and hence acting as a drag on the economy in the first quarter.”

If you read the statement, I found this somewhat concerning:

Private sector companies responded to slower new business growth by reining in staff hiring during March. Latest data pointed to the weakest increase in payroll numbers since June 2017.

We will have to wait till the first Friday of April to find out if US payrolls took another hit in March but this certainly wasn't encouraging.

What does all this mean for US stocks? Well have a look at the one-year daily and 5-year weekly charts of the S&P 500 ETF (SPY) which remain in an uptrend despite the pullback (click on images):





This is hardly something to panic about but it can be that stocks are rolling over here and taking a breather, or it could be something far worse.

Yesterday, Zero Hedge posted a decent comment,Battle Of The Quants: Kolanovic Counters McElligott With 6 Reasons Why It's Time To Buy.

I won't bore you with the details but here are the six factors Nomura's strategist Charlie McElligott cited to warn the bank's clients that the market's "pullback window" has opened:

1. The market's traditional slide after a major capitulationary inflow
2. Fading dealer delta-hedging demand
3. The continued rise in CTA "sell triggers", which will launch a renewed systematic bout of selling once the threshold level goes in the money
4. The ongoing QT and the heavy month-end Fed balance sheet runoff
5. Stock-selling from quarter-end pension rebalancing
6. The buyback blackout period window begins

That bearish list caught my attention because I was the one pounding the table on December 26 of last year saying the world's most influential allocators were about to make stocks great again by rebalancing out of bonds and into equites.

People glorify the world's richest hedge fund managers but I couldn't care less about them, tell me what the world's most influential allocators are doing with their asset allocation and then you have my attention.

Are they rebalancing out of stocks and into bonds? It's possible they took some profits but I don't think there is any major rebalancing going on even if stocks surged from their December lows.

So try not to panic about the inverted yield curve or the bond market's ominous warning, it's still too early to tell whether stocks are going to get clobbered again or if this is just another pullback before they keep grinding higher.

On that note, a look at the how the S&P sectors performed this week, courtesy of barchart (click on image):


As you can see, Financials (XLF) got slammed hard, down 5% this week.

And here are the top-performing US stocks for this past week, courtesy of barchart (click on image):


Again, a bunch of small cap biotech stocks nobody has ever heard of.

Also, here are the top large cap stocks year-to-date, courtesy of barchart (click on image):


Here, I see a lot of familiar names but no wonder a lot of active managers are underperfoming again this year.

Anyway, hope you enjoyed my weekly market comment, try not to panic about the bond market's ominous warning. As always, please remember to support my work via a donation on PayPal on the top right-hand side under my picture. I thank everyone that supports my work, it's greatly appreciated.

Below, special counsel Robert Mueller on Friday delivered his report to Attorney General William Barr on Russia's election meddling and possible collusion with Donald Trump's presidential campaign. CNBC's Eamon Javers reports.

Second, CNBC's Mike Santoli and Rick Santelli break down what the yield curve may be signaling for the market and how a yield curve works.

Third, CNBC's "Power Lunch" team is joined by Ron Insana, CNBC contributor and senior advisor to Schroders North America, and Krishna Memani, chief investment officer with Oppenheimer Funds, to break down how the markets are reacting today as well as what the yield curve represents at this time.

Fourth, Tobias Levkovich, Citi chief U.S. equity strategist, discusses the market selloff and pressures on the economy with "Squawk on the Street".

Fifth, David Rosenberg, chief economist at Gluskin Sheff, talks his economic forecast with CNBC's "Closing Bell." I agree with Rosie, the Fed might be on hold but it raised rates nine times and we are only now seeing the lagged effects on these rate hikes in the economy.

Sixth, Danielle DiMartino Booth of Quill Intelligence says despite a broad positive outlook, there are still several troubling signs about the US economy. Danielle is a top economist, listen carefully to her analysis.

Lastly, Greg Daco, Oxford Economics chief U.S. economist, and Paul Hickey, Bespoke Investment Group co-founder, join 'The Exchange' to discuss the market plunge amid concerns on a global slowdown. Very good discussion, well worth listening to their views.

John Gittelsohn of Bloomberg reports, How Fast Can CalPERS’s $360 Billion Grow?:

In January, Ben Meng started his job as chief investment officer of a seriously big fund: the $358.4 billion California Public Employees’ Retirement System, or CalPERS, the largest U.S. pension. But neither the scale nor the political spotlight that comes with the role seems likely to intimidate him. For the last three years, he was deputy CIO at the State Administration of Foreign Exchange (SAFE), the tightly controlled $3 trillion reserve fund in China. “It’s not often that an individual has the opportunity to hold key roles for two of the largest pools of capital in the world,” wrote Stephen Schwarzman, chief executive officer of private equity giant Blackstone Group LP, in an email.

Perhaps more daunting for Meng is this figure: 7 percent. That’s CalPERS’s annual return target. It may not sound very high given that the S&P 500 returned almost an annualized 11 percent in the five years through January 2018. But CalPERS made only an annualized 6.3 percent in that period. And deep into both a bull market and economic expansion, there may not be a lot of easy gains to be made from here.

The stakes for CalPERS are high, since missing the mark too widely endangers retirement payments for its 1.9 million members. “We need to do things differently,” says Meng in his Sacramento office. The walls are still bare, and the furniture arrangement is in flux as he tries to find a place where the sun’s glare won’t hit his computer screen.

Meng’s plans to improve returns hinge on private equity. Unlike owning stocks and bonds, investing in private equity funds means holding illiquid stakes in companies that may take years to realize their value. In theory, such investments can play to the advantage of CalPERS as a very long-term investor. Money managers who ignore their institution’s innate strengths and weaknesses, he says, “are the profit center for the other people.”

But CalPERS also faces private equity capacity constraints—it may have more money than it can profitably invest. Its $45 billion allocated to private equity includes $17 billion in uncommitted capital. It needs to place $10 billion a year just to keep up with growth and replace funds that have reached the end of their investment terms. And it’s competing for deals as the private equity industry’s dry powder—money it hasn’t invested yet—climbed to a record $1.2 trillion at the end of 2018, according to Preqin Ltd. That’s a sign that private equity, too, may not offer the bargains it once did.

Meng is exploring a range of options to find opportunities, including creating funds to buy late-stage startups and other companies CalPERS could hold for the long term, competing head-to-head with some of the pension’s longtime partners, such as Schwarzman’s Blackstone. He says he’ll need five years to hire the investing talent and change the culture at CalPERS to implement his vision. “For the investment portfolio to show the effect, it may have to take 10 years,” he says.

He passed his first political hurdle on March 18, when the board endorsed his plan to invest $20 billion in startups and long-term company holdings. “It may or may not work now,” he told the board. “We will not know if we don’t try. And in this challenging capital market environment, we owe it to all our stakeholders to explore all the options available.” Skeptics, including State Controller Betty Yee, a CalPERS board member, questioned whether it’s a good idea. “We’re taking on a larger risk for a future benefit that likely will not move the needle,” said Yee, who voted against the plan.

Meng was born in the Chinese port city of Dalian, the youngest of two sons of an engineer and a history teacher. It was 1970, a year before President Richard Nixon reopened U.S.-China relations and almost a decade before Deng Xiaoping began reforms that launched China’s transformation into a global economic superpower. “If I were born 20 years earlier, I wouldn’t have had the opportunity to leave China and go to the U.S.,” he says. “I was born in an era when you didn’t have to be from a rich family to be successful.”

He came to the U.S. in 1995 for a Ph.D. program in civil engineering at the University of California at Davis. His new California friends were all buying stocks, making a bundle on the dot-com bubble, so he opened an E*Trade account, bought tech stocks, and watched the money grow. He enjoyed investing so much that he enrolled in a new financial engineering program at UC-Berkeley. To pay tuition, he sold his stocks—just before the market crashed. “Dumb luck,” he says. “I didn’t know the difference between alpha and beta.” That’s investment jargon for beating the market and tracking it, respectively. “I didn’t know about bonds,” he adds.

After earning his financial engineering degree in 2002, he worked at Morgan Stanley, Lehman Brothers, and Barclays Global Investors. Then he joined CalPERS in 2008, when the financial crisis sent the fund plunging 24 percent. He focused on a variety of investment areas, helping CalPERS dig out of its hole. He became a U.S. citizen in 2010.

In 2015 he took the job in China to broaden his work experience, he says, but also to be close to his recently widowed mother, who still lives in Dalian with his brother. Meng says he’s not permitted to go into detail about his work at SAFE, where he advised the CIO through last year. “They manage the foreign exchange reserves for China, so that’s an even bigger challenge than CalPERS,” says William Overholt, a senior research fellow and China specialist at Harvard’s Kennedy School of Government. The reserves include international currencies (mostly U.S. dollars), gold, and other foreign exchange assets, according to SAFE’s website. Overholt says SAFE and the People’s Bank of China, the central bank, are “two entities but closely joined.” China’s exchange rate management—sometimes called “ manipulating” by President Donald Trump—is one of the key trade disputes between the world’s two largest economies.

Meng declines to wade into a politically charged discussion about U.S.-China relations. He says his big takeaways from SAFE were developing professional relationships and working on a huge scale. “Once you see $3 trillion, to go to $350 billion is helpful,” he says. “When you work in another country, you see things from an entirely different perspective—you’re right there, right in the middle of things.”

Having lived outside China for 20 years, Meng says he felt like a visitor when he returned for work. He stayed in touch with his former colleagues at CalPERS, and he applied for the CIO job there as soon as he heard of its opening last year. His return to Sacramento has been easy in some respects, he says. He even moved back into the house he bought in 2012 and never sold, as if he were “maybe subconsciously thinking I was coming back.”

He says he took the CalPERS job for the mission, “to serve those who serve California.” His 2019 maximum pay is $1.7 million, including a performance-based bonus. Amid all the big numbers he manages, Meng sometimes struggles to keep things in perspective. “When I make an investment decision at CalPERS or anywhere, it can easily be a half-billion dollars,” he says. “Then I think about the average retiree making less than $3,000 a month from CalPERS.”

Meng tells a story to illustrate how, in money management, nothing is guaranteed. After he got the CalPERS CIO job, his mother was so proud that she opened a brokerage account in China. She would phone her son from China every day to ask if her stocks were going up, and he would reply that he couldn’t be sure. After a while, she stopped calling. “My brother told me she got really worried about what I’m doing,” he says. “How can I manage other people’s retirement money if I can’t even talk to my mother with certainty?”

Investors can, at best, learn the odds and play them in their favor, he says. “The market is not an accommodating machine,” he says. “It doesn’t give you 7 percent every year just because you need it.”

Chief Investment Officer also reports, CalPERS Investment Committee Approves Private Equity Plan at Urging of the CIO:

The approval Monday by the investment committee of the California Public Employees’ Retirement System (CalPERS) creating two new private equity organizations came after a plea from the system’s chief investment officer calling for support of the plan.

“We cannot access private equity, access private equity exposure on the scale that we need, and then there are characteristics of the conventional private equity business model that are suboptimal in terms of our needs, namely the higher fees, lower transparency, and a relatively lower control,” CIO Ben Meng told the investment committee Monday.

The plan approves the concept of creating two new investment organizations for CalPERS to invest in late-stage venture capital and take buy-and-hold stakes in establishment companies.

CalPERS is the one of the largest private equity investors in the world—and its $27.8 billion portfolio is the largest in the US—but its program, made up largely of limited-partner stakes in buyout funds run by private equity firms, has been rapidly shrinking.

The private equity asset class made up 7.9% of CalPERS’s $351.1 billion portfolio as of January 31, down from around 12% six years ago.

Meng said competition from other institutional investors to participate in funds run by top managers has reduced CalPERS’s opportunities to be in prime funds with the best-expected returns. Fees are another issue. CalPERS paid more than $700 million in fees to private equity partners in the 12-month fiscal year ending June 30, 2018.

Private equity is CalPERS’s best-producing asset class, with a 10.5% average in a given year over the last 20 years. Without expanding the asset class, the pension system will not be able to make its annualized average annual return of 7%, Meng has said. He said this would decrease CalPERS’s funding level, estimated around 70%, even more, causing additional contributions from government units, many which are already seeing soaring CalPERS bills. Private equity is expected to earn an average 8.3% annualized over the next decade.

CalPERS investment officials see forming two investment vehicles, Innovation and Horizon, as a way to build the private equity program.

Innovation would make direct-style investments of up to $10 billion in late-stage companies in the venture capital cycle. Horizon would take buy-and-hold stakes, also up to $10 billion, in established companies, similar to what Warren Buffett does with Berkshire Hathaway.

However, the actual implementation of Innovation and Horizon, could still be months away, or even longer.

The plan approved by the investment committee on Monday (March 18) gives CalPERS investment officials the power to negotiate contracts with investment teams for the new organizations.

The private equity plan would then come back to the 13-member investment committee for final approval. An outside investment consultant would also give the investment committee its prudent-person opinion before the vote.

Meng has not given a timetable as to when the new investment organizations could start but said before Monday’s vote that it “will help ensure CalPERS is able to bring potential (investment) partners to the table.”

Meng, who took over as CalPERS CIO three months ago, said finding the right investment talent is key to making the new program work.

There are still three skeptics on the 13-member investment committee: Margaret Brown, Jason Perez, and State Controller Betty Yee. Concerns raised by the three include the lack of transparency surrounding Innovation and Horizon. The two investment organizations would be funded by CalPERS but run by general partners who would control investment decisions.

In addition, the compensation of the general partners and their investment teams—which could run into the tens of millions of dollars—would not be disclosed to the public.

One irony is that the biggest critic of the plan is former CalPERS investment committee member J.J. Jelincic. He also worked as a CalPERS investment officer for several decades.

Meng, who also used to work at CalPERS as an investment official and knew Jelincic, said last month that it was Jelincic who helped convince him to take the CalPERS job. The two remain friendly, but continue to differ on the private equity plan.

Jelincic was at Monday’s meeting voicing his opposition to the plan. He questioned whether lower private equity fees would result from the plan and discussed the transparency issue regarding the lack of disclosure of compensation of the investment staff of the new organizations.

“Direct the staff to continue to explore and develop this plan,” he told the investment committee. At the same time, he urged a no vote against the plan, saying it kept changing, and was not ready to be voted on.

Meng maintains that the proposed structure, with general partners running the investment organizations and CalPERS serving as the sole limited partner, is the best way to launch the new investment organizations as quickly as possible. The CalPERS plan differs from what Canadian pension plans do, often making private equity investments directly without general partners.

He says CalPERS should ultimately over time save some of the fees it pays private equity partners through the new investment organizations. CalPERS currently pays external managers running its buyout funds management fees of up to 2% and 20% of the profits. Meng has not, however, offered specifics as to how much in fees could be saved. He also admits that fee savings might not be in the beginning years of the private equity investment organizations as they are getting off the ground.

On Friday afternoon, after the market close, I had a chance to speak with Ben Meng, CalPERS's new CIO.

Let me first thank Ben for taking the time to talk to me, he's a very busy man and I really enjoyed our long conversation. Let me also thank Wayne Davis, Chief of the Office of Public Affairs at CalPERS for reaching out ot me and setting this call up.

And let me also thank Ben's predecessor at CalPERS, Ted  Eliopoulos, for putting in a good word about me to Ben. Ted moved to New York with his family and joined Morgan Stanley in a new role as vice chairman of investment management and head of strategic partnerships where he will oversee six investment team leaders and bolster the investment bank’s relationships with its asset owner clients.

So what did I talk about with CalPERS's new CIO and what were my impressions of him? First, he came across as an extremely nice, intelligent and humble man who is keenly aware of the challenges/ constraints he faces at CalPERS but is very focused on fulfilling his fiduciary duty of attaining the 7% bogey over the long run.

Second, there is so much media attention on CalPERS, including social media, that has gotten it  wrong and some are spreading outright lies or disinformation on what CalPERS is doing with this new private equity project (they got board approval to go on to the next phase last Monday).

Here, I will take a moment (me, not CalPERS or Ben Meng!) to call out the naked capitalism blog run by Yves Smith (aka, Susan Webber) who has been on a mission to lambast CalPERS's senior managers every chance she gets, calling them grossly incompetent and even worse.

I have no issues with raising legitimate points but Yves Smith has never worked at a pension fund, she has never invested a dime in a private equity fund, and doesn't fully understand the long-term benefits of the asset class. If it was up to her, all US public pensions wouldn't be investing in private equity, just indexing everything to public markets (and grossly underperforming over the long run, even worse than their current dire state).

She cites academics who have never invested a dime in private equity, and she even miscites some of them who are reputable and know what they're talking about.

For example, Dr. Ashby Monk never "repudiated" anything from CalPERS and recently wrote a letter to Bill Slanton, CalPERS's Chair of the Investment Committee, and other board members praising the
innovative approach to private equity and praising Ben Meng specifically.

I read this letter and let me just quote this (added emphasis is mine):

I chose to testify in front of you and your colleagues, twice, because I see an opportunity for CalPERS to act boldly to support its members, employers and taxpayers and be a role model for innovation to plans around the world. And innovation is required today, as the professional private equity industry is capturing far too much value. As companies have shifted from public to private markets, seeking to avoid the high cost and short-termism associated with being a public company, the greatest beneficiary has probably been the professional money managers and specifically private equity general partners. In my humble opinion, these GPs are becoming astoundingly, mindbogglingly rich under the status quo.

For example, when all pension funds decide they won’t do first time funds in private equity – which is common among public pensions - or they won’t invest with managers that don’t havea long and successful track record, they serve to entrench and enrich the managers that are past their first funds and have that track record. I understand that it may individually make sense for a pension fund to do this, but it serves to stifle collective competition and creates quasi-monopolistic conditions. If every pension avoided first-time funds as a matter of principle, where would competition come from to reduce the cost of the biggest GPs?

The truth is that we need much, much more innovation in private markets so that investors and companies capture more of the value being moved, stored and created. I’m not suggesting there is no role for private equity GPs. Rather, I simply think their current role needs to be challenged and change. Even the well-resourced Canadian pensions have decided to continue using GPs to source co-investment deal flow, recognizing that the PE space is very hard to fully internalize. In short, if the biggest and most well-resourced pension funds in the world are still using GPs creatively for private equity – I describe this as ‘reintermediation’ instead of full ‘disintermediation’ – then I believe your attempt at reintermediation is also the right one.

The good news here is that you don’t need to recreate the reintermediation wheel, as many of your peers around the world have recently launched innovative vehicles to access private markets. You could draw inspiration from BCI and its recent decision to spin out all real estate into QuadReal. You could refer to PSP Investments’ role in seeding more than 10 private equity GPs over the past few decades (very similar to what you are considering). You could look at the experiences (and associated challenges) that the Australian super funds had with Industry Funds Management. You could look at what the Public Investment Fund and Mubadala recently did with Softbank and how the Vision Fund has fundamentally changed the venture capital landscape. You could look to the seeding platform launched by Alaska Permanent, Wafra and RailPen for private equity. I could go on for pages, but I won’t. The simple fact is that you are not alone in trying to reintermediate private markets through
innovation.

As it pertains to your specific plans, I personally take comfort that CalPERS’ new Chief Investment Officer (CIO) Ben Meng, Ph.D. has evaluated the proposal with fresh eyes and believes it is a critical tool to help the Fund achieve a 7 percent return. The arms’ length nature of the vehicle will allow you to attract high quality talent. And by seeding the vehicles from scratch, you can re-align the strategy and incentives of the talented people you hire, pushing them to work more effectively towards the goals of your own organization.

To conclude this letter, I will leave you with three final points:

First, please remember that innovation is, almost by definition, messy, uncertain and hard. There are challenges along the way, and many people will seek to push you off course. As someone who has started multiple companies, I can tell you that the number of people who say you cannot do what you end up doing will fill notebooks. You have to establish a robust process with effective governance and remain confident in that process and governance.

Second, in addition to the work you are doing to make private markets more attractive, I also believe you need to be much more proactive about making public markets attractive again. Public markets are cheaper and more efficient than private markets, which means companies staying private just benefits professional money managers. From your position of influence, you could push for long-term corporate governance standards that might attract more companies back to public markets earlier.

Finally, I stand ready to support you and CalPERS in this innovation project. Please consider this an offer to volunteer some of my time – for free – to help you get the governance and structure of this vehicle right, if you or your staff feel it useful. the State of California and indeed the world needs you to succeed in this. Without innovation, it’s the intermediaries that benefit most from our increasing reliance on private markets.

This hardly sounds like someone "repudiating" CalPERS's new initiative in private equity.

Let me just correct Ashby Monk on something, PSP did seed new private equity funds in the past under the former Head of Private Equity, Derek Murphy, with mixed results. A few were very successful but most were flops.

But he's absolutely right that power has shifted completely to the top GPs and there are all sorts of structural reasons for this and CalPERS needs to take an innovative approach with this new private equity venture.

That's exactly what Ben Meng is doing with Innovation (pillar 3) and Horizon (pillar 4). This is an ambitious new project, there are many details left to iron out but he is absolutely right that the focus must be on private equity and taking a completely different approach from the current one.

"The current comingled fund approach isn't working for us. We pay lots of fees, are competing with big LPs for an increasingly smaller share of the top-decile funds, and as a consequence are not able to maintain out private equity weighting which we need to attain our bogey as this has been our best-performing asset class over the long run."

Now, let me explain something to my readers. When you invest in a private equity fund, the kingpins want to diversify their base of investors (limited partners or LPs), they don't want CalPERS or anyone else owning too big a piece of the pie. Moreover, their alignment of interests aren't always with their LPs, they want to crystallize their gains as soon as possible and move on to raising their new fund so they can collect more fees.

Sometimes you have really good companies and LPs with a longer investment horizon want to keep them on their books for a longer time. In Canada, the large pensions know their portfolio companies intimately well because they typically sit on its board and once a private equity fund is winding down to raise money for their next fund, they have the expertise to bid on these companies if they want to keep them on their book longer.

The other thing Canada's large pensions do well is coinvest with their private equity partners on larger deals, allowing them to maintain their weighting in the asset class as their fund gets bigger and lowering overall fees (they pay little to no fees on coinvestments as long as they remain invested in the GPs' comingled funds where they pay 2 & 20 in fees).

Ben Meng knows all this, he surprised me with his knowledge of Canada's large pension funds:

 "The Canadian funds have the right governance model, they are able to attract and retain qualified staff and pay them almost as much as Wall Street investment bankers and private equity funds, roughly 80-85%, because they don't need to raise funds there since their clients are captive and they operate in international financial centers and have opened offices all over the world. I cannot do this at CalPERS which is based in Sacramento (not exactly a financial hub!), at least not now, and need to think carefully about the best way to proceed forward which is timely, efficient and fulfills our fiduciary duty to attain our 7% annualized long-term target."

As mentioned above, CalPERS investment officials see forming two investment vehicles, Innovation and Horizon, as a way to build the private equity program going forward. Innovation would make direct-style investments of up to $10 billion in late-stage companies in the venture capital cycle. Horizon would take buy-and-hold stakes, also up to $10 billion, in established companies, similar to what Warren Buffett does with Berkshire Hathaway.

Ben told me he read my comment on Canadian pensions embracing new technologies and liked it a lot. I reminded him, however, that venture capital is risky, especially at this stage of the cycle, and so is private equity where record dry powder is driving up multiples and could blow up the industry.

I told him flat out, venture capital and private equity are overvalued and he surprised me with his answer. "You're right but find me an asset class which isn't overvalued. Cash isn't an option for us. We need to take intelligent long-term risks and when I look at all the asset classes, I believe the best opportunities lie in private equity as long as you get the approach and alignment of interests right."

He added: "At CalPERS, we have scale, the brand and proactive liquidity management and can make a meaningful allocation to the asset class, that's what Innovation and Horizon are all about."

This is where they are at now. CalPERS's Board approved the next phase of the project, to identify the GPs they will be working with and that is far from a done deal.

I raised the issue of specific GPs, heard BlackRock and others made a short list, then I heard those plans were scrapped, it all left me very confused.

Ben said the media and social media are to blame and made no specific comments about any GPs. I personally told him he should talk to Mark Wiseman and André Bourbonnais at BlackRock, he told me he has spoken to Mark and thinks highly of him but when I asked him why wasn't Blackstone, Brookfield, and other top GPs on the short list, he politely replied: "Out of respect to all great GPs, we are not going to comment, suffice it say there are ongoing dialogues and what was reported in the media and social media was inaccurate or speculation."

I told Ben venture capital is a tough cookie to crack, seen success and major blowups in past functions at pensions and the BDC and I'm not sure they will be able to allocate $10 billion to Innovation. He agreed, said it won't be easy but cited the IPO pipeline for Lyft, Ubber, Pinterest, and other large private tech companies geting ready to go public, providing VCs and their investors great returns.

On Horizon which he calls pillar 4, the goal is to mandate it to a "captive GP" which will initially be captive to CalPERS, where there will be a long-term "Warren Buffett approach" and if that's successful, they can then invite "like-minded LPs to join it down the road."

The critics focus too much on transparency and fees but Ben is right, given the constraints he's operating under, this is the best approach for CalPERS to beef up its all-important asset class over the long run and deliver the 7% bogey going forward.

He's in no rush, however, and will take his time as he and his team proceed to the next phase. Given where the private equity and venture capital industry are right now, I think it's wise to take their time, find the right partners, and scale into Innovation and Horizon over the next few years as opportunities arise, but they need to do something because the current comingled fund approach isn't working.

I joked with him: "What about opening offices in Vancouver, Toronto and Montreal to do more coinvestments and scale into private equity relatively fast?" He replied: "You never know, that might happen in the future."

On a more serious note, Ben told me he will be visiting Toronto this summer and wanted to meet his peers. I told him I'll be happy to put him in touch with CIOs, CEOs and others in the industry, professionals I know.

After speaking with him, I really think CalPERS, its Board, its members and its stakeholders, need to all take a step back and allow Ben and his team to move forward on Innovation and Horizon.

Lastly, let me share something with all of you, and I told this to Ben but he was polite and had no comment as his focus is squarely on investments and delivering long-term returns.

You can have the best investment team on the planet but unless you adopt a shared-risk model like Wisconsin and others have done, including Canada's top pensions, your plan will always be vulnerable to a pension deficit. Take the time to read my comment comparing OTPP to PSPP, I discuss all this.

Again, these are MY views, not Ben Meng's views, so please don't email him lambasting him on adopting a shared-risk model. The man only talked private equity with me.

I want to sincerely thank Ben for taking the time to speak with me, he was too kind and I look forward to meeting him in person some time in the future when our paths cross again. I also thank Wayne Davis for contacting me to set up this call.

For everyone else, stop reading negative comments on CalPERS on social media and media sites. Trust me, Ben Meng knows very well the challenges he's facing, he has a keen sense of his fiduciary duty and is proceeding on the right path given the constrainsts he's dealing with. CalPERs was very wise to hire him as their new CIO.

Below, CalPERS CIO Ben Meng discusses how private equity has been the highest returning asset class for the California pension, helping them achieve their target return. I also embedded the entire Investment Committee which took place last Monday, take the time to listen to all of Ben's points on private equity, he is the first speaker and does a great job outlining the key issues.

Lastly, Mark Redman, OMERS's global head of private equity, recently discussed the appetite for private equity and growing concerns about record dry powder with Bloomberg's Jason Kelly at the SuperReturn International conference in Berlin.

Great discussion, listen carefully to what he says and realize the big difference between their approach and that of CalPERS and other US state pension funds.

Jim Keohane, President & CEO of the Healthcare of Ontario Pension Plan (HOOPP), announced today that he will be retiring in March of 2020.

He will continue in his role for a full year while the Board of Trustees conducts an extensive search to find a successor, and will work closely with the Board to ensure a smooth transition.

Jim began his career at HOOPP in 1999 as Manager, Equity Trading. From there, he had progressively senior roles and became CEO in 2012. He is a pioneer in the area of Liability-Driven Investing, which he introduced and implemented at HOOPP; and he developed HOOPP’s derivatives capability, which is considered second to none in Canada. During Jim’s time as President & CEO, the Fund has doubled in size, growing to $79 billion in assets.

“Jim is well respected around the world for his pension advocacy, investment strategy and leadership,” said Adrian Foster, Chair, HOOPP Board of Trustees. “Under his leadership, he and his team have done an exemplary job of delivering on the pension promise. He has built a strong culture and business platform to help ensure the organization will continue to meet its critically important mandate of providing pension security to members.”

Dan Anderson, Vice Chair, HOOPP Board of Trustees added: “On behalf of the entire Board, I congratulate Jim on an outstanding career, thank him for his lasting and ongoing contribution, and wish him all the best for the next chapter of his life.”

“It is an honour to be a part of HOOPP and I am very proud of the many shared achievements during my time with the organization,” said Jim. “We have excelled during times of challenge and change and, most importantly, we have continually strengthened our ability to deliver on the pension promise to our members.”

He added: “I am grateful for the talent, dedication and support of HOOPP staff, the passion and commitment of our members, and the opportunity to represent and talk about HOOPP around the world. I will retire next year knowing that HOOPP is well positioned for the future and has a great team in place to continue on our 59-year history.”

About the Healthcare of Ontario Pension Plan

Created in 1960, HOOPP is a multi-employer contributory defined benefit plan for Ontario’s hospital and community-based healthcare sector with more than 570 participating employers. HOOPP’s membership includes nurses, medical technicians, food services staff and housekeeping staff, and many other people who work hard to provide valued Ontario healthcare services. In total, HOOPP has more than 350,000 active, deferred and retired members.

As a defined benefit plan, HOOPP provides eligible members with a retirement income based on a formula that takes into account a member's earnings history and length of service in the Plan. HOOPP is governed by a Board of Trustees with representation from the Ontario Hospital Association (OHA) and four unions: the Ontario Nurses' Association (ONA), the Canadian Union of Public Employees (CUPE), the Ontario Public Service Employees' Union (OPSEU), and the Service Employees International Union (SEIU). The unique governance model provides representation from both management and workers in support of the long-term interests of the Plan.

Let me begin by stating I have mixed feelings about Jim retiring. He definitely left an indelible mark on me and his contributions to this blog have been invaluable, not just on pension investments but more importantly, on overall pension policy.

Jim has been a very vocal leader advocating for the expansion of well-governed defined-benefit plans in Canada. Along with Hugh O'Reilly who recently resigned from OPTrust, they have been the two pension leaders who have lent their voice and expertise to an important public policy issue, namely, why we need to bolster defined-benefit plans and make them more accessible to all Canadians.

I'm not going to lie, without Jim and Hugh around, there is a deep vacuum in pension policy in this country.

Luckily, Jim told me he plans to still lend his voice to this issue and I asked him to stay in touch and possibly write some guest comments whenever he has something important to state in the future.

Jim also has mixed feelings about retiring but told me he wants to spend more time with his wife and kids now that he's still in good health and that being a CEO is a full-time job, even when on vacation.

I had seen Jim earlier this week in his offices. I went to Toronto to attend a luncheon and pension conference. I'll write all about that next week as there's a lot to cover.

Earlier this week, we spoke about his recent trip to Mexico and he really enjoyed it. I asked him if he's thinking about retirement. He told me to "stay tuned" and the next day I received the press release announcing his retirement.

Today, I told him it's going to be sad to see him go but also wished him a long and happy retirement. Jim admitted he has mixed feelings about leaving, wants to stay active on some boards but he can look back and be proud of all they accomplished at HOOPP under his tenure.

In our conversation today, we looked back at the last 20 years at HOOPP. Jim joined HOOPP in 1999. Prior to this, he had amassed extensive experience working as a derivatives trader at Merrill where he was one of the first to trade derivatives and act as a market maker when the derivatives exchanges opened here.

His extensive knowledge of derivatives served HOOPP well when John Crocker, HOOPP's former CEO, went out and hired him to be their CIO.

At the time, Nortel's weighting in the TSX had reached a high of 37% and they were looking to diversify outside of Canada. Unfortunately, there was a 30% foreign content restriction rule but Jim and his team used swaps, futures and options strategies to get around these rules. In credit, they used credit default swaps because "Canadian corporate credit was very overvalued relative to US corporate credit."

This was a "huge win in derivatives" for HOOPP but the tech bubble and bust did hit them and they went from overfunded to underfunded "in a real hurry." It didn't help that at the end of the 90s they had adopted a contribution holiday.

Still, they cut back benefits, scaled back inflation protection from 100% to 75% for a period and managed to get back to fully funded status relatively quickly.

But that experience made them strategically rethink how to manage risks more effectively. They shifted their objective from trying to beat markets to being a "pension delivery organization."

"At the time, people were treating equities like a long duration asset" but as long-term rates plunged they realized they weren't effectively managing for interest rate risk.

Remember a pension plan has three risks: equity risk, a decline in long-term rates and inflation risk and by far the most important risk is the second one, a decline in long-term rates because it disproportionately impacts liabilities in a negative way.

HOOPP started thinking completely differently, "the guiding light became all about delivering on the pension promise and every employee was thinking about matching assets with liabilities."

They bolstered their front, middle and back office systems to better manage cash and derivatives and they brought their stock and bond lending activities internally saving a lot of costs (instead of outsourcing to a custodian) and allowing them to intelligently lever up their balance sheet.

"What looks like leverage is just an inflated balance sheet. Others use custodians so it's not on their books but it's still there, we just internalized it, saving money and that allowed us to gain incremental returns."

Under Jim's watch, HOOPP has built out its funding and arbitrage strategies. They are more nimble and use derivatives extensively to hedge risks and improve their overall risk-adjusted returns.

"Out of 700 employees, roughly half are in IT, allowing us to mark all our assets to market daily and build our capabilities to move collateral and better manage our cash flows around swaps."

In other words, HOOPP is running a very sophisticated operation but the focus is very simple, to deliver on the pension promise.

However, no matter how sophisticated they are in their investment approach, Jim is adamant about conditional inflation protection. "Even in a worst-case scenario, we calculate that completely cutting inflation protection for a brief period can improve the funded status by 20%."

He told me they went to HOOPP's members and told them if they want guaranteed inflation protection, they'd have to increase the contribution rate to 14% from the current 8.5% and the members rejected this, opting instead for conditional inflation protection.

I told him that I had seen Malcolm Hamilton for dinner on Tuesday evening and he was still harping on the fact that HOOPP and other large public pensions should discount their liabilities using the government discount rate and report that figure but James Davis, OPTrust's CIO, told me that would "kill DB plans" and that's what they did in the Netherlands and hurt DB plans there as they became procyclical, de-risking at the worst possible time.

Jim said "it's even worse as they use the 10-year swap rate which went to zero" and turned "a great system" into one full of problems by making "liabilities look gigantic, rolling back pensions when they didn't need to because plans were never underfunded."

What else? We had a long discussion of how duration is not an effective measure of funded status risk, especially when rates are low, because when 10-year Government of Canada bonds went under 1%, duration was high but they took advantage to sell "all their bonds" whereas relying just on duration would have left them there. From an asset-liability standpoint, it didn't make sense to continue owning bonds at that point because as rates rose, their liabilities decreased.

He also told me (earlier this week) that they put on a big hedge in October and that saved them from taking a $7 billion hit in Q4" when equities got clobbered.

Another interesting fact I learned today, unlike other employees at large pensions, employees at HOOPP get a DB pension based on HOOPP's sustainability. They basically get to invest in HOOPP ensuring alignment of interests is there.

They can do this because HOOPP is a private trust but having a DB pension is a big perk of working at HOOPP and in my opinion more than makes up for the fact their employees are not compensated as well as the larger pensions in Canada.

Don't get me wrong, they're extremely well compensated but add in the DB pension based on HOOPP's performance and they're getting something much more valuable the longer they stay there.

Each employee at HOOPP knows the value of a good pension because they're working to serve their members delivering on the pension promise and they have skin in the game.

In closing, Jim told me he was very happy to leave the "toxic culture of investment banks" to join HOOPP because "after a while making more money doesn't get you out of bed." He said: "At HOOPP, I talk to members, I see the difference we are making and I'm grateful for this opportunity. That's really what drives me, what has driven me over the last 20 years, we are making a significant difference in people's lives."

I couldn't think of a more fitting end to our long conversation. Jim is a true gentleman, an incredible pension leader who has left his mark on HOOPP and help raise awareness on an important public policy issue. I'm sure their next leader will continue in his footsteps but I won't lie, part of me will be sad to see him go, there just aren't many leaders like Jim Keohane around.

Below, in HOOPP’s 2018 Annual Results video, President & CEO Jim Keohane discusses the Plan’s 2018 performance and explains how the Plan performed in 2018.

Last week, I attended the CFA Society Toronto's 2019 Annual Spring Pension Conference:

The 2019 Annual Spring Pension Conference will be held on March 28th at Toronto Board of Trade in Lennox Hall. This event aims to provide you with the latest updates on issues impacting the Canadian pension industry and markets where they invest. Thought leaders and practitioner experts will address many hot topics to help better navigate as we enter an environment with increased volatility and uncertainty surrounding disruptive forces. Come hear the insights from leading practitioners on what the environment may hold in 2019 and learn about best practices and practical tips to guide you in managing businesses and investment portfolios. You will also have the opportunity to exchange ideas during networking and lunch sessions as well as some drinks at our popular evening reception following the event.

Topics Include:

• Our CIO panel discussion on navigating portfolios in an increasingly volatile world and changing business landscape
• A session on the Canadian economy post new-NAFTA, carbon pricing and Fed balance sheet deleveraging.
• What artificial intelligence & machine learning is doing to transform prediction but may not replace judgement
• Insights on global political landscape from those in the know. US/China trade wars and impact of Brexit are just a few disruptors to discuss.
• Hear about practical tips on how to improve diversity at corporate boards and asset managers, and hear about the new Diversity Project for asset managers
• Learning about China from an investment perspective from an investment expert in the region
• Some initiatives from practitioners to help prepare for Climate change risk assessments in a world with imperfect knowledge about the future

This was a great conference but before I get to it, I also wanted to mention the day before, I went to a luncheon hosted by the Canadian Club where Michael Denham, President and CEO of the BDC gave an incredible speech. In fact, it was so good, I embedded it below.

At that luncheon, I was sitting at the KPMG table with James Davis, CIO of OPTrust, Scott Lawrence, Managing Director and Head of Infrastructure at CPPIB, Andrew Claerhout, the former Head of Infrastructure and Natural Resources at the Ontario Teachers' Pension Plan, Andrew Walton, Partner of Ironbridge Equity Partners, Mike Murray, Managing Partner of Peloton Capital Management, George Rossolatos, CEO of the Canadian Business Growth Fund, Jon Haick, Managing Partner at The Woodbridge Company, and Benjie Thomas, KPMG's Canadian Managing Partner for Advisory Services (KPMG was one of the sponsors of this event).

All these people are very accomplished, intelligent and extremely nice. Jon Haick was sitting next to me and given his experience working at Brookfield Asset Management's private equity group (see this recent article, Brookfield shuns 'eat-what-you-kill’ in quest to transform private equity unit into giant) before joining The Woodbridge Company, I was paying close attention to his thoughts on private equity.

Jon basically told me there is a lot of money being thrown at the asset class but if you remain disciplined, nimble, flexible, taking minority stakes and focusing on value creation, you can still find deals and deliver decent returns.

Remember that phrase, value creation, I will be referring to it in this and subsequent posts where I will be profiling some of the fund managers I met last week, including Peloton Capital Management and the Canadian Business Growth Fund, and other key intermediaries who help GPs and LPs realize gains in their acquisitions.

On Wednesday, the day before the CFA conference, I also had meetings with Jean Michel, the CIO of IMCO, and Michel Leduc, Senior Managing Director & Global Head of Public Affairs and Communications at CPPIB.

Both are super nice guys, very down to earth and they really know their stuff. Jean told me they made some key hires in infrastructure and other areas which they will be announcing soon and he discussed his vision and priorities.

I don't want to give too much of it away as he repeated some things at the pension conference the following day but let's just say he thinks the good years are definitely over in public and private markets, you need to be well diversified, have a value creation plan and execute it flawlessly, and "fight for every basis point".

He is particularly keen on ramping up the credit team which is headed by Christian Hensley who was recently appointed the Senior Managing Director, Public Equities and Credit. Jean shared this with me, and I totally agree: "Credit people think differently, more focused on risk, they will be a nice complement to the rest of the team."

What else did he say? Credit will consist of sovereign debt, high yield, leveraged loans, but also other private debt investments. On the alpha side, he wants to build out 15 strategies and even have an "idiosyncratic bucket" for things that fall between the cracks (like royalties).

Asset allocation is the key, something Bert Clark alluded to when discussing why the Canadian model must evolve, but he was careful stating that asset allocation will not swamp the added value in any year.

Interestingly, on added value, he thinks 100 basis points will be considered "top decile" and that it will be critically important to have a very diversified approach and that all assets deliver on their targets to make money going forward.

He also wants to build out a dedicated currency team, stating if you look at the variation of returns among Canada's large pensions on any given year, a lot of it can be explained by the currency hedging policy they adopted.

I completely agree and told him in my experience, no large pension plan in Canada has consistently made money trading currencies so they typically give up and adopt a fully-hedged approach or more likely, no hedging whatsoever.

The problem? Even if you don't hedge, you're still taking active currency risk and there are some years where you want to be a lot more active in currencies (like if the CAD crosses above 150 or goes back to parity).

Right now, IMCO partially hedges currency risk but Jean is keenly aware he needs to build his group's capabilities in that department. He also wants to revamp all the systems (back, middle, and front) to make them a lot more robust to be able to handle the volume and complexity of the trades they'll engage in and more importantly, so when IMCO goes out to entice new clients to join them, they feel very comfortable they can pass any operational and investment due diligence.

On the macro front, he told me "there's a lot of debt" in the system, growth is waning and he sees the US economy rolling over later this year or early next year. We talked a lot about deflationary structural factors like the debt problem, an aging population, and rising inequality. Jean is extremely well read, a thinker, not afraid to express his macro views.

And when he said "last year, when the 10-year US Treasury yield hit 3.25 % and everyone was saying it will go to 4%, I thought that was the top for yields," I felt like jumping out of my chair screaming "yes, someone I can finally agree with on bonds and last year's bond teddy bear market."

Sorry, I get very passionate about bonds especially when I hear Jeffrey Gundlach, Warren Buffett and others poo-pooing them on television.

Anyway, after my meeting with Jean Michel, I met up with Michel Leduc of CPPIB. Super nice guy and extremely fit (like David Denison, he runs 10K every morning and departs for the office at 6:30 a.m.). Told Michel I had dinner with Malcolm Hamilton the night before and he said: "I know Malcolm, he's my favorite curmudgeon."

Michel explained the three stools of retirement very clearly to me: people invest in a house, they save for retirement and they have CPP. From those three stools, CPP is the safest one, you can count on it till the day you die, it's the one stool that "protects you the best from longevity and investment risk."

Again, I completely agree which is why I thought it was about time we enhanced the CPP for all Canadians.

Interestingly, even though he told me CPPIB will surpass $1 trillion in assets in a decade, they are not in the business of chasing after deals. Instead, they remain very disciplined, focus on total portfolio risk and their differentiating factors. "We cannot compete with large sovereign wealth funds writing huge cheques, so we like to find large complex deals others shun where we think we can add value."

He told me Geoffrey Rubin who is responsible for overall fund level investment strategy and heads the Total Portfolio Management (TPM) department has a huge job but everyone is implicated in the big investment decisions, especially Mark Machin.

What else? We spoke about Danforth and Greek restaurants in Toronto. I politely listened to some of his recommendations but even my friends in Toronto will tell you it's impossible to find a really great Greek restaurant in that city (although I was told two of the most expensive steak houses, Jacobs and  Harbour 60, are owned by Greeks). Told him the next time he and Mark Machin are in Montreal, I'll take them out for lunch at Milos, by far the best lunch special in the city for the quality of the food you're getting (another one I really love is Molivos, took Henri-Paul Rousseau there for lunch a while back and he was raving about the food).

Alright, let me finally get to the CFA Society Toronto's 2019 Annual Spring Pension Conference. You can download the agenda here, see the speakers here, and most timely, you can now download the slides from the presentations here.

I thought it was a fantastic conference, I give credit to Heather Cooke of Fiera Capital and the other committee members for organizing a great conference but I was a bit disappointed with the turnout and thought it lacked more representation from large pension funds (too many asset managers in my opinion, where were all the pension fund members?).

[Note: I met a super nice guy who just started working at CPPIB's Risk Group, Michael Friesen. Apart from him, can't say their were many pension representatives, maybe a few more.]

Anyway, since I'm a macro guy at heart, I really liked Eric Lascelles' morning presentation going over the main global macro risks and I also enjoyed Catherine Yeung's afternoon presentation on what China’s One Belt, One Road strategy and the ‘Made in China 2025’ strategy mean for the region (super sharp lady who really makes you think long and hard about China's economic and political policy).

To be honest, all the presentations were excellent which is why I'm glad they made the slides available here.

There was also a great panel discussion on diversity & inclusion in the morning featuring Tanya Van Biesen and Kelly Battle that I think should be made public so everyone can hear their views (not sure they tape these discussions but that was an awesome exchange).

Obviously, my focus was on pensions so I was particularly honed into the morning presentation on sustainable finance featuring a panel discussion with Stephen Kibsey, CFA, VP of Emerging Risks at the Caisse de depot et placement du Quebec; Pieter Wijnhoven, Managing Director at Ortec Finance Canada & Barbara Zvan, OTPP's Chief Risk & Strategy Officer.

Barb spoke about the progress being made with the Expert Committee on Sustainable Finance. She said the final report should be coming out at the end of this month or early May with key recommendations.

She spent some time going over this slide (click on image):

She said something interesting that stuck with me, even in Canada's oil & gas industry, when oil prices fell, they figured out ways to adopt new technologies to make extraction more efficient, lowering costs using less energy.

Anyway, Barb is extremely intelligent, she did over 500 interviews to add to that final report (as did others) and I'm looking forward to reading the final version once it's made available.

As a footnote, Barb Zvan and Kim Thomassin will be speaking at the CAIP Quebec & Atlantic Conference at Mont-Tremblant in late September.

Pieter Wijnhoven, Managing Director of Ortec Finance Canada basically went over OPTrust's climate savvy project.

Stephen Kibsey, VP of Emerging Risks at the Caisse, shared a lot of interesting information. He mentioned the Caisse published its second Stewardship Investing Report, which provides an update on actions taken and concrete results it has obtained in 2018 on a variety of environmental, social and governance (ESG) issues.

From the press release:

Several initiatives were undertaken over the last year in key areas related to la Caisse’s activities as an investor. With regard to the fight against climate change in particular, la Caisse exceeded its target with the addition of $10 billion in low-carbon assets in 2018, prompting it to raise the target for 2020. In addition, the 10% reduction in carbon emissions for each dollar invested in 2018 is on track to reach the 25% reduction target for2025.

I think the Caisse is at the forefront on stewardship investing but others are catching up fast and in Canada, it's safe to assume sustainable investing is taken very seriously.

What Stephen said that struck me was everyone in his team had to go back to school to "learn the science of climate change." In fact, he kept stressing the need to keep up-to-date with the science to really understand the risks and opportunities across public and private markets.

From his six-member team, three are continuously looking at data and recalculating it when it isn't available.

He also stressed once they had management "buy-in", the "ball carriers were aligned with us and there was a good flow of communication to generate output/ disclosure."

As I stated, the Caisse has an ambitious strategy for climate change (click on image):


What I got out of that panel discussion is there's still a lot of confusion and misperceptions about ESG investing and to be fair, it's an area which we are only beginning to understand and we need to continuously expand our knowledge.

For example, this weekend, I read Bill Gates's note on why we should discuss soil as much as we talk about coal, noting the following:

Most discussions about fighting climate change focus on electricity and the need for renewable energy. De-carbonizing the way we generate electricity would be a huge step, but it won’t be enough if we don’t reach zero net emissions from every sector of the economy within 50 years (and make a serious dent in the next ten). That includes the agriculture, forestry, and land use sector, which is responsible for 24 percent of all greenhouse gas emissions—just one percentage point less than electricity.

Gassy cattle are a memorable and significant example of emissions—but they’re not the only major contributor to agriculture, forestry, and land use’s slice of the emissions pie. We’re just as well-off picking on soil.

Here’s a mind-blowing fact: there’s more carbon in soil than in the atmosphere and all plant life combined. That’s not a big deal when left to its own devices. But when soil gets disturbed—like it does when you convert a forest into cropland—all that stored carbon gets released into the atmosphere as carbon dioxide. That’s one reason why deforestation alone is responsible for 11 percent of all global greenhouse gas emissions. (Another reason is that forests and grasslands are natural carbon sinks. Clearing them reduces the planet’s capacity to remove carbon dioxide from the air.)

The microbes in soil can also create greenhouse gases when they come into contact with fertilizer. Synthetic fertilizers revolutionized how we feed the world, but they release a powerful greenhouse gas called nitrous oxide when broken down by those microbes. Natural fertilizers like manure aren’t any better, because they release greenhouse gases as they decompose.

Take the time to read Gate's full note here.

Alright, let me jump into the afternoon CIO discussion:

3:20 PM - 4:30 PM - CIO Fireside Chat: Top Challenges and Opportunities in 2019 and Beyond

Moderator: James C. Davis, CFA, Chief Investment Officer, OPTrust

Fireside Chat Experts: Marlene Puffer, Ph.D, CFA, ICD.D, President & CEO, CN Investment Division; Jean Michel, Chief Investment Officer, IMCO, & François Bourdon, FCIA, FSA, CFA, PRM, Global Chief Investment Officer, Fiera Capital

The CIO panel will discuss how they are navigating their portfolios and organizations in a changing and challenging business landscape. The fireside chat will cover key trends and practical ideas such as asset allocation in an increasingly volatile world, technology disruption, ESG investing, climate change, risk management in a rising rate environment and business management challenges from different perspectives (public sector, private sector and asset management).

James was a wonderful moderator, he said he always had a "hard time following directions," threw out the rules and basically just fired away and got an interesting discussion going.

He started by asking each person to share an interesting factoid about themselves. From what I recall, Marlene Puffer said she's "a quant geek at heart" and loves to sing and dance. Jean Michel said he grew up in Trois-Rivières and finds raising two teenage boys "far more challenging" than investing billions (that made everyone laugh).

Jean then talked about portfolio construction distinguishing between short-term factors like the trade war and rising populism and long-term factors like rising inequality which he admitted we will have a hard time addressing. He once again repeated the world is slowing and rising debt levels are ensuring slower growth ahead.

Marlene said she oversees a very mature $18 billion pension plan at CN where there are 3 retired workers for every active member and she needs to make sure they have the $1 billion a year they need to make payouts every year.

She said she was balancing out liability hedging component with return seeking component. They hedge a lot of interest rate risk and they have their board's approval to prudently leverage their balance sheet (her experience sitting on HOOPP's ALM committee for years came in handy there).

She stated they are trying to generate the same return using less risk using all the tools available and are investing across public and private markets and anything that falls in between but are managing their liquidity very tightly.

For his part, Fiera's CIO François Bourdon said we are in the eighth inning of the economic cycle but only in the fourth inning of the flow cycle in the mid market space. He was saying how a typical real estate debt loan here with a 60% LTV, you'll get prime + 4% but in Australia, you can get prime + 9%.

Interestingly, John Valentini who I worked with at PSP when he was CFO and later interim CEO is now in charge of Fiera's private markets and they are present in many alternatives, including private debt, real estate and infrastructure.

For his part, Jean Michel reiterated a lot of what he told me the previous day, namely, real estate cap rates are at historic lows, valuations of infrastructure and private equity at historic highs.

But Jean was clear, the future is in private markets, and going forward you need a value creation plan and you need the right team to execute it (that job falls under Nicole Musicco, Head of Private Markets at IMCO). He just feels we need to prepare for lower returns ahead across the board and I completely agree.

As far as ESG factors, all three CIOs said we need more disclosure and they are definitely important. Jean said "ESG has to be part of your process" and Marlene said they do a top down analysis of ESG factors for risk considerations. François said ESG is evolving at Fiera but it is definitely an integral part of the process.

There was an interesting discussion on currency risk and hedging. François said they are bulls on the CAD (I believe Jean-Guy Desjardins is still bullish on Canada's energy sector) but unless you have more than 20% allocated to the USD, you shouldn't worry too much about currency risk.

James Davis asked them about whether US debt concerns them and its impact on the US dollar and Marlene (rightly) answered "no" as those concerns have been around for years. She also rightly noted in a sharp downturn flight to safety will be bullish for the USD as global investors rush to buy US bonds (like me, Marlene did a stint at BCA Research, she really knows her macro well).

At CN, they hedge some F/X risk, on active equity bets and hedge funds, but not on passive equity exposure. Marlene used the example of Nestlea, they aren't buying it for Swiss franc exposure but for the company's long-term economic growth as a global business.

Jean Michel said said with over 50% allocated outside of Canada, he can't ignore currency risk. He's taking the steps to become "a more currency aware firm"(smart move, very necessary but you need to hire currency experts with a track record for printing money!).

A discussion on bonds ensued and Jean Michel called it "the best asset class to diversify risk" (again, totally agree, wrote about this three years ago). He said all assets are pricey, risk premiums are compressed, and "in the next few years, success will depend on getting a lot of different things right," ensuring you have the right value creation plan and fight for each basis point. "Basically, everything has to go right in each asset class to add value."

Marlene agreed but added: "you need to be flexible enough to take advantage of niche strategies" and look at areas others aren't looking at like mid-market private debt.

François Bourdon said he likes agriculture, infrastructure, private debt in Asia, and hedge funds with a differentiating tilt/ model.

Lastly, James Davis asked the panelists what factors contribute to a CIO's success.

Jean Michel said you need to be humble, surround yourself with great people who are specialists in what they do, and trust them. "To be a good leader, you also need to ensure everyone works well as a team."

For her part, Marlene said her experience on the sell-side allowed her to gain important knowledge on how the "sausage factory works" and it prepared her by asking the right questions.

François Bourdon said he believes in the KISS principle (keep it simple stupid) and that every time he overcomplicated something, he created a bigger problem down the road.

I hope you enjoyed reading this comment, I tried to go over some important aspects of my meetings and the pension conference in Toronto. If needed, I will edit this comment to add or remove items.

Below, Michael Denham, President and CEO of the BDC delivered an outstanding speech last week at the Canadian Club of Toronto (March 27, 2019). All you leaders who want to improve your presentation skills, watch this, Michael is a naturally gifted speaker.

Benefits Canada reports, OPTrust remains fully funded, lowers discount rate in ‘worst year for markets’:

In addition to remaining fully funded and lowering its discount rate, the OPSEU Pension Trust returned one per cent in 2018.

This compares to a 9.5 per cent return in 2017, six per cent in 2016 and eight per cent return in 2015.

The plan’s real discount rate was lowered to 3.15 per cent, net of inflation, from 3.30 per cent in 2017. This move added conservatism to the plan’s funding valuation by calculating a higher liability value, which helps to protect the plan from future market volatility, noted the OPTrust in a press release.

“OPTrust’s objective is to maintain the funded status of the Plan without taking excessive risk,” said Doug Michael, interim president and chief executive officer of the OPTrust. “In the worst year for markets since the global financial crisis, we maintained our fully funded status for the tenth consecutive year and increased the long-term stability of the plan by lowering our discount rate.”

The OPTrust also noted it received high service scores from members and retirees, with service satisfaction at 9.1 out of 10. As well, it touted its risk management for helping to improve the plan’s funded status, maintain stability and increase its ability to weather a severe market downturn.

“As the world continues to change at an increasingly rapid pace, OPTrust’s members can know their pension plan is stable and secure,” said Michael. “We remain focused on the long term rather than day-to-day changes within the market. For our members, the funded status is the measure that matters.”

OPTrust released a press release, OPTrust lowers discount rate, remains Fully Funded for tenth consecutive year:

OPTrust today released its 2018 Funded Status Report, which details the Plan’s financial results and funded status. OPTrust achieved an investment return of one per cent for the total fund in 2018. In addition to remaining fully funded, the Plan lowered its discount rate, already the second-lowest of Ontario’s public sector plans. The organization also received high service scores, with members and retirees rating their service satisfaction as 9.1 out of 10, a top-six placement in a global benchmarking survey.

“OPTrust’s objective is to maintain the funded status of the Plan without taking excessive risk,” said Doug Michael, Interim President and CEO of OPTrust. "In the worst year for markets since the global financial crisis, we maintained our fully funded status for the tenth consecutive year and increased the long-term stability of the plan by lowering our discount rate.”

Implemented in 2015, OPTrust’s Member-Driven Investing (MDI) strategy seeks to increase the likelihood of Plan certainty by aligning outcomes with members' needs. Superior risk management has helped to improve funded status, maintain stability and increase the Plan’s ability to weather a severe market downturn, like the one experienced by the global economy in 2008. OPTrust once again reported in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), having become one of the first plans to do so in 2017.

“As the world continues to change at an increasingly rapid pace, OPTrust’s members can know their pension plan is stable and secure,” said Michael. “We remain focused on the long term rather than day-to-day changes within the market. For our members, the funded status is the measure that matters.”

The Plan remained fully funded in 2018 on a regulatory filing basis, while actuarial assumptions continued to be strengthened to enhance long-term funding health. The Plan’s real discount rate was lowered to 3.15%, net of inflation, from 3.30% in 2017. This move added conservatism to the Plan’s funding valuation by calculating a higher liability value, which helps to protect the Plan from future market volatility.

More detailed information about OPTrust's 2018 strategy and results is available in Building for the Future.

Take the time to carefully read OPTrust's 2018 Funded Status Report here. I will be referring to tables and charts from this report below.

Earlier today, I had a chance to speak with Dani Goraichy, Vice President, Actuarial Services at OPTrust. I thank Claire Prashaw and Joe Vesci for setting this call up.

Dani is a sharp actuary and I enjoy talking to actuaries because they really understand plan design and asset liability matching.

He began by telling me the plan remains fully funded. You can see the funding highlights below (click on image):


Dani said there are two sources of income: investment returns and contributions. "The less need we have for investment returns, the less risk we have to take."

The goal is to keep the contribution rate as stable as possible all while maintaining a fully funded status.

I asked why the Plan's real discount rate, already the second lowest of Ontario's public plans (OTPP has the lowest), was lowered from 3.30% to 3.15% given it's a fully funded plan and he told me for two reasons:

1. Stability of the contribution rate
2. Intergenerational equity

"Having a surplus allows us to maintain the stability of the contribution rate and it minimizes generational inequities."

On page 33 of the 2018 Funded Status Report, you can see the membership statistics (click on image):

As you can see, OPTrust is a mature plan. Dani told me the ratio of active to inactive members is 1.2. The average age of members is 45 years old and of pensioners it's 71 years old.

You can also see the average salary in 2018 of active members is $63,195 and the average annual pension is $21,613. I like seeing these numbers because a) it shows you the pensions we are talking about are modest but very important to these members and b) more importantly, there are real people counting on these pensions or that will be counting on them.

In other words, a pension isn't just about investment returns or even asset liability management, it's about helping people retire with modest but safe and secure benefits.

All too often people forget behind each pension, there's a person, so I like OPTrust's table above, I'd actually put it at the beginning of each Funded Status Report, it provides an excellent snapshot of members and what these pensions mean to them.

Now, getting back to the discount rate, changes in the Plan’s actuarial assumptions can have a major impact on the projected cost of members’ and retirees’ pensions and the Plan’s funded status. This table from page 21 of the 2018 Funded Status Report shows the impact (in millions of dollars) of a 0.5% change in certain key assumptions on the Plan’s funded status (click on image):


As shown above, lowering the discount rate by 50 basis points has a huge impact the projected cost of members' and retirees' pensions.

I got into this interesting discussion with Dani on what Malcolm Hamilton told me last week, namely, all of Canada's large public sector pensions should be using the Government of Canada long bond yield to discount their liabilities.

I noted that OPTrust's CIO, James Davis, told me last week at the luncheon, while he understands Malcolm's position, if OPTrust did this, it would to double the contribution rate, which is crazy. James also told me: "Malcolm's proposal would effectively kill DB plans, this is what they did in the Netherlands and ruined a great system, forcing pensions to de-risk at the worst time and cutting benefits when they didn't really need to" (HOOPP's Jim Keohane agreed and said it's even worse than that as they used the 10-year swap rate to discount liabilities and it went to zero).

Dani noted another problem with Malcolm's proposal, namely, OPTrust has a lot of illiquid assets in infrastructure, real estate and private equity, so it doesn't make sense to use a very liquid Government of Canada bond yield to discount future liabilities.

He said it's probably more appropriate to use the Province of Ontario's long bond yield (roughly 80 basis points higher than the Government of Canada long bond yield) but that they are doing a lot more research on the appropriate discount rate and this is a more complex subject than most people think.

We then got into why OPTrust and OMERS are the only two major Ontario pension plans which have yet to adopt conditional inflation protection. Given the maturity of these plans, I'd think it's only logical and necessary to ensure long-term sustainability.

Dani told me OPSEU is a sponsor of HOOPP, OTPP, and CAAT Pension Plan, all of which have adopted conditional inflation protection (not guaranteed inflation protection like OPTrust and OMERS) but that OPTrust has not experienced a serious pension deficit that warranted such a shift.

All true but I told him I am a big believer in a shared risk model that adopts conditional inflation protection. In fact, HOOPP's Jim Keohane told me last week: "Even in a worst-case scenario, we calculate that completely cutting inflation protection for a brief period can improve the funded status by 20%."

Dani and I then discussed OPTrust's innovative new pension solution, OPTrust Select, an initiative which aims to provide a defined benefit solution for the broader public sector, charitable and not-for-profit industries.

He said it's going well but can't provide more information at this time. Also, he said while OPTrust Select will make the Plan younger, the drop in the discount rate is by far the most important thing to ensure the Plan's long-term sustainability (all you mature plans, if you really want to make your plans younger and more sustainable over the long run, adopt conditional inflation protection just like OTPP, HOOPP and CAAT).

Anyway, let me shift my attention to investments. Take the time to read this section carefully starting on page 22 of the 2018 Funded Status Report.

Some of the main points I noted:

• Liquid asset internalization: we now manage over $10 billion of gross liquid assets internally— this has reduced costs, made us more agile, and allowed us to pursue more customized strategies. 
• Illiquid asset rebalancing: we took advantage of favourable market conditions to realize gains on some illiquid assets, while taking a disciplined approach to new capital deployments.

Now, have a look at OPTrust's asset mix (click on image):

As you can see, 29% is in Alternative Public Market Strategies which didn't perform well last year, down over 5%:

Asset returns are composed of a risk-free rate, risk premia, and alpha components. We invest in customized, alternative public market strategies to access a broader and more diversified set of risk premia and alpha streams. These strategies are less correlated with traditional market returns and make our total fund portfolio more resilient to different economic and market environments. Alternative public market strategies generated a net return of -5.4% in 2018. Within this portfolio, alternative risk premia and multi-asset strategies struggled, consistent with weak returns delivered by market risk premia in 2018. Lower returns in these strategies were offset by positive returns from our pure alpha and insurance-linked securities strategies.

In English? The internal and mostly external absolute return strategies (ie. hedge funds) struggled last year and didn't deliver the alpha OPTrust was looking for.

Go back to read my comment from earlier this year, 2018's Hedge Fund Winners and Losers, you'll understand why it was a tough year for many hedge funds. Ray Dalio's Pure Alpha hedge fund returned 14.6% net of fees in 2018. But Dalio’s important All Weather Fund, in which he is heavily invested, was down by about 6%.

Still, Dalio earned an estimated $1 billion in 2018, all part of an elite club of the highest-earning hedge fund managers.

As far as multi-strategy funds, most struggled but Ken Griffin's Citadel and Izzy Englander's Millennium delivered great risk-adjusted results last year (there were a few others).

So if hedge funds didn't deliver the requisite alpha, where did most of the alpha come from? Where else? Private markets which make up roughly 36% of the asset mix. Here are some highlights that caught my eye:

• Real Estate: Real estate markets were characterized by strong fundamentals and ample access to capital in 2018, but the cycle is maturing and expected returns have moderated. Against this backdrop, we focused on building portfolio resilience through market cycles. We committed to 10 new investments totalling $435 million in 2018, nine in North America and one in Scandinavia. These investments were sourced through existing partners, reflecting our ability to access compelling opportunities through our network of trusted partner relationships. New commitments were partially offset by $258 million of selective realizations. The real estate portfolio generated a net return of 7.6% in 2018.
• Infrastructure: Asset valuations have remained elevated in a record year for fundraising within the infrastructure asset class. While this environment created good selling opportunities in the portfolio in 2017, the heightened competition from increasing capital inflows has meant there was better value in 2018 in smaller scale opportunities and establishing platforms to pursue them. We executed on six new transactions totaling $569 million, reflecting the value of our flexible and partner-driven approach in a challenging market. The infrastructure portfolio was able to generate a net return of 9.9% in 2018.
• Private Equity: Our private equity strategy, which includes private credit, long term equities and buyout investments, allows us to identify a broad range of investment opportunities and execute upon those which offer the most attractive risk-adjusted returns. In 2018, we committed to 10 new investments totalling $434 million and funding ongoing growth and expansion initiatives in various portfolio companies. As in 2017, we were able to capitalize on the strong market conditions by selling our equity ownership stakes in certain portfolio companies that had achieved their value-creation plans while retaining minority positions, where practicable, to continue to participate in future growth potential. The private equity portfolio generated a net return of 15.7% for the year.

What else caught my eye? The contribution from passive currency exposure was 1% for the total fund:

• Currency overlay and other: The remainder of the total fund return is comprised of our foreign currency exposures, overlay portfolio activity, credit, gold, cash and money market, and other capital markets activities. Among these exposures, currency and overlay portfolio activities made the largest contributions to total fund returns at 0.9% and -0.7% respectively. We hedge most of our foreign currency exposures, as fluctuations in exchange rates can significantly impact the volatility of a global investment portfolio. However, we do maintain some exposure to currencies that can act as a safe haven in times of stress and a small amount of emerging market currencies. The positive return contribution from currency in 2018 reflected a weakening of the Canadian dollar against the foreign currencies we hold. Negative return contributions from the overlay portfolio mostly reflected currency hedges to bring down our total fund foreign currency exposures and positions undertaken to diversify our total fund risk-mitigation strategy. Other items in this category made only marginal contributions to total fund returns.

Now, OPTrust partially hedges currency risk but stated another way, if the currency swung the other way, OPTrust's entire gain for 2018 (1%) would have been wiped out. It's also worth noting that active currency overlay detracted from the fund's performance (-0.7%) which proves my point, it's very hard to make money in active currency overlay.

It also proves that IMCO's Jean Michel is on the right track with his view that he needs to build a strong currency department (please read my last comment going over CFA Toronto's annual spring pension conference for details).

What else did I notice from the discussion on investments in OPTrust's 2018 Funded Status Report? There is no discussion on benchmarks used to benchmark public and private markets and added value over benchmarks.

To be fair, I didn't get a chance to talk to OPTrust's CIO James Davis today about this report and didn't raise this issue with Dani, but I have a feeling it's because they want the focus to be on the Plan's funded status, not its investment gains relative to benchmarks (all part of changing the conversation to focus on what matters most).

Still, benchmarks are used to evaluate long-term and short-term performance, and it's long-term performance which determines compensation (click on image):


Obviously, OPTrust is delivering the added value over the long run but I would have liked to have seen more transparency on benchmarks for each asset class and the added value over the benchmark results.

Nevertheless, there is a full discussion on governance and accountability starting on page 34 of the Report which is worth reading in detail.

Again, take the time to read  OPTrust's 2018 Funded Status Report, it is excellent and offers a lot more information on all investment and non-investment activities that took place last year, including a great discussion on Responsible Investing.

Lastly, let me address another issue. Hugh O’Reilly recently resigned as President and CEO of OPTrust.

I heard a few things about this while I was in Toronto last week. One person who isn't related to the organization told me: "OPTrust has had a hard time keeping its CEOs around, Hugh was actually there the longest. Before him, Bill Hatanaka lasted less than one year, and before him, Stephen Griggs, left in 2012 after about a year on the job and he sued the organization."

I don't know what exactly is going on but all I can say is there's no doubt in my mind OPTrust lost a great CEO and that Hugh O'Reilly did wonders while at OPTrust raising the organization's profile. In fact, Dani Goraichy told me flat out: "that's an understatement."

So let me end this comment with a tribute to Hugh O’Reilly. Since there are no video clips available going over 2018's Funded Status Report, I  decided to embed an older one where Hugh explained why they are changing the conversation. Good luck, Hugh, hope you're well.

Martha Porado of Benefits Canada reports, Ontario Teachers’ posts 2.5% return for 2018 amid volatile investment environment:

The Ontario Teachers’ Pension Plan posted a net return of 2.5 per cent for 2018, down from 2017’s net return of 9.7 per cent.

The pension fund outperformed its benchmark by 1.8 per cent, remained fully funded for the sixth consecutive year and increased its assets by $1.6 billion to a total of $191.1 billion.

“Our balanced portfolio approach helped us navigate one of the most volatile investment environments in recent years, particularly in the last half of last year,” said Ron Mock, president and chief executive officer of Ontario Teachers’, in a conference call on Tuesday.

On the equities side, the plan lowered its exposure slightly, moving down from 19 per cent in 2017 to 17 per cent of the total asset mix for 2018. Private equity, however, rose slightly from 17 to 18 per cent. The proportion of the plan’s fixed income component rose in 2018, with bonds moving from 22 to 31 per cent of the overall portfolio, while real rate products fell from 11 to 10 per cent.

Ziad Hindo, chief investment officer at Ontario Teachers,’ noted the significant increase in fixed income held by the plan was a defensive move intended to limit the plan’s exposure to potential economic slowdowns. “When markets are turbulent, we protect our capital,” he said during the call, noting there were also rises in yields to take advantage of in the asset class.

Further, Hindo said the plan continues to maintain enough liquidity to allow it to jump on investment opportunities when they appear.

The report’s standout was a strong performance of the pension fund’s alternative asset classes, which resulted in positive returns during a challenging year, he added. “We actively manage our assets with a mix of assets designed to perform well against a variety of economic environments and that is paying off.”

Private equity was the major outperformer, yielding 19.5 per cent. Real assets also performed well, with infrastructure contributing an 8.8 per cent return and real estate 5.8 per cent.

Private equity and real assets are becoming increasingly competitive areas, where more capital is chasing fewer available opportunities, said Hindo, noting the plan is focused on continuing to foster its global footprint to enable strong geographic diversification.

Inflation-sensitive assets stayed roughly the same in terms of portfolio construction, as did real assets, making up 15 per cent and 26 per cent of the portfolio, respectively, in 2018. Meanwhile, credit and absolute-return strategies each rose slightly, to make up eight and seven per cent, respectively.

OTPP put out a press release, Ontario Teachers’ net assets at $191.1 billion at year-end 2018:

Ontario Teachers' Pension Plan (Ontario Teachers') today announced net assets of $191.1 billion as of December 31, 2018, a $1.6 billion increase from December 31, 2017. The total-fund net return was 2.5% for the year.

"In 2018 we were able to generate positive returns even as we navigated some of the most volatile markets in years, thanks to the work we have done to build a diversified investment portfolio that can perform across market scenarios," said Ron Mock, President and Chief Executive Officer. "Concurrently, we are pleased to report that as of January 1, 2019, we were fully funded for a sixth consecutive year, with 100% inflation protection being provided on all pensions."

As at December 31, 2018, the Plan has had an annualized total fund net return of 9.7% since inception. The five- and ten-year net returns, also as at December 31, 2018, were 8.0% and 10.1%, respectively.

During the year the plan's volatility was subdued compared to what would have been experienced by a more traditional asset allocation. Portfolio diversification – across asset class, geography and other factors – resulted in the Fund outperforming its benchmark by 1.8% or $3.5 billion, demonstrating the value Ontario Teachers' members realize with active management.

"Times like these show how continuing to rebalance the portfolio for stability is paying off," said Ziad Hindo, Chief Investment Officer. "In 2018, our private assets carried the day. Despite a more difficult environment, we were able to conclude a number of significant, complex transactions during the year."

Total fund local return was 1.3%.The Plan invests in 35 global currencies and in more than 50 countries, but reports its assets and liabilities in Canadian dollars. In 2018, currency had a positive, +1.5% impact on the total fund, resulting in a gain of $2.8 billion that was mainly driven by the appreciation of the U.S. dollar. The positive impact followed negative currency impacts in 2017 and 2016.

About Ontario Teachers'

The Ontario Teachers' Pension Plan (Ontario Teachers') is Canada's largest single-profession pension plan, with $191.1 billion in net assets at Dec. 31, 2018. It holds a diverse global portfolio of assets, approximately 80% of which is managed in-house, and has earned an annual total-fund net return of 9.7% since the plan's founding in 1990. Ontario Teachers' is an independent organization headquartered in Toronto. Its Asia-Pacific region office is located in Hong Kong and its Europe, Middle East & Africa region office is in London. The defined-benefit plan, which is fully funded, invests and administers the pensions of the province of Ontario's 327,000 active and retired teachers. For more information, visit otpp.com and follow us on Twitter @OtppInfo.

Before I beginmy analysis, please see the following attachments:

•  Net Assets graph (PDF)
•  Link to Annual Report
•  Benchmarks Used to Measure Fund Performance
•  Deal Highlights 2018
•  Member Services – Key Statistics (PDF)
• 2018 Responsible Investing Report

The most important attachment is OTPP's 2018 Annual Report but I also enjoyed reading the 2018 Responsible Investing Report.

Take the time to read OTPP's 2018 Annual Report, it's truly excellent and packed with great information. I obviously cannot cover the entire report here but will highlight some key sections.

I also had a brief discussion with OTPP's CEO Ron Mock earlier this afternoon but he was getting ready to jump on a conference call with Jim Leech, Claude Lamoureux and the Ontario Teachers' Federation for some event celebrating its 75 year anniversary.

Ron was polite, however, and asked me to call back tomorrow if I need to cover more material but we went over the key points and I will be sharing them below.

First, let me begin with the Report from the Chair. Steve McGirr wrote the following:

Maintaining a well-funded plan is an important measure of a pension’s success. I am proud to report that as at January 1, 2019, the plan remained fully funded for the sixth straight year.

This funding status was achieved with a nominal discount rate of 4.8%. The board is responsible for setting the discount rate, and we feel it reflects a realistic and prudent outlook. The plan had a preliminary surplus of $10.0 billion based on an average contribution rate of 11% and 100% inflation protection being provided on all pensions.

The plan sponsors, Ontario Teachers’ Federation and the Ontario government, will determine how to allocate this surplus if they choose to file this valuation with the regulators, including whether or not to classify the surplus as a contingency reserve.

Recent surpluses are a welcome outcome; however, they should not be taken for granted. Headwinds for investors intensified over the last year. Global trade and cooperation are under strain. Populism and protectionism are on the rise. On top of this, the 10-year bull market for equities is tapering off and the outlook for future returns is uncertain.

Considering the complex global environment in which the plan operates, it is prudent to be cautious. Today’s difficult and volatile markets demonstrate the value of a buffer that enables the partners to keep benefits and contribution rates stable.

I couldn't agree more in terms of using the surplus as a buffer because when the storm hits, that buffer will come in very handy. Mr. McGirr also praised his predecessor, Jean Turmel, who I think did an outstanding job for 12 years.

Next, this is what Ron Mock had to say in his report that caught my attention:

We have a history as leaders in the pension industry; however, our future success will not be built on past results. To continue to fulfill our mission, we need to look ahead and abroad. We must continue to attract and nurture aligned partnerships and world-class talent.

Enhancing our global perspective and capabilities remains a high priority for the organization. Doing this benefits us in many ways. We diversify our portfolio, gaining access to new opportunities and decreasing risk. We gain local knowledge and relationships, which help us navigate complex markets. This approach also helps us source, develop and motivate talent.

Strong, long-lasting partnerships have been a key element of our success. We continue to partner with the best from around the world, establishing new relationships and enhancing existing ones. We put our efforts into a select number of partnerships that are mutually beneficial and long term, and that allow us to learn from one another.

Our business is, at its essence, a people business. The people who work at Ontario Teachers’ are the engine of this organization. They generate the insights that shape and sharpen our thinking. They foster the trusted relationships that drive our success.

A case in point are the new appointments to our executive team this year. Ziad Hindo was named Chief Investment Officer and Jo Taylor was named Executive Managing Director, Global Development. Ziad and Jo have been strong contributors for many years. They have brought their insights and a greater international perspective to the executive team.

In 2018, we announced that we would be moving our headquarters to downtown Toronto. After much thought and analysis, it was clear that this move will help us attract and retain top talent.

We are not content with yesterday’s performance. We balance learning with action to stay one step ahead and deliver on our commitments over the long term.

That last part is classic Ron Mock. Years ago, I had invited him to the Caisse to discuss hedge funds with Henri-Paul Rousseau, Gordon Fyfe and others and he had forgotten some notes on a paper napkin he scribbled on the flight to Montreal.

Anyway, he left the building with Gordon and forgot the napkin with the notes. Gordon called me at my office, told me to got to the conference room, find the napkin with notes and bring it down to Ron. I did and Ron said: "Thank you so much, I had jotted my strategy for the next two years on that napkin on the flight over and this is critically important to me."

That's how he is, always thinking ahead 18 to 24 months. The first time I met him, he really impressed me with his knowledge of hedge funds and since then, he has expanded his knowledge considerably to include private markets.

During our brief conversation this afternoon, he reiterated some key points:

• The plan remained fully funded for the sixth straight year. They will maintain 100% inflation protection and reduce the contribution rate by 1.1%. The $10 billion in surplus is a true measure of success.
• The portfolio is well-diversified. From the way he described it, OTPP is taking a Bridgewater All-Weather approach, looking to be hedged against four economic scenarios: Low growth/ low inflation or deflation, high growth/ low inflation, high growth/ high inflation, and low growth/ high inflation. 

I noted that in 2018, currency had a positive, +1.5% impact on the total fund, resulting in a gain of $2.8 billion that was mainly driven by the appreciation of the US dollar.  The positive impact followed negative currency impacts in 2017 and 2016.

Ron told me they have done a lot of work to lower the volatility of currency swings, noting currencies aren't an asset class with a risk premia they can harvest so they thought of ways of minimizing the swings.

He said in the past, currency could impact the total fund anywhere between 2-7% and that wasn't acceptable so they figured out ways to hedge currency risk and target no more than 40% F/X exposure.

For the total fund, they are targeting "9-10% volatility and a Sharpe ratio that is pretty darn solid."

In other words, it's all about minimizing downside risks to the total fund, be it from currency swings or other factors.

This explains why they increased their bonds from 22% to 31% in 2018, hunkering down, preparing for any negative shock.

In fact, OTPP's CIO, Ziad Hindo, shared this in his report:

Continuing to rebalance the portfolio for stability is paying off, as the plan’s volatility was subdued compared to what would have been experienced by a more traditional asset allocation. Portfolio diversification – across asset class, geography and other factors – helped us outperform our benchmark result by 1.8% or $3.5 billion, demonstrating the value our members realize with active management.

I also noted Private Equity had an outstanding year, delivering 19.5% last year, trouncing its benchmark (click on image):


Ron told me "Private Equity had a very, very strong year" but all their private market assets, including Cadillac Fairview (Real Estate) and Infrastructure delivered solid returns last year (click on images):



In Private Equity, Jane Rowe's team did great deals in Europe and the US focusing on executing on the value creation plan which includes everything from "HR, IT, and other processes that drive EBITDA growth".

Interestingly, he shared this with me: "Writing a cheque isn't good enough, you got to have capacity. Also, you can't leverage or recapitalize your way to create value like the past, you need to have the right team in place to help companies transform themselves and grow."

He said they took advantage of high valuations to sell some assets and lock in solid gains.

He also said the focus over the next five years is Asia as countries like China, India and Singapore grow, they have boots on the ground to capitalize on opportunities there and are providing them with all the necessary resources to support them.

He told me we are in a "lower return environment" and are constantly thinking of how they will attract and retain talent, not just investment talent, but "data analytics, IT and AI talent which we are competing with great tech companies."

That's a great point, the complexity and scale of their operations, these large pensions don't just need top notch investment talent, they need top notch talent across all fields to support their investment professionals.

I told him: "Thank God Teachers' will soon move their offices downtown near HOOPP" (Jim Keohane showed me where last week). Ron said that will help in terms of attracting and retaining talent.

I asked him what he's worried about and he said "exogenous political events like unresolved tariff disputes". 

I had to leave him there to join his former colleagues, Jim Leech and Claude Lamoureux but appreciate the time he took to chat.

Again, take the time to read OTPP's 2018 Annual Report, it's really a great read. I particularly enjoyed reading the Plan Funding Report as it's packed with great insights.

For example, take a look at how the plan's funding variables have changed (click on image):


Ontario's teachers are living longer and they're enjoying very decent pensions for a lot longer.  The plan is mature with 1.3 active teachers to pensioners which explains why they are looking for stability in the total portfolio (less room for errors).

Given this profile, it only made sense to introduce conditional inflation protection, a measure that will make Teachers' young again (click on image):


Anyway, take the time to read the entire 2018 Annual Report, including the detailed discussion on OTPP's compensation program (starting on page 52) to understand how executive and other compensation is determined (click on image):


No doubt, OTPP definitely pays their senior managers extremely well but given the challenge pension funds face in recruiting talent, it needs to and the plan's long-term results and funded status speak for themselves.

Below, OTPP CEO Ron Mock discusses 2018 annual results with BNN's Amanda Lang. Good discussion, listen to Ron explain how managing volatility with a balanced portfolio and how increasing their fixed income weights helped reduce the total portfolio's volatility last year.

He also explains how diversifying in Asia in private markets is critically important for them since that is where they see opportunities but they "have to be selective given where asset prices are."

Tanya Thomas of DealStreetAsia reports, NIIF, Roadis to jointly invest $2b in road projects in India:

Infrastructure investment company Roadis and the National Investment and Infrastructure Fund (NIIF) have announced the creation of a platform that will invest in road projects in India.

The platform will invest up to $2 billion of equity to target toll-operate-transfer models, acquisition of existing road concessions and investment opportunities in the road sector with the aim of creating a large roads platform in the country, the companies said in a press release.

With 710 km of highways under ownership and management, Roadis is a wholly owned subsidiary of the Public Sector Pension Investment Board (PSP Investments), one of Canada’s largest pension funds. NIIF is a fund manager that invests in infrastructure and related sectors in India, anchored by the government of India.

In 2018, the central government introduced the toll-operate-transfer model for national highways as part of its efforts to monetise public infrastructure and build new assets under programmes such as Bharatmala. The first round of TOT auctions was hugely successful, where the winning bidder Macquarie bid ₹9,681 crore against the NHAI’s expectation of₹6,258 crore for 700km of national highways. However, the second round of auctions, for 586km of highways, had to be cancelled after the highest bid was 14% below the NHAI’s expectation of ₹5,362 crore.

Roadis-NIIF had bid jointly in the first round of auctions.

José Antonio Labarra, CEO, Roadis, said, “This agreement, which aligns with our growth strategy, strengthens our long-term commitment to India. NIIF is a partner that perfectly fits our profile given its commitment to infrastructure investment and the robust governance standards it follows”.

Sujoy Bose, MD & CEO, NIIF, said, “The Indian road sector has attracted significant global capital over the last two decades and will continue to offer large investment opportunities. The road network is a key enabler for the Indian economy to grow and sustain its position as the fastest growing major economy in the world, and this provides significant upside potential for investments, while creating value for users.”

Bloomberg Quint also reports, NIIF, Roadis Partner To Invest Up To $2 Billion In Highway Projects:

The National Investment and Infrastructure Fund of India, and European highway concession manager Roadis announced the creation of a platform that will invest up to $2 billion in highways projects in India.

With 710 km of highways under ownership and management, Roadis is the largest European highway concession manager in India and is a wholly-owned subsidiary of the Public Sector Pension Investment Board (PSP Investments), one of Canada's largest pension funds.

NIIF is a fund that invests in infrastructure and related sectors in the country.

"The platform will invest up to $2 billion of equity to target Toll Operate Transfer models, acquisitions of existing road concessions and investment opportunities in the road sector with the aim of creating a large roads platform in the country," the entities said in a statement.

This jointly-held platform will benefit from the expertise and value creation capabilities of both the entities, the statement said, adding that with strong investment and operational expertise, the platform intends to operate the roads portfolio with the highest global standards, while creating maximum value for the shareholders.

Jose Antonio Labarra, chief executive officer at Roadis said, “This agreement, which aligns with our growth strategy, strengthens our long-term commitment to India. NIIF is a partner that perfectly fits our profile given its commitment to infrastructure investment and the robust governance standards it follows.”

“The Indian road sector has attracted significant global capital over the last two decades and will continue to offer large investment opportunities. The road network is a key enabler for the Indian economy to grow and sustain its position as the fastest growing major economy in the world, and this provides significant upside potential for investments,” Sujoy Bose, managing director & CEO at NIIF said.

And Ranjani Raghavan of VCCircle reports, NIIF and PSP-owned ROADIS float $2 bn road investment platform:

Infrastructure investment firm ROADIS and the Indian government-anchored National Investment and Infrastructure Fund (NIIF) have set up a $2 billion platform to invest in road projects in India.

ROADIS is a wholly-owned subsidiary of the Public Sector Pension Investment Board (PSP Investments), a Canadian pension fund.

The platform will invest equity in toll-operate-transfer (TOT) models, acquisitions of existing road concessions and other investment opportunities in the road sector, as per a statement.

“This agreement, which aligns with our growth strategy, strengthens our long-term commitment to India,” said José Antonio Labarra, chief executive officer of ROADIS, which has about 710-km of highways under ownership and management.

In an interview with VCCircle last December, PSP Investments’ global head of private investments Guthrie J Stewart said that it was focusing on scaling up its investments in Indian infrastructure, especially in transport.

ROADIS and NIIF had last year jointly bid for toll-based highways in the first such auction in India where the government decided to monetise operational roads.

Eventually, the National Highways Authority of India (NHAI) sold nine toll-based highways under the TOT model to Australia's Macquarie Group for Rs 9,681 crore (around $1.5 billion).

“The Indian road sector has attracted significant global capital over the last two decades and will continue to offer large investment opportunities,” said Sujoy Bose, managing director and chief executive officer of NIIF.

A recent VCCircle analysis of the sector showed that while the government’s budgetary support and investment ballooned more than four times -- from just short of Rs 33,000 crore in 2014-15 to more than Rs 1.3 lakh crore during the last financial year -- private investment did not maintain that pace.

Private investment in the highways sector went up more than 54% from 2014-15 to 2015-16, but slid sharply in the following two years to around Rs 16,500 crore, before perking up to Rs. 25,000 crore during the last financial year.

Several marquee private equity investors including Macquarie, Brookfield, I Squared Capital, International Finance Corporation-backed Cube Highways and the Kuwait Investment Authority have pumped money into the sector in recent years.

Cube Highwayshas been particularly consistent in placing bets on the Indian highways sector over the last 4-5 years. Not only was it among the top private equity investors over the past three years, it reportedly also emerged as the highest bidder for this year’s NHAI auctions under the TOT model. However, the government agency canceled the bids since they were far below its expectations.

In 2017, Brookfield Asset Management acquired two assets worth Rs 1,900 crore (close to $300 million) in the largest private equity buyout deal in the roads sector.

You'll recall last month, I discussed why CPPIB and OTPP are eyeing big Indian projects and stated CPPIB was in advanced talks to acquire 12 operating road assets of Sadbhav Infrastructure Project Ltd (SIPL), in a deal worth $400-500 million (Rs 3,000 crore).

You can read more about ROADIS here. I note the following:

ROADIS is a company with proven international experience in highway concessions. It is owned by one of the largest Canadian pension fund managers, PSP Investment (Public Sector Pension Investment Board), and it manages its assets through the promotion and finance of the projects, until their execution, construction and operation.

It currently develops and operates a significant portfolio of assets and projects, with an investment which amounts to over  3,408 M €. Specifically, it has 1,882 km of highway under concession.

Its experience and position in these sectors have allowed it to reach investment agreements with diverse international partners.

ROADIS is a global company with a solid position in the countries where it operates. Its geographic presence has a high strategic value, given that it is present both in countries with consolidated economies (USA, Portugal and Spain), and in key markets of the new world economy (India, Brazil, Mexico).

ROADIS has a strategy of international expansion and continuous growth which is translated into a quest for investments for new assets.

Basically, ROADIS is one of the platforms PSP"s Infrastructure team relies on to invest and manage its toll road projects in India and elsewhere. It's a subsidiary of PSP but operates independently on PSP's behalf and is staffed by highly trained professionals. You can read more on ROADIS's executive committee here.

Its CEO, Jose A. Labarra, came from Grupo Isolux, in which, as General Director of Motorway Concessions, he led the achievement of the portfolio of projects that constitutes the starting point for ROADIS today. 

The members of ROADIS's board of directors are:

• Patrick Samson. Chairman (Managing Director, Head of Infrastructure at PSP)
• José A. Labarra Blanco. CEO and Vice Chairman
• Janis Carol Kong. Non-Executive Director
• Gabriel Damiani. Director
• Patrick Charbonneau. Director (Managing Director, Infrastructure at PSP)
• Ignacio Moreno. Non-Executive Director

So, even though ROADIS operates independently on PSP's behalf, two of its board members are the two most senior infrastructure investment officers at PSP.

[Note: PSP has other platforms that manage other assets like airtports. Along with Ferrovial, it was seeking to acquire a majority stake in India’s GVK Airport Holdings].

And as stated in the article above, India is where the capital is going and there's a lot of competition from the likes of Cube Highways and large Canadian asset managers like Brookfield, one the best infrastructure investors in the world.

In fact, in February, Rajat Arora of India's Economic Times reported, 4 companies put in bids for 9 operational national highways under ‘toll-operate-transfer’ model:

The government’s ambitious plan to monetise publicly funded, commercially operational national highway projects has got a big boost.

Four companies — Brookfield Asset Management, Macquarie, IRB Infrastructure and Roadis-NIIF — have put in bids for nine national highways on offer in the first round. The National Highways Authority of India (NHAI), which invited bids for these highways, hopes to generate more than Rs 6,000 crore by leasing out the roads under the ‘toll-operate-transfer’ (TOT) model.

The auction will involve five highways running across Andhra Pradesh and four in Gujarat. The total length of these highways is just under 700 km.

The Cabinet Committee on Economic Affairs in 2016 had authorised NHAI to monetise 75 publicly funded national highways that are operational and have been generating toll revenues for at least two years.

The government expects the TOT deals to bring in at least Rs 60,000 crore. This will provide NHAI funds to build more highways, filling in for the private sector that is reluctant to invest in new highways. A second batch of around five national highways with a total length of 500 km would be put out for bidding in March.

Under the TOT model, pension funds and PE firms are allowed to lease government-owned national highways for 30 years by making an upfront payment. The lessee, in turn, gets the right to collect the toll, operate, manage and maintain the highway stretch. The government can also increase the concession period in later stages, if the concessionaire wants it.

"Asset recycling of public funded infrastructure in India has achieved its first milestone. Three international investors and one domestic company have come forward to bid for national highways,” NHAI member-finance Rohit Kumar Singh told ET.

“Once it is successful in the highways sector, other sectors such as power transmission, oil and natural gas could replicate the same model, thereby unlocking the huge off-budget funding," he added. The government will line up more such projects for bidding early next year.

Technical bids for the national highways on offer in the first round will be opened on Friday. After technical qualification assessment, financial bids will be opened next week. “Only then we'll be able to make the quotes pubic," Singh said. NHAI will provide a risk cover to the lessee against circumstances such as a rapid fall in toll collection and structural or engineering fault on the highways.

The interesting thing to note from this article is if these public-private toll road projects in India go well, it will open the door to using the same model in other sectors such as power transmission, oil & gas, and renewable energy.

The key thing is investors aren't willing to take greenfield risk, the Indian government has to take construction risk, and investors can then invest alongside it and manage these assets properly.

Now, why are Canada's large pension funds investing in toll roads in India? The short answer is that's where growth will be over the next decades.

A friend of mine, an expert on toll roads, shared this with me:

"In developed countries, most families already have one or two cars. Your toll roads and other infrastructure projects typically grow with GDP, so your gross return will be GDP growth + CPI inflation. In developing countries like India where demographics are favorable, industrialization is taking place and lots of people still don't own cars, you can still collect very nice returns on toll roads. You will get GDP growth + CPI inflation + increases from tolls + as more people begin buying one or two cars, it will generate more traffic on these highways and profits will increase commensurately. It's a long-term project in a growing economy with great demographics."

But my friend also stated this: "However, sponsors tend to be too optimistic in their financial models and raise tolls too quickly (i.e charging more than the economy can bear). This usually has a negative impact on demand."

He also cynically added: "Or you do what Greece did - overtax gas and everyone stays home because it's too expensive to commute to work. Kills the economy and tolls roads all at once."

My friend is right, in Greece, they built this beautiful highway going from Athens to Patras, Olympia Odos, and when it finally opened, Greeks kept using the old highway to avoid paying tolls on the new one. It has since become more popular and more affordable as the economy has picked up somewhat in recent years.

Now, India isn't Greece, it's booming, has a very young population, with more than 50% of its population below the age of 25 and more than 65% below the age of 35.

Try finding favorable demographics like that in the developed world where there has been a 'remarkable decline in the fertility rates.

Even China isn't doing well when it comes to demographics. In fact, a recent Bloomberg article states that America's big advantage over Russia and China is demographics:

Countries with unhealthy demographic profiles will find it harder to remain economically competitive as their populations shrink and a smaller number of workers support a larger number of retirees. They will face agonizing guns-versus-butter tradeoffs that make it harder to undertake bold geopolitical ventures. When demographic problems become severe, they can exacerbate social and political strains, leading to crippling instability. And as it happens, America’s competitors are likely to face sharp demographic pressures in the coming decades.

The legacy of China’s one-child policy will be a steadily shrinking population for generations, as the number of Chinese falls from 1.41 billion in 2017 to 1.36 billion in 2050 (according to figures provided by the United Nations), and then falls faster still to perhaps 1 billion by 2100. Meanwhile, China’s retirement-age population will jump starkly, according to statistics compiled by Nicholas Eberstadt of the American Enterprise Institute, from 135 million in 2015 to almost 340 million by 2040, as its working-age population falls by roughly 100 million.

This demographic contraction will place tremendous stress on China’s economy, as old-age costs skyrocket and the number of productive workers shrinks. The slowing of Chinese growth that is already underway will become far more pronounced; Beijing’s debt problem will become worse as social expenditures rise and austerity becomes more politically difficult to pursue. The Chinese government will have fewer resources with which to continue its military buildup and implement major geo-economic projects like the Belt and Road Initiative. Not least, demographic trouble may well foster domestic upheaval, as the shortage of marriage-age females, challenges in providing for the wellbeing of retirees, and tapering off of economic growth test China’s social compact. We are accustomed to thinking of China as a rising power. Yet demographic decline is setting in, with potentially profound consequences.

Russia faces its own problems. Its population is around 144 million today. But due to numerous factors — the lingering demographic damage caused by World War II, low birth rates and levels of immigration, and a relatively short life expectancy — the population may be as small as 119 million by 2050. The working-age population will decline from 60 percent to less than 50 percent of the overall population during this same period, compounding Russia’s long-term economic decline. The implications are already becoming clear: Russia will face Hobson’s a choice between pouring scarce resources into old-age pensions and inviting the political tumults that austerity could easily bring. Nuclear weapons and the capacity to create mischief through information warfare will keep Moscow in the game, but Russia’s underlying geopolitical potential will continue bleeding away.

The U.S. looks pretty good in comparison. Thanks to a relatively healthy birth rate and high levels of immigration, the U.S. population is slated to increase from 324 million in 2017 to 390 million in 2050. The retirement of the baby boomers will make America a significantly older society, as the proportion of retirees to working age individuals nearly doubles by 2060. But the overall growth of the population will cushion the effects of this shift, and the stresses America faces should not be nearly as severe as those its rivals confront. As a study by the RAND Corporation concludes, “Barring catastrophe, the United States appears likely to have the demographic and economic resources to remain the world’s indispensable nation through at least 2050.”

While the US will likely be the 'world's indispensable nation' for decades to come, the article also warns:

[...] if America is likely to be in relatively good shape demographically three decades from now, many of its traditional allies will not be. Important partners such as Japan, Germany and many Western European countries will have shrinking, aging populations. Japan in particular: Its population is projected to decline from 127 million in 2017 to 109 million in 2050 and keep falling thereafter. As a result, America’s core alliances will be less of a force-multiplier in the future than they are today. This will place an ever-higher premium on deepening ties with countries such as India, whose population is set to grow from 1.3 billion in 2017 to 1.7 billion by 2050.

Got that? India is the place you want to be over the next three decades which is why PSP, CPPIB, OTPP, the Caisse, OMERS and other large Canadian pensions and global asset managers are focusing their attention there.

Just keep this in mind, infrastructure is a long-term asset class, even more so than real estate, with a duration that closest matches the long-duration liabilities of pensions, making it very attractive from an asset-liability standpoint. Typically, infrastructure assets offer a return in between stocks and bonds with a much lower volatility than stocks (similar to real estate).

But infrastructure assets are pricey in the developed world as capital chases fewer deals, which is another reason why these large pensions and asset managers are turning their attention to emerging markets where they can still find attractive deals, for now.

Are there risks? Yes, infrastructure carries illiquidity risk, currency risk but the biggest risk of all, especially in countries like India and China, is political and regulatory risk. All it takes is one bad government to come in, change tolls for political reasons, materially impacting the yield on these infrastructure assets (of course, that will kill private sector investment in India which is why it's not a wise decision).

Below, India's $90 billion Delhi-Mumbai industrial corridor is one of the most ambitious, expensive endeavors in human history. But the project that will change the lives of the most people is the construction of hundreds of thousands of kilometers of paved roads.

Also, Bharatmala is the name given to a centrally-sponsored and funded road and highways project of the Government of India. The total investment for this plan is estimated at ₹5.35 trillion (US$83 billion), making it the single largest outlay for a government road construction scheme.

Watch these clips, they are fascinating and explain why super highways will transform India.

Sveinung Sleire and Mikael Holter of Bloomberg report, Norway's $1 Trillion Fund Told to Sell Emerging Market Bonds:

Norway’s $1 trillion sovereign wealth fund got the go-ahead to cut government and corporate bonds from emerging markets in an overhaul of its $310 billion fixed-income holdings.

The decision, announced on Friday by the Finance Ministry, comes after more than a year of deliberation. The fund will cut bonds from 10 emerging market countries in its index, including Mexico, South Korea, Russia and Poland, and will also be limited in its investments in emerging markets outside the index, such as Brazil and Indonesia.

The fund will still have leeway to invest up to 5 percent of its bond portfolio in emerging markets, or about $15 billion. It currently owns about $28 billion in such investments, with the biggest holdings in South Korean and Mexican debt.

The move doesn’t go quite as far as the initial 2017 proposal from the fund, which called for whittling its bond holdings down to just three currencies: the euro, the dollar and the pound. Big currencies such as the yen, the Australian and Canadian dollar and the Swedish krona were spared. The ministry also rejected the fund’s wishes to cut developed market corporate bonds.

The proposal was made after the fund got approval to lift its stock holdings to 70 percent of its portfolio. It has argued it makes little sense in owning government bonds across the world since they have become more correlated and that it’s also exposed to a wide array of currency risk through its ballooning stock holdings.

Reactions were muted in emerging markets.

“I understand this is a strategic decision,” said Ulrich Leuchtmann, head of currency strategy at Commerzbank AG in Frankfurt. “They change the benchmark. It’s not a sign that they get increasingly bearish on EM right now.”

He said that a shift of developed market central bank to “to a longer (perhaps permanent)” ultra-low interest-rate policy “should keep hunt for yields in general alive,” he said.

The specific changes and an implementation plan will be prepared in consultation with the fund after parliament’s deliberation of the white paper, the ministry said.

The government also agreed to allow the fund more time to do so-called re-balancing of the portfolio when it strays too far from the benchmark weighting.

Thomas Sevang, a spokesman for the fund, said it will read the report “with interest” and have an “orderly implantation after the mandate is updated.”

Interestingly, this afternoon, I was looking at the breakout in emerging markets stocks (EEM) which have been coming back nicely this year (click on image):


So I was a bit surprised when I read the news that Norway's giant fund decided to go ahead and cut government and corporate bonds from emerging markets in an overhaul of its $310 billion fixed-income holdings.

As shown below, emerging markets bonds (EMB) have been performing very nicely too this year, and unlike EM stocks, they are making new highs (click on image):


Now, Norway's giant sovereign fund isn't selling emerging markets bonds because they're bearish on emerging markets, so I wouldn't read too much into this decision (it's a strategic, not a tactical call).

If anything, I take strength in emerging markets stocks and bonds as a very positive sign that global growth will pick up in the months ahead and if the Fed stays put, it will engineer a soft landing.

Earlier his week, an astute blog reader of mine sent me Tim Duy's comment, There Will Be A Recession At Some Point, But It Won’t Be Soon. This morning's US jobs report supports this claim as the job market bounced back in March with a 196,000 gain in payrolls.

But what worries me is this chart below, the continued strength in the USD ETF (UUP) which is inching closer to making a new high (click on image):


If the US dollar is rallying because global investors remain jittery and are therefore placing a premium on USD assets, then I'd be cautious about interpreting too much into the rally of emerging markets bonds and stocks.

And while emerging markets stocks are headed for their longest winning streak in over a year, there are still issues with some EM countries:

[...] Turkey’s lira weakened and is headed for a 0.5 percent weekly decline as markets await the outcome of a vote recount in Istanbul, where the main opposition candidate said he remained ahead by nearly 19,000 votes.

The lira has been under pressure from declining economic indicators, rising tensions with the United States and uncertainty around local elections. Fears are growing that last year’s 30 percent slide of nearly 30 percent will be repeated.

“European investors are concerned about economic and financial market distress in Turkey. While not a part of EU, Turkey is a major trading partner of many European economies, and the demand destruction there in the past year has been felt acutely by the regional exporters,” said economists at DBS Economics & Strategy.

A Reuters poll showed that 2019 outlook for emerging-market currencies was mixed, despite the U.S. Federal Reserve’s recent dovish stance.

It remains to be seen what will happen in Turkey following the elections but it's clear the country is at a critical point in its relations with the West.

Another thing that concerns me is how US bond yields remain near their yearly lows and prices (TLT) near their yearly highs (click on image):


If global growth is really coming back, I'd expect to see a much more significant backup in bond yields (drop in bond prices), but so far the bond market isn't buying any of this global growth story.

All this to say, I'm not convinced the Risk On trade will dominate in the second half of the year, even if the Fed manages to orchestrate a soft landing. That all remains to be seen but so far, the trading in emerging markets stocks and bonds is encouraging and doesn't signal trouble ahead.

Will Turkey change this? Who knows, it might if something blows up there and Turkish shares (TUR) look like they're rolling over here and could retest their lows (click on image):


Still, the S&P 500 ETF (SPY) is getting ready to make a new high and if it does, we can see a meaningful breakout in US stocks (click on image):


And to all the skeptics out there, have a look at how semiconductor shares (SMH) have performed recently, they broke out and are making new highs (click on image):


There are areas of this market which clearly signal Risk On is picking up steam which is why I can't discount the possibility of another bubble in stocks even if I remain cautious given that global PMIs remain weak.

But have a look at the how the S&P sectors performed this week, courtesy of barchart (click on image):


As you can see, all the cyclical sectors rallied hard this week, namely, materials, financials, industrials and energy. This is definitely a bullish sign for those arguing that global growth is coming back.

And since it's Friday, here are the top-performing US stocks for this past week, courtesy of barchart (click on image):


Again, a lot of small cap biotechs and one shipping company that I recognize but most certainly not brand name stocks here.

Also, here are the top large cap US stocks year-to-date, courtesy of barchart (click on image):


That wraps my long week, hope you enjoyed this comment and all the other comments I posted this week.

Below, Omair Sharif, Societe Generale senior US economist, and CNBC's Steve Liesman join 'The Exchange' to discuss March's jobs report numbers and what it means for the economy on the horizon. They also discuss Trump's Fed nominees Herman Cain and Stephen Moore.

Second, Goldman Sachs chief economist Jan Hatzius joins 'Squawk on the Street' to discuss the March jobs report number and his thoughts on the state of the US economy.

Third, Ruchir Sharma, chief global strategist and head of emerging markets at Morgan Stanley Investment Management, joins CNBC's "Closing Bell" team to break down where emerging markets are headed.

Fourth, CNBC's "Closing Bell" is joined by Ruben Roy from MKM Partners and Kevin Rottinghaus from Edgewater Research to talk about semiconductor stocks and whether the rally can last.

Lastly, Jane Foley, head of FX strategy at Rabobank, and Emmanuel Cau, head of European equity strategy at Barclays, discuss the US-China trade talks and their impact on markets. They speak on “Bloomberg Daybreak: Europe.”