There are seminal moments in any career and Jim Keohane’s is a doozy. He knew something was wrong when his lowball offer for Canadian Pacific Railway shares, lobbed in at $1 below the asking price, was instantly accepted.

It was October 1987 and by the time the shares he had traded overseas opened on the Toronto Stock Exchange hours later — on what would become known as Black Monday — they had dropped a further $5 per share.

Keohane, who will step down next year after a widely praised 20-year run as chief investment officer and then chief executive of the $79-billion Healthcare of Ontario Pension Plan (HOOPP), recalls that his loss on that day’s trade was painful as markets historically tumbled to a depth and at a speed few thought possible, but it was far from the worst thing that happened.

The firm where he worked, Wood Gundy & Co., had just agreed to underwrite a large stock issue by British Petroleum Co. at a guaranteed price, and the loss triggered by the market collapse nearly toppled the independent investment dealer, and pushed the previously well-capitalized 82-year-old firm into the arms of Canadian Imperial Bank of Commerce.

“They were trying to get out of the (BP) deal, but they couldn’t … and they were practically bankrupt,” Keohane recalled during a lengthy and wide-ranging interview at HOOPP’s new headquarters on Toronto’s rapidly developing waterfront. “That’s why Wood Gundy did the deal with CIBC, because they were effectively bankrupt.”

What Keohane took from Black Monday and its aftermath was a resolve to always conjure up a scenario where “the worst case plays out” and to visualize “what that looks like” for every investment.

“That was quite an insightful experience with risk,” he said, reflecting on the unexpected turbulence more than 30 years ago and the lesson that stuck with him. “Sometimes that does play out, so you better understand what you’re getting into.”

Balancing risk and reward is something Keohane has become known for: using sophisticated derivatives to help produce benchmark-beating returns since 2008, usher HOOPP into the upper echelons as Canada’s fifth-largest public-sector pension, and save mortgage lender Home Capital Group Inc. along the way. But as the nearly 65-year-old enters his final nine months in charge, the question arises of whether a successor can walk the line of risk management as successfully.

At stake are the pension nest eggs of more than 325,000 active HOOPP members and pensioners that include hospital workers, community health-centre employees and family health teams.

The ability to scan for and spot anomalies that could lead to trouble or opportunity has been the key to Keohane’s success as a pension manager, said Hugh O’Reilly, who was outside counsel to HOOPP’s board of trustees for about a decade before becoming chief executive of another Ontario pension manager in 2015.

“He sees things before others do,” said O’Reilly, now a senior fellow at the C.D. Howe Institute and executive-in-residence at the Global Risk Institute. Keohane, he added, pairs that ability with an eagerness to look “under the hood” and deeply analyze the nuts and bolts of complex investments.

For example, it was Keohane who, as chief investment officer, led the push to turn HOOPP into a liability-driven investment plan, based on his concern that a simultaneous drop in both stock markets and interest rates could doom the fund’s ability to pay out future benefits that had been guaranteed by the defined-benefit plan.

The transition began after the dot-com bust in the early 2000s, and included a shift to extensively use derivatives — including futures, options and swaps — both as a hedge to limit losses when markets do poorly, and to increase returns.

The strategy helped HOOPP weather the financial crisis better than other pension funds in Canada and around the world. In 2008, the fund lost 12 per cent compared to losses of between 15 and 25 per cent at other large pension funds, according to a World Bank Group report in 2017.

The fund’s “timely reduction of its equities allocation… in 2007 protected roughly $2 billion in asset value,” the report said.

O’Reilly said HOOPP also appeared to benefit from some prescience in 2009 when it boosted stock holdings at the time later identified as the bottom and the best time to buy equities.

“In my opinion, Jim is the best pension investment person on planet earth,” said O’Reilly, who until March was chief executive of OPSEU Pension Plan Fund (OPTrust), which administers the pension plan of public service workers in Ontario.

In the pages of the HOOPP’s financial statements, there are references to derivatives tied to credit, currency, equity, and interest rates, and terms for instruments including options, futures, swaps, and even “swaptions.”

Keohane has built a reputation over the years as an expert in controlling and exploiting the financial instruments that gained notoriety during the financial crisis for their inherent riskiness and potential to magnify both gains and losses.

“HOOPP is a top performer both short term and long term,” said Canadian pension expert Keith Ambachtsheer.

The fund’s 10-year annualized return is 11.2 per cent and its 20-year annualized return is 8.5 per cent.

But using derivatives to free up money to invest and generate returns is a strategy that has also drawn critics.

Malcolm Hamilton, a retired pension actuary who is a senior fellow at the C.D. Howe Institute, told the Financial Post in 2016 that HOOPP and other Canadian pensions were “levering up and hoping for the best.”

So far, though, HOOPP has been prospering under Keohane.

In 2018, the pension’s funded status stood at 121 per cent, meaning there was $1.21 on hand for every dollar needed to pay out a pension. Net assets, which totalled less than $20 billion when Keohane joined the pension two decades ago, more than quadrupled to nearly $80 billion by the end of last year.

Sitting in a boardroom high in HOOPP’s gleaming office tower on a recent spring day in Toronto, Keohane, who lives not too far away in the tony neighbourhood of Forest Hill, is farther from his childhood home of Ottawa than the kilometres between the two cities would suggest.

His younger brother Ed, a senior vice-president in Bank of Nova Scotia’s wealth-management division, recalls a story about the teenaged “Jimmy” — the third of eight siblings — taking apart and reassembling a Toyota Celica because he knew it would fall to him to do any repairs.

“It was scattered all over the garage and we were all amazed that he was able to get it back together,” said Ed, who is three years younger than Jim. “At that time we didn’t have much money — you know, eight kids — we had to fix our own cars. We learned how to manage with not a lot of beans.”

Jim and Ed, like their siblings, got part-time work and summer jobs that included pumping gas and doing outdoor yard work for Ottawa’s National Capital Commission to pay for their post-secondary education — in Jim’s case, a science degree followed by an MBA.

“We grew up fine. We didn’t know we didn’t have money,” Ed said.

Despite the number of mouths to feed, summers were spent at a cottage on the Quebec side of the Ottawa River with their mom, a teacher, who had her first three children within three years of one another, and went on to earn a university degree part-time while working.

During his youth, Jim developed a lifelong passion for skiing, according to his brother, one that nowadays reveals an appetite for risk that might seem incongruous for someone who works so scrupulously to control it in his professional life, though Ed said his brother also revels in remote heli-skiing adventures.

“I wouldn’t do it. But he does,” he said with a mix of awe and concern creeping into his voice.

The large family still gathers at least once a year in the cottage community of Norway Bay, Que., where they summered. The usual occasion is to honour their father at a golf tournament in his memory. Brian Keohane passed away at 61 in 1988, a year after Jim’s formative Black Monday experience.

Jeff Johnson, a long-time family friend who would later seek out advice from Jim Keohane when he was considering getting into the pension industry after working in the banking and energy sectors, recalls Keohane’s mother, Enid, who turns 90 on July 12, stepping in seamlessly as the family’s figurehead after Brian died.

“I’ve worked for six organizations over 35 years, and I did speak to Jim before I joined OPTrust,” Johnson, who is now director of enterprise risk management at the pension manager, said. “I just wanted to get his perspective on this organization and get a sense of the profession and whether he enjoyed it. I’m here, so it’s reflective of how positive that conversation (was).”

Johnson still goes to Norway Bay and said many members of the Keohane family have bought their own summer getaways there, but Jim Keohane is putting the finishing touches on a large retirement home in Caledon, Ont., where he plans to spend time with his wife when he retires, between trips they hope to take, like one to Asia earlier this year. The home will also have room for his four sons, all now in their 30s, from a previous marriage.

“I wouldn’t call him extravagant or anything like that,” Ed said, describing his brother instead as “very goal-driven.”

It was Keohane’s ambition to rise through the ranks that led him into the world of derivatives. He said he began learning about the sophisticated financial instruments early in his career, after moving to Toronto, because he reasoned that developing a rare specialization would propel him above the crowd of “junior” bankers in Canada’s largest city.

The decision guided Keohane as he moved on to jobs with Pemberton Securities, Royal Bank of Canada, HSBC and Deutsche Bank before landing at HOOPP in 1999. His first job there was to set up a derivatives program.

In March, Keohane told Pension Pulse blog writer Leo Kolivakis he was very happy to leave the “toxic culture of investment banks” to join HOOPP because “after awhile making more money doesn’t get you out of bed.”

It didn’t take long, though, for the lessons of Black Monday to influence his decision-making at HOOPP. Keohane considers it one of his career highlights that he was able to steer the pension fund away from serious exposure to Canadian heavyweight Nortel Networks Corp.

At its peak in 2000, Nortel accounted for more than a third of the Toronto Stock Exchange’s benchmark index As a result — and the fact that and Nortel ownership was also embedded in Bell Canada at the time — the data networking equipment manufacturer had come to represent a sizeable chunk of the portfolios of HOOPP and other institutional investors.

Keohane found the concentration “disproportionately high” and worried about the impact should something go wrong, so he instituted a process to ease Nortel holdings down to less than five per cent of the portfolio using — not surprisingly — a complex set of derivative investments.

“We used an option strategy known as a costless collar,” Keohane said, explaining that put and call options were purchased and sold at prices that fully covered HOOPP’s costs. As Nortel spiralled from high flyer into bankruptcy protection in 2009 in one of the largest corporate failures in Canadian history, “the put options we held protected us from taking a loss on those Nortel sales.”

Now, 20 years into his tenure at the pension fund, and in his seventh year at the helm, he boasts that HOOPP has one of the largest derivatives portfolio of any pension in the world. But he is quick to point out that the high concentration of derivatives is in just one of the fund’s two portfolios, the one designed to use excess funds to seek returns. The liability hedge portfolio, by contrast, is largely made up of bonds and short-term fixed-income investments, as well as real estate.

Though praised for his smarts, the task of relaying complicated financial details and manoeuvres has not always been easy. HOOPP is governed by a board of trustees, which draws its 16 members from appointees of the Ontario Hospital Association and four unions including the Ontario Nurses’ Association and the Canadian Union of Public Employees.

“Jim’s style was quiet and he was always viewed as being exceptionally smart and having the pensioners’ best interests at heart, so that carried him a long way,” said Marlene Puffer, a former HOOPP trustee who was chair of the asset-liability management committee during her nine-year term.

“The board was always, I would say, confident in the ideas that were being presented, but Jim’s quiet approach also meant that he was sometimes difficult to understand.”

Puffer, the first board member appointed by the hospital association with investment and derivatives expertise, became a translator of sorts.

“It was always a bit amusing to watch the dynamic in the room because he would speak in the way he does, which is (to give) an extremely intelligent answer that I would understand and maybe a couple of other people in the room would understand,” Puffer explained. “And quite often my role was to take his answer and repeat it in plain language. So we had that dynamic going all the time.”

The sophistication of HOOPP’s investment strategy has led to speculation — and a bit of concern — about who will replace Keohane when he officially steps down next March.

“It’s going to be a real challenge,” said Paul Litner, head of the pension practice at Toronto-based law firm Osler, Hoskin & Harcourt LLP, who also serves as external counsel to HOOPP’s board of trustees. “The board has its work cut out for it now. It’s big shoes to fill.”

Even Keohane himself acknowledged — rather sheepishly — that there are only one or two managers on the bench at HOOPP who would be logical successors.

Observers outside the pension, such as Claude Lamoureux, who ran Ontario Teachers’ Pension Plan from 1990 to 2007 and knows Keohane as a friendly rival, suggest he’s not just being modest.

“He will be hard to replace,” Lamoureux said. “He has done a great job at HOOPP and … even helped save (mortgage lender) Home Capital with a line of credit that no one wanted to grant.”

Lamoureux and Keohane almost crossed paths on the board of Home Capital Group, one of the few times that has stoked controversy during Keohane’s career.

Lamoureux joined in early May 2017 to help shore up governance at the mortgage lender, which was struggling with a crisis of confidence after the Ontario Securities Commission levelled allegations of misleading disclosure against Home Capital and a handful of executives.

Keohane had left the board in late April that year, a move that was announced amid scrutiny of a high-interest emergency loan extended to Home Capital by a HOOPP-led syndicate of lenders as investors and depositors fled the troubled mortgage company.

At the time, Keohane defended the loan as a win-win for Home Capital and HOOPP, and said he had properly recused himself from discussions where there could have been a conflict.

Koehane more recently added that the pension fund had expertise in the type of lending required by Home Capital, having made similar, though less publicized, loans to other companies.

Puffer, who is now chief executive of the CN Investment Division, which runs Canadian National Railway Co.’s corporate pension, said Keohane “was right that there was an opportunity for a win-win” in the Home Capital loan, adding that everything was handled the way it should have been from a governance perspective.

“For Jim, unfortunately, the media attention was not rational … It had kind of put him in a place where no matter what sort of explanation he offered, it wasn’t going to be satisfying,” she said, alluding to the widespread coverage of Home Capital’s regulatory run-in and subsequent panic. “I think in the end, he handled it very well and it died down, because it was a good deal. It was a good, beneficial transaction.”

Warren Buffett was widely praised as Home Capital’s saviour a short time later, observers note, when the HOOPP-led lifeline was replaced with a loan from his Berkshire Hathaway Inc. that carried a rich — albeit lower — interest rate of nine per cent, plus one per cent on undrawn funds.

Puffer said the Home Capital affair highlighted the depth of HOOPP’s deal team, which, combined with sophisticated operations and technology to keep track of the myriad investment strategies, should ease the transition from Keohane’s tenure.

In addition, the board has always relied on outside advisers with pension expertise to ensure that the board is asking the right questions to keep managers focused on providing promised pensions down the road, she said.

“It’s a critical thing to keep educating the board, so they’re going to have no choice but to continue to do it because HOOPP’s approach is very much, at its heart, reliant on these sophisticated strategies, and it’s so much a part of the DNA of the organization,” Puffer said.

Many strands of that DNA can be attributed to Keohane, and his successor will inherit that legacy.

“He’s a tough act to follow,” said Ed Keohane, someone who ought to know, echoing many across Canada’s pension industry. “Everybody knows him. I get asked often if he’s my brother. I proudly say yes.”

In one of his first acts as Finance Minister, Rod Phillips appointed one of his major donors and long-time business partner Neil Selfe to the Investment Management Corporation of Ontario (IMCO). Another long-time Phillips business associate, Brian Gibson, was also quietly appointed to the IMCO board on June 20.

Official Opposition NDP MPP Taras Natyshak said Doug Ford and the Conservatives are continuing to rubber-stamp patronage appointments of close friends and insiders to key roles. That’s why Natyshak and the NDP are calling on these and all recent Conservative appointees to appear before the Standing Committee on Government Agencies to face questions about potential conflicts of interest, and their qualifications.

“It’s troubling that Phillips’ first move as Ontario’s Finance Minister was to hand out a couple tickets on Doug Ford’s gravy train, rather than get to work on the things that matter to Ontario families,” said Natyshak. “Ontarians have a lot of questions about why his former business buddies are now in charge of directing multi-billion dollar investments, including people’s public sector pensions and investment funds.

“Time and time again, the Ford government manages to rubber-stamp their friends and insiders to taxpayer funded positions, robbing Ontario families of transparency and scrutiny. These insiders are getting power, control over public funds, or a ride on the gravy train — while the rest of us are getting cuts.”

Selfe and Gibson are just the latest in a string of appointments that have skirted public scrutiny, with Earl Provost, former chief of staff to Rob Ford, and Jag Badwal, real estate agent and former Conservative party president, gifted appointments, complete with salaries of up to $185,000 along with living expenses in exotic locales as Ontario’s “agents-general” — positions that were scrapped as unnecessary in the 1990s.

The IMCO is supposed to operate independently of government and is tasked with achieving the long-term investment objectives of Ontarians. Natyshak said the goal of questioning these appointees at committee is ensuring the appointees put the interests of Ontarians above all else.

“No one voted for the Conservatives to secretly appoint their friends and allies to taxpayer-funded positions,” said Natyshak. “If Ford’s ministers are going to continue to rubber stamp these positions, then the opposition must be given every opportunity to call these appointees to committee and ensure that they face the level of scrutiny that Ontario families expect.”

Yee’s comments to CIO came after three dozen faculty members at the California State University system pressed the CalPERS board at its retreat meeting on Monday to divest their holdings in US private prison companies CoreCivic and The GEO Group.

The faculty members, along with other CalPERS members opposed to the system’s investments in the private prison companies, have become a fixture at CalPERS meetings. But the board, which generally is against being forced to divest from companies, has not publicly taken up the issue despite the outcry.

The CalPERS board also has opposed action by state legislators that would bar the retirement system from investing in the stock of the prison companies. This is in contrast to the California State Teachers’ Retirement System board, which voted in December 2018 to divest from CoreCivic and The GEO Group.

Yee was one of five votes against CalSTRS’s divestment in a 6-5 vote. She argued at the time through a representative that engaging the private prison companies was a better course of action.

No longer.

Yee told CIO that the “egregious conditions” at migrant border facilities has raised the issue of private prisons housing migrants to a new level.

Recent accounts of migrant children living in squalor at US Customs and Border Patrol facilities hasn’t not involved the two private prison companies. Yee said it does not matter.

She said the migrant detention focuses attention on the larger issue of the two private companies housing migrant adult attendees and children.

Both companies say they don’t set policy and are just contractors with the federal government, which is responsible for the detainee policy.

“I thought engagement made sense,” said Yee of her CalSTRS vote. She said given the “egregious activities” occurring regarding the treatment of migrant detainees, “CalPERS needs to take a serious look at the issue of private prison companies running detention facilities.”

“No one deserves that kind of treatment anywhere,” she said of the migrant detention.

Yee said from a fiduciary point of view, investment in the private prison companies is becoming increasingly riskier, given that several major banks have stopped doing business with the companies and the stock of the companies has been in a tailspin.

CalPERS spokesman Wayne Davis told CIO that the CalPERS investment office is continuing to engage management of the two private prison companies and evaluating whether divestment would be a prudent course.

Jennifer Eagan, political action and legislative chair for the California Faculty Association, told the CalPERS board Monday that faculty members reject the system’s refusal to tackle the issue.

“We know the board’s position is that stakeholders shouldn’t be able to tell them what to do,” she said. “Our argument is twofold: the immorality of what these corporations are doing, as well as investments being poor and risky. There is no reason to hold onto these stocks from a fiduciary point of view.”

Stock prices of the two private prison companies have been falling following remarks last month by presidential candidate Sen. Elizabeth Warren that she would move to ban federal contracts with private prisons if elected.

A number of banks have also announced recently that they will not do business with the prison companies, including Wells Fargo, Fifth Third Bank, J.P. Morgan Chase & Co., Bank of America Corp., and Sun Trust Banks.

Shares of CoreCivic closed at $17.47 Tuesday, down 2.57% from the opening price. The stock has traded as high as $26.09 over the last 52 weeks. The GEO Group, meanwhile, closed Tuesday as $18.66, down 1.01% from the opening bell. The stock had been trading as high as $27.06 over the last 52 weeks.

Congress is also getting into the action. At least one congressional committee has said that it will investigate The GEO Group and CoreCivic and their role in housing migrant children and adults.

As the Trump administration took office in 2016, the administration reversed an Obama administration ban on the federal government contracting with the two companies. The Trump action helped increase the stock price of the two companies.

Yee said she will push the CalPERS board to have a public discussion and a vote on divestment from the two private prison companies in the next several months.

In addition to CalSTRS, other major pension plans that have divested from the two private prison companies are the New York City Pension Plans and the New York State Common Retirement Fund.

With over a $170 billion global equity portfolio, CalPERS’s investment in the two private prison companies is relatively small, several hundred million dollars. A move, however, for the largest US pension plan to divest could certainly carry symbolic value. Yee said she is convinced that CalPERS needs to take a stand.

"We often trade in and out of companies that are part of major stock indexes," said [OTPP] spokesperson Lisa Papas. "We regret holding exposure to this stock.... Our members care deeply about human rights, and we are committed to investing responsibly."

Founded in 2013 and based in Houston, the Company provides critical surface treatments such as non-destructive testing, shot peening, chemical processing, plating, painting and spray coating to aerospace and defense components that require complex finishing to meet engineering specifications. Valence currently operates eight (8) facilities throughout the U.S. in key aerospace and defense manufacturing regions, serving over 3,000 customers and processing over 12 million individual parts annually.

“Over the last several years we have built Valence into a market leading platform and we look forward to expanding the Company’s capabilities and geographic footprint as we seek to offer additional, differentiated services to our growing customer base” said Tracy Glende, Chief Executive Officer of Valence. “We are very excited to partner with ATL given their sector focus and in-depth knowledge of commercial aerospace and the surface finishing market.”

“ATL has followed the Valence story since the beginning and we are very impressed with the business that the Valence management team has built,” said Frank Nash, Founder and Managing Partner of ATL. “We believe there are many opportunities for growth in the Company, through both organic initiatives and strategic add-on acquisitions, and we are excited to support the Valence management team as they execute their strategic vision for the Company over the coming years.”

“Valence Surface Technologies is a well-managed leader in the aerospace industry, and BCI looks forward to supporting the business through its next phase of growth,” said Jason Cawley, Senior Portfolio Manager, Private Equity at BCI. “This investment aligns with our clients’ long-term objectives to invest in companies with solid management teams and strong growth potential.”

Owl Rock Capital Corporation and Antares Capital LP provided debt financing to support the acquisition. Lazard served as the lead financial advisor to the Company.

BCI’s acquisition of governance rights in the Company remain subject to customary regulatory approvals.

• Valence is a single-supplier solution to aerospace outside processing. With significant investments in capacity, it provides a single supplier full-service solution that improves productivity, lowers lead-times, and allows us to deliver over 25 million parts annually.
• Valence services every global aerospace market, and all key aerospace and defense programs. With over 3,500 unique approvals, and 700,000 sq. ft. of processing space across 8 facilities, no other supplier can match out breadth and ability to seamlessly service the industry.
• Valence provides full-service capabilities with a track record of superior service. Even with the most comprehensive set of aerospace approvals and finishing capabilities, it constantly adds new technologies to deliver on key growth programs.

Ben Gray, a Founding Partner of BGH, said it was an exciting time to invest in education and partner with a provider of the calibre of Navitas.

“The market dynamics continue to support Navitas’ growth aspirations, with global demand for education and training remaining strong,” Mr Gray said.

“This is a very significant acquisition for BGH and we look forward to supporting Navitas over the long term.”

Navitas is BGH’s first major acquisition since it was founded in 2017. The acquisition was financed by $1.2 billion of equity from BGH and its consortium partners, and a unitranche debt facility provided by HPS, KKR and Nomura.

BGH’s equity contribution was funded by BGH Capital Fund I which had a final close of approximately A$2.6 billion in May 2018, representing the largest private equity fund focused on Australia and New Zealand.

Navitas entered into a Scheme Implementation Deed with the consortium (BGH BidCo) on 21 March 2019 under which BGH BidCo proposed to acquire 100% of the share capital of Navitas by way of Scheme of Arrangement for a cash consideration of $5.825 per share.

Navitas shareholders voted in favour of the Scheme on 19 June 2019 which was approved by the WA Supreme Court on 21 June 2019. Implementation takes effect today.

Rod Jones, former Navitas CEO of 23 years, said: “I am delighted to be returning to the company I co-founded, as its Non-Executive Chair, and look forward to working with BGH to implement our shared vision which is centred on the best student experiences and outcomes, and strong and trusted relationships with our university partners.”

Healthscope Ltd (HSO.AX) said it had picked Brookfield Capital Partners’ sweetened offer that values the hospital operator at up to A$4.5 billion ($3.24 billion) over BGH’s A$4.1 billion bid.

Navitas Ltd (NVT.AX) also snubbed BGH, saying its A$1.97 billion bid undervalued the adult education provider, but kept the door ajar for a future deal or a rival bidder.

....

Some industry players said BGH could be making a prudent choice by not sweetening its offer.

“The last thing they want to do is increase the price to the level where their clients and investors can’t make a return on their investment capital,” said Simon Mawhinney, chief financial officer at Allan Gray Australia that owns Navitas shares.

The investment, which values BMS at £500m, is subject to regulatory approvals and is expected to close in the third quarter.

The BMS management team, led by chief executive officer Nick Cook, will all remain in their current roles following completion, and management and staff of BMS will remain significant shareholders in the company.

Following the transaction’s completion, Pioneer Underwriters will be owned directly by the current shareholders of Minova Insurance, the holding company that had previously owned BMS.

Nick Cook commented: “The long-term investment by BCI and PCP secures our future as an independent broker and maintains significant employee ownership. We have grown consistently over the past 5 years generating revenues in excess of £100m for the first time in 2018. We look forward to partnering with BCI and PCP as we continue to invest in our business and attract market leading talent to the benefit of our clients. My thanks go to all of our colleagues who have been at the root of our success.”

Dane Douetil, CEO of Minova added:“This investment is excellent news for BMS’s dedicated staff, who will remain important shareholders, and particularly for BMS clients who will continue to benefit from the very best independent advice in the market. It is also a ringing endorsement of the London market and, following considerable consolidation in the broking sector, ensures that an independent voice will continue to be heard.”

Gordon J. Fyfe, CEO/CIO of BCI said:“As an investor of patient capital, we seek companies with a sustainable competitive advantage that offer value-add services and are led by talented management teams. BCI’s long-term investment in BMS allows them to grow the business and generate the returns that our pension plan and accident fund clients require. Our investment also provides regional and sector diversity to our clients’ private equity portfolio.”

Jatender Aujla, a Partner of Preservation Capital commented: “We have been impressed by the growth BMS has experienced since Nick and his management team took over the business. Today, BMS is one of the largest independent specialty lines focused insurance brokers in the London market. We look forward to working with the team as long term partners and helping them seize the significant opportunities available in the market.”

The value of the 10% investment the California Public Employees’ Retirement System (CalPERS) made in London’s Gatwick Airport nine years ago has skyrocketed, turning an initial $155 million investment into a stake worth more than $1.24 billion.

The disclosure came during the pension system’s semiannual retreat meeting in Santa Rosa, California, last week, during a panel highlighting the importance of infrastructure investments to the $356.6 billion retirement plan.

Small changes at the airport like giant luggage trays designed to help travelers get through airport security faster have meant the airport can accommodate more travelers, increasing landings, departures, and profits, said Adebayo “Bayo” Ogunlesi, chairman and managing partner, Global Infrastructure Partners (GIP). The firm runs the investment consortium that manages Gatwick.

Speaking before a panel, chaired by Paul Mouchakkaa, CalPERS’s managing investment director for real assets, Ogunlesi said while airports can be strong investments, it won’t be easy to find another investment like Gatwick.

For one thing, Ogunlesi said US airports are run by government authorities and are not privatized. He said that restricts the pool of available airports to those overseas that don’t trade hands frequently.

“Airports for sale are very scarce,” Ogunlesi said.

The lack of similar investment opportunities like Gatwick has put CalPERS in a conundrum.

Infrastructure has been CalPERS’s top-producing asset class, but there has been intense competition from other global institutional investors for the best deals. That has meant that infrastructure makes up only around $5 billion of the largest US pension plan’s assets.

Over the last 10 years, the plan’s infrastructure investments returned more than 14% on an annualized basis.

A CalPERS infrastructure report last year cited the “fierce competition for new investments, especially Core” infrastructure, such as the Gatwick investment.

In December 2018, Vinci SA, a French company, agreed to acquire a 50.01% stake in Gatwick for £2.9 billion ($3.7 billion).

Sellers disposing of part of their stake in the airport included the Abu Dhabi Investment Authority, the National Pension Service of Korea, and Australian’s Future Fund Board of Guardians.

Ogunlesi told CIO that CalPERS decided not to sell its interest.

CalPERS officials did not discuss why they decided to hold onto their investment while other institutional investors have decided to partially cash out.

“CalPERS is a long-term investor, and it makes sense for them to continue to own it because this airport will continue to do well,” Ogunlesi said.

He said Gatwick has been in an unusual position to grow because larger Heathrow Airport is already at flight capacity.

“London is the largest airport market for origin and destination flights from around the world,” he said.

Ogunlesi said when CalPERS and the other investors originally bought Gatwick, the airport saw 32 million passengers per year.

“Now it’s 46 million passengers a year,” he said.

In addition to the rising value of its investment, CalPERS also earns a revenue stream from the airport.

The airport in its annual report said it earned £411.2 ($514.2 million) in the 12-month fiscal year that ended on March 31, 2019.

That would give CalPERS a $51.4 million return in investment income in the 12-month period, not counting any fees paid to GIP.

Ogunlesi said Gatwick plans to spend £1.11 billion ($1.38 billion) in the next five years to expand its two terminals and convert an existing standby runway to handle more flights.

Gatwick currently has only one operating runway.

Canadian pension fund Ontario Municipal Employees’ Retirement System (OMERS) is scouting for acquisition opportunities in India, in an affirmation of the country’s position as a green energy hot-spot.

With net assets of more than $100 billion under management, OMERS has been attracted by the presence of other Canadian investors in India such as Canada Pension Plan Investment Board (CPPIB), Caisse de dépôt et placement du Québec (CDPQ) and Brookfield Asset Management.

This comes at a time when India’s emerging green economy is expected to require investments of around $80 billion till 2022, growing more than three-fold to $250 billion during 2023-30.

“The next big play is expected from OMERS which is actively scouting for acquisitions in India’s clean energy sector. The investment thesis about India being an attractive investment destination continues for them," said a person aware of the development requesting anonymity.

India has become one of the top renewable producers globally with ambitious capacity expansion plans.

The country has an installed renewable energy capacity of about 80 gigawatts (GW) and is running the world’s largest renewable energy programme with plans to achieve 175GW by 2022 and 500GW by 2030, as part of its climate commitments.

OMERS portfolio includes large-scale infrastructure assets in sectors such as energy, transportation, and government-regulated services. The infrastructure projects that OMERS has invested in include the London City airport, nuclear power station Bruce Power—Canada’s private nuclear generator—in Ontario, and the port of Melbourne in Australia.

“We are interested in making investments in the Indian clean energy space — but beyond that, we don’t have more to say at this time," an OMERS spokesperson said in an emailed response.

Earlier this year, OMERS announced an investment of $121 million for a 22.4% stake in IndInfravit Trust, an infrastructure investment trust (InvIT), marking its first infrastructure deal in India.

IndInfravit holds a portfolio of five operational toll road concessions that were initially built and operated by L&T Infrastructure Development Projects Ltd (L&T IDPL), a unit of construction major Larsen and Toubro Ltd. L&T IDPL is focused on developing infrastructure projects with a focus on roads and electricity transmission.

The other large overseas investors include Singapore’s GIC Holdings Pte Ltd, Abu Dhabi Investment Authority (ADIA), the UK’s CDC Group, French energy firm Engie SA, and Japan’s JERA Co. Masdar-owned by Abu Dhabi government’s sovereign wealth fund Mubadala Investment Co. is also scouting for opportunities.

However, some concerns have emerged about India’s green energy space.

“Investors are perturbed about what’s happening in Andhra Pradesh," said a Mumbai-based deal maker seeking anonymity. The person was referring to Y.S. Jagan Mohan Reddy-led Andhra Pradesh government’s controversial plan to reopen power purchase agreements (PPAs) inked under the previous N. Chandrababu Naidu administration.

In an attempt to diffuse the brewing legal crisis in Andhra Pradesh that may derail India’s clean energy run, Union power minister Raj Kumar Singh had written to the state government citing a danger of erosion of investor confidence. The state government has however decided to proceed with its plans of the PPA review.

The communication reviewed by Mint stated, “It will be wrong and against the law to cancel all the PPAs. The appropriate course will be that the action for the reopening and cancelling of contracts is only taken in those cases where a prima facie case of corruption is made out based on objective evidence."

The National Democratic Alliance (NDA) government at the Centre is pulling out all stops to impress upon the state government to not cancel the previous Telugu Desam Party’ (TDP)-led government’s decision to ink PPAs for the projects in the so-called “in-pipeline," as it would have a wide ranging impact on foreign investments. Andhra Pradesh has around 7,700 mega watt (MW) of solar and wind projects.

“We are also with you in your campaign against corruption and would like to see that corrupt meet their just deserts. However, we have to move in a manner which is fair and transparent and according to the law. If we do not so, the investment process and development will come to a halt," the minister said in his letter to Reddy. “The Power Purchase Agreements are contracts binding on all signatories. If the contracts are not honoured, the investment will stop coming," he said.

Singh, in his letter, also said that the tariff for solar and wind energy projects in different states will be different depending upon solar radiation and wind speed.

The day before he resigned as Premier Doug Ford’s chief of staff amid a cronyism scandal, Dean French orchestrated the dismissal of the chair of a $60-billion public pension's board and appointed three new members, the Star has learned.

On June 20, David Leith, the chair of the Investment Management Corporation of Ontario, was advised in writing that his services would no longer be required even though the respected Bay St. veteran had been expected to be reappointed to the $150,000-a-year post when his term expired June 30.

In what ended up being his penultimate day as Ford’s chief of staff, French decreed that Neil Selfe, Brian Gibson, and Geoffrey Belsher would be joining the board that manages assets on behalf of the Ontario Pension Board and the Workplace Safety and Insurance Board.

Reached by the Star on Friday, French hung up the phone when a reporter identified himself. He did not respond to an email with detailed questions about the moves.

Leith, a former top CIBC executive who has a masters from Cambridge University, declined to comment on Thursday.

The IMCO board now has nine members, but no chair.

Members are paid $50,000 annual retainers plus expenses, as well as an additional $1,500 per meeting attended, and $10,000 if they chair one of the board’s three committees. In 2018, some board members participated in 14 meetings, meaning they earned $71,000 from IMCO.

Sources close to Ford said French had concerns about IMCO president and CEO Bert Clark, and wanted to expand and shake-up the board.

Clark did not returns messages from the Star. He is the former president of Infrastructure Ontario and the son of Ed Clark, the one-time TD Bank chief executive who later served as Liberal premier Kathleen Wynne’s privatization guru.

Progressive Conservative insiders, speaking confidentially in order to discuss internal deliberations, said French felt IMCO was not performing as well as it should be and wanted the board to replace Clark, who made $1.78 million last year.

Leith and others who were on the board at the time resisted.

“It was personal. Dean had some issue with Bert Clark and none of us could ever figure out what it was,” a senior Tory insider said Wednesday.

Another government official insisted there is no intention of trying to oust Clark despite the board changes last month.

“That may have been Dean’s plan, but, of course, Dean is no longer here,” said the PC source.

Ford’s press secretary defended the revamp of the IMCO board. “The former board of IMCO was not delivering on its expressed mandate to pool assets,” Ivana Yelich said Friday.

“As a result, the government appointed new directors to get a better understanding of the issues at hand and explore ways to improve the fund’s performance. The time to make changes is at the end of an appointee’s term and prior to the (annual general meeting),” she said.

The new IMCO board members were not available for comment. Selfe is the chief executive officer of INFOR Financial Group, Gibson is the chief executive officer of TAVANI Relationship Investors, and Belsher is a lawyer and retired CIBC executive.

Yelich noted Ford is examining the overall appointments process in the wake of French’s sudden departure on the night of June 21.

“The premier has directed his staff to review all pending appointments. Additionally, if the premier finds that people have been appointed for the wrong reason and are not performing to the highest standards, these individuals will be removed from their positions,” she said.

“As an added level of scrutiny, the premier has directed that all public appointments must go to the Treasury Board for approval prior to going to cabinet and the multi-party standing committee.”

The changes at IMCO were announced at 4:15 p.m. on June 20, the same day Ford unveiled a massive cabinet shuffle that dominated the news cycle at Queen’s Park.

The announcement came 90 minutes after the government disclosed that Taylor Shields, a niece of French’s wife, and Tyler Albrecht, a 26-year-old lacrosse buddy of French’s son, were being awarded six-figure patronage jobs to be Ontario’s agents-general in London, England and New York City.

Early on June 21, Ford revoked the Shields and Albrecht appointments and, under pressure from cabinet ministers furious about the patronage scandal, accepted his chief of staff’s resignation that evening.

Over the past month, the “French connections” affair has led to six appointees stepping aside and sources in the premier’s office admit they do not know if there are other potential landmines out there.

“Dean did a lot of this on his own. The premier had no idea this was going on and when he found out he stepped in,” an official said.

But NDP MPP Taras Natyshak (Essex) said Thursday that it strains credulity to claim Ford was out of the loop and that French acted unilaterally.

“We see his signature on every certificate,” said Natyshak, referring to the cabinet orders in council that the premier often signs.

“He knows exactly who those people are. Either he’s ignorant to the process or he’s complicit” the New Democrat said.

“I mean, Doug’s driving the bus here. This is his show.”

I'm not going to accuse Doug Ford's government of meddling with IMCO, but if it does, it will be the downfall of that organization. Period.

Ford’s press secretary defended the revamp of the IMCO board. “The former board of IMCO was not delivering on its expressed mandate to pool assets,” Ivana Yelich said Friday. 

I believe that with most of these plans the government appoints a number of board members - at OTPP that is 5 of the 11 board members. The Ontario Teachers' Federation also appoints 5 board members and the 10 board members then appoint the chairman. Presumably they can fire those board members at will but it is very unusual for the board members to be fired. More likely they may not be reappointed for additional terms, but even that rarely happens as board members typically serve 2-3 terms as it takes time to get up to speed on the organization and having board members for 5+ years can be very helpful. But for a board member not to be renewed at the last minute is pretty shocking. IMCO had to cancel its July board meeting due to this upheaval.

IMCO has a board structure that has closer ties to the Ontario government as the Ontario government takes more of the risk than in a Jointly Sponsored Pension Plan like OTPP.

From my experience in Canada, outside of la Caisse, there has been very little political influence into the provincial pension plans. The board members appointed by the province did not appear to be patronage type of appointments as the board members were often very well qualified as past senior executives of financial institutions, accounting firms, etc. They did not appear to be outwardly political and appeared to be focusing solely on working int he interests of plan stakeholders, like active members, pensioners, and taxpayers.

That may be changing in Ontario with these moves by the Ford government - or it may just be a one-time event that was led by Dean French who has now left the Ford administration.

The scope of the “risk manager” role has increased considerably over the last 20 years. The global financial crisis shone a spot light on the importance of sound risk management practices and as a result, risk managers have become an even more critical business partner. Today, traditional risk capabilities such as credit and market risk are still necessary, but with increasing regulatory demands, changes in technology and the ever changing needs of clients, risk managers are expected to bring to bear experience within compliance, AML, regulatory (FBO, CCAR, etc.) and operational risk, data management and analysis, stress testing, business experience and much more. With the required skills and capabilities of risk managers changing at an ever quickening pace, how are organizations like RBC training, developing and recruiting the top risk talent of tomorrow?

Managing in a Changing Environment

In a changing global economy, what constitutes risk has changed as well. Credit risk, which has expanded over the years to include multiple facets, is an important part of risk management, but the risk management discipline is so much more today.

Post the 2008 global financial crisis, the risk function is dealing with many risks beyond the credit risk environment. Financial institutions now have a significant focus on market risk, which includes securities, fixed income, equities and foreign exchange. The 2008 global financial crisis also increased the focus on liquidity risk. Each financial crisis seems to be a little different at the time, and with the benefit of hindsight, there is an opportunity to learn and then apply those learnings to help avoid history repeating itself.

Another area which continues to increase in importance is operational risk, which covers a number of areas including cyber risk, sales practices, operational services, etc. Reputational risk is also significant to organizations as reputation is a huge strength for financial institutions and needs to be protected Strategic risk, which examines, for example how an organization will grow in a low growth environment, and how it will adjust to technological changes that could disrupt its business model, must also be explicitly considered.

Risk management is therefore a dynamic and ever changing responsibility.

Factors that are now taken into consideration by risk professionals include:

• Macroeconomic variables (e.g., oil prices)
• Market impacts of political regimes
• Stress testing that measures vulnerabilities to severe events which could adversely impact the organization
• Addressing volume and pace of regulatory change and evolving requirements (e.g., AML, IFRS 9, BCBS 239, Basel IV)
• Operational risks such as systems failures, human error, fraud and cyber security
• Risks associated with third party service providers and outsourcing arrangements
• Technology driven innovation and changes to the traditional mode such as digital, mobile and social interactions and disruption to the traditional financial services model

New Perspective, New Tools

Recognizing the need to increase their employees’ awareness and understanding of risk language internally, RBC developed a Risk Pyramid to help identify and categorize its principal risks in new and existing businesses, products, acquisitions and alliances. The principal risks facing RBC have historically been organized vertically from the top of the Pyramid to its base according to the relative degree of control and influence RBC has over each risk type. A review in 2015 augmented the placement of principal risks within the Pyramid to include the dimension of risk drivers. Four risk drivers were identified that reflected the key factors that influence whether or not the principal risks materialize.

These risk drivers are:

Macroeconomic, Strategic, Execution and Transaction/Positional:

Macroeconomic:

Adverse changes in the macroeconomic environment in which we operate can lead to a partial or total collapse of the real economy or the financial system in any of the regions in which we have a presence. Examples include a rapid deterioration in the Canadian housing market, severe North American recession, downturn in China, etc.
Strategic:

The strategic choices made in terms of business mix will determine how the risk profile changes. Examples include strategic expansion of risk appetite to accommodate increased exposure to leveraged financing or commercial real estate, acquisitions, responding to the threats posed by non-traditional competitors, responding to proposed changes in the regulatory framework, etc.

Execution:

The complexity and scope of a financial institutions operations across the globe exposes the institution to operational and regulatory compliance risks, including fraud, money laundering, cyber threats, conduct/fiduciary risk, etc.

Transactional/Positional:

This driver of risk presents a more traditional risk perspective. This involves the risk of credit or market losses arising from the transactions and balance sheet positions undertaken every day.

Another change to RBC’s Risk Pyramid was the relocation of regulatory compliance risk from the base of the pyramid to the same level as operational risk to align more clearly with the concept of these risk drivers.

Global risks and trends that could impact an institution also need to be identified and considered as part of the strategic risk assessment. The Global Risk Institute’s Global Risks and Trends Framework (GRAFT) is structured to help organizations identify and assess potential impacts.

What Experiences Do Risk Managers Need Today?

RBC’s focus today is to develop risk managers so that they can acquire a breadth of experience across multiple risk disciplines. Traditional risk capabilities such as credit and market risk are still necessary; however, these skills are no longer sufficient on their own. The desired capabilities are also shifting with the changing regulatory landscape. Increasingly, risk managers are expected to bring experience within compliance, anti-money laundering, regulatory (FBO, CCAR, etc.) and operational risk, in addition to business experience. With changes in technology, also comes increased focus on developing risk managers who bring high proficiency in data management and analysis, mathematical modelling, programming and stress testing.

There is an increased understanding that developing and deepening leadership capabilities are vital because ultimately, our leaders shape the future. The role of a leader includes identifying first and foremost those who can act as stewards of the enterprise to service clients, drive and reinvent strategy as appropriate, work effectively within and across boundaries and build the next generation of talent.

Leaders need to set the tone and act with integrity in everything they do. They need to be role models for their teams – take action where necessary, deal with uncertainties, be accountable, engage their employees and create an environment where people find meaning in their work and know how important their contribution is to a firm’s success. This drives growth while changing the way we work, breaking familiar patterns to work in a more customer centric manner, simplifying and being more agile.

It has also become a more common expectation that risk managers have business experience such as marketing, sales, account management, which is often easier to do earlier in career. When developing risk managers, there needs to be deliberate and focused planning through professional development programs, cross platforms experiences and rotational programs, especially for the top talent. Supporting and enabling client facing experiences and increasing breadth of experience across different risk disciplines helps to foster connectivity and understanding between the risk function and the business it supports. This leads to stronger and more mature risk managers. Rather than being viewed as an impediment, risk managers need to be seen as strategic partners and colleagues, able to foster mutual appreciation with the business while also in a position to interact with and challenge other firm functions.

The next generation of risk managers will not only need to provide a higher degree of client focus, agility, strategic orientation, global perspective, innovation and business acumen to remain competitive; they will also need to have a growth mindset, understand how to engage employees and actively sponsor and develop talent. Employees are an organization’s key differentiator and their development and engagement level is something that leaders can directly influence.

Continued Focus on Diversity

If the rise of new innovations has shown us one thing, it’s that the way we did things in the past may not lead us to success in the future. In the same way, we now know that diversity and inclusion are key ingredients to driving successful risk management approaches and ultimately, sustainable business growth.

To best support an increasingly diverse and global client base, organizations need to ensure that their employees reflect that diversity. Diversity is imperative for innovation and growth. By understanding and leveraging different perspectives, experiences and cultures, an organization is able to tap into perspectives and approaches that wouldn’t otherwise be considered.

This diversity in perspective is also needed to broaden our thinking about risks.

The Increasing Role of Technology

Technological advances are reshaping financial services, presenting both challenges and opportunities. New ways are being found to transcend traditional industry barriers and deliver compelling and differentiated client value propositions. For example, big data, and exploration of predictive analytics capabilities, will help banks to glean insights from structured and unstructured data repositories.

While technical innovations will be a competitive advantage for some financial institutions, they also pose new and previously unexplored risks.

Ongoing development of risk technology and resiliency through cyber security initiatives and ongoing technological innovation will continue to help financial institutions better prepare for the changing landscape.

For risk managers, the shift to analytics focus will be significant over the coming decade. Big data, for example, enables risk functions to use structured and unstructured customer information to help them make better credit risk decisions, detect financial crime and predict losses.

Machine learning also improves the accuracy of risk models through the detection of non-linear patterns in large data sets and could have large scale implications for risk managers.

Identifying the Right Talent

Building future leaders begins with recruiting for key skills and behaviours. Organizations must look for risk candidates who, have an analytical mindset and who bring relevant business experience in areas such as business or functional areas such as capital markets or finance. A Masters or PHD in a quantitative discipline is an increasingly desirable designation. For external candidates in particular, it is especially important to look for people who display behaviours in alignment with the organization’s values

At RBC, we identify high potential talent from our internal employee population based not only on performance, but also on indicators that show potential for growth at an accelerated rate. High potential employees have aptitude to grow into a senior leader, i.e., they are broad thinkers who take decisive action, stand out amongst their peers and are aligned to RBC’s Leadership Model:

• Drive to Impact
• Adapt Quickly, Always Learn
• Unlock the Potential of Our People

Talent identification starts early in a career and differentiates those employees who are in consideration for senior leadership roles. Additionally, thorough the year, the senior management team discuss talent needs and opportunities within their teams. These discussions enable the leaders to discuss top talent and determine any gaps or development opportunities to ensure the employee is/will be successful.

Planning for the Right Roles

The market for risk talent globally is tight, particularly in a period of heightened regulatory scrutiny, hence financial institutions are finding they are increasingly challenged by a competitive environment when recruiting risk professionals. Common challenges include extensive time to fill given the specialized nature of the work, increased competition from more established firms, and the fact that candidates often have a choice of where they want to live and work. Risk professionals also have new options available to them as fin-techs and more traditional technology companies put increased focus on building their risk management functions.

There remains a need to balance hiring early career talent (with the intention of overseeing their development) with experienced hires who bring a critical skill that is required. To stay competitive and seek out and attract the best talent, financial institutions need to continue to source for experienced hires, both internally and externally. At the same time, they need to identify critical skill set gaps where early talent hires would add immediate value or shorter term succession potential for senior roles.

Competition for risk professionals is significant and places further pressure on banks to develop tomorrow’s risk leaders from within. This means succession and retention planning for senior leadership roles, and continued focus on the active development of all employees, with differentiated development of high potential talent.

Robust succession plans for leadership roles within the risk management function are necessary and these need to be reviewed regularly to maintain their strength. Annual activities that strengthen succession planning and development processes should include targets around developmental moves, proactively developing external talent with diverse and critical skills, creating a strong university campus recruitment presence, and accelerating development of high potential women and visible minorities.

High potential talent development is designed to provide foundational skills while also supporting a tailored approach to individual development needs. Knowing that a lot of this development will not happen in the classroom, RBC looks at three different ways of providing future risk managers the right development in their early career:

• Experience – Cross platform moves, stretch assignments, special projects, rotational assignments
• Exposure – Assessments, sponsorship, mentoring programs, coaching (internal and external)
• Education– Internal leadership development programs, external leadership development, major educational sponsorships and business and functional specific development programs

Conclusion

Risk management is something all employees are accountable for – all employees have a shared responsibility for doing what’s right, which contributes to the company’s strength and stability and helps its client thrive and communities prosper. How risk is assessed and measured to capitalize on opportunities and how it is analyzed and mitigated to protect the business, competitive position and reputation is integral to an organization’s success.

Risk management has evolved significantly over the last two decades and, with it, so has the role of the risk manager. One of the responsibilities of leaders is to help guide employees toward clear and sometimes diverse paths that encourage them to pursue advancement opportunities and leadership roles. To develop risk managers for tomorrow, it is incredibly important to have targeted development plans in place, to be transparent with future leaders about their required development and to provide them with opportunities to gain the breadth and depth of the required experience. By developing and empowering our leaders, we enable them to drive change, shape and strengthen culture, impact employee engagement and performance and ultimately position their organization for greater success.

Sources:

http://www.mckinsey.com/business-functions/risk/our-insights/people-and-talent-management-in-risk-and- control-functions

http://www.pwc.com/us/en/financial-services/publications/talent-in-control-functions.html

https://hbr.org/2008/03/talent-management-for-the-twenty-first-century

http://www.mckinsey.com/business-functions/risk/our-insights/the-future-of-bank-risk-management

"My answer to your question is both. I think that the CRO can only be organizationally effective if the person has the support of the CEO, hence the need for the direct reporting relationship. The CRO should also hold a regular in camera with the Board."

Stocks rose on Friday after strong earnings from big tech companies such as Alphabet and Intel while the U.S. economy grew at a better-than-expected clip in the second quarter.

The S&P 500 gained 0.6% while the Nasdaq Composite climbed 1%. Both indexes reached all-time highs around midday Friday. The Dow Jones Industrial Average traded 27 points higher.

The major indexes briefly pared gains after National Economic Council Director Larry Kudlow told CNBC’s “Squawk on the Street ” he would not expect a “grand deal” to come out of next week’s U.S.-China trade talks.

For the week, the S&P 500 and Nasdaq were headed for solid gains. The two indexes were up 1.6% and 2.2% week to date, respectively. The Dow is up 0.1% this week.

Alphabet reported better-than-expected earnings Thursday and announced a massive $25 billion share repurchase program. The results and buyback sent the stock up 10.4%.

Twitter shares gained more than 8% on the back of second-quarter results that topped estimates. The social media company also reported a 14% rise in monetizable daily active users.

Consumer stocks such as Starbucks and McDonald’s also contributed to the gains. Starbucks gained 7.1% after reporting same store-sales growth for the previous quarter that crushed estimates.

McDonald’s climbed 0.5% as promotions led better-than-expected U.S. same-store sales.
More than 40% of S&P 500 companies have reported quarterly earnings for the second quarter. Of those companies, 76.4% have posted a stronger-than-forecast profit, according to FactSet.

The U.S. economy expanded by 2.1% in the second quarter, the Commerce Department said Friday. The broadest measure of the U.S. economy was expected to come in at 1.8%, according to economists surveyed in CNBC/Moody’s Analytics Rapid Update.

Growth was driven by a 4.3% increase in consumer expenditures, which offset a 5.5% slump in business investment.

“The consumer and government spending drove all of the gain in GDP as trade, inventories and investment reversed the Q1 gains,” Peter Boockvar, chief investment officer at Bleakley Advisory Group, said in a note. “On the question that everyone tries to answer in light of the longest economic expansion on record, when will we see the next recession, I again believe it will be determined by the direction of the stock market.”

The data release comes as investors await a potential rate cut from the Federal Reserve next week. Market expectations for a 25 basis-point rate cut were at 78.6% on Friday morning, according to the CME Group’s FedWatch tool.

“The market owes its strength in large part to the Fed eases priced in. And the Fed has noted the slowdown in business resulting from the generally slower global economy,” said Steve Blitz, chief U.S. economist at TS Lombard. “The net of this is ... the Fed has no option other than to cut 25 on Wednesday and see whether the data unfold to create the need for a further cut in September. The push is to keep equities up and help the world be safe for dollar debt.”

A measure of value vs growth stocks across developed markets just slumped to its lowest since 1975. https://t.co/U7qhg4V5PX

— Lisa Abramowicz (@lisaabramowicz1) July 23, 2019

Greek 10-year yields fall to a record low of 1.9%. pic.twitter.com/53mCublJAl

— Lisa Abramowicz (@lisaabramowicz1) July 25, 2019

Since the 2008 Global Financial Crisis, the U.S. economy has been in a low-altitude expansion mode, with no apparent boom happening anywhere in the economy. Overall GDP growth has averaged 1.8% throughout the entire expansion phase, with consumer spending growing at 2.1% and private capital investment at a 3.6% annual rate.

Consumers have been reluctant to re-leverage their balance sheets, and wage gains have at most been anemic, averaging a mere 1% since 2013 after adjusting for inflation (Chart 4). Most importantly, inflation has been very low and under the Fed’s target for some 10 years, giving no excuses for tight monetary policy. In fact, last week, Fed Chair Jay Powell made clear that the central bank is ready to chop rates.

The only place that may have excessive growth is corporate leverage, which has escalated since 2014 (Chart 5). Rapid growth in debt always merits concern. Nevertheless, there is something important to be noted: The U.S. corporate sector has used debt to buy back shares in order to maximize profits, rather than to finance investment or expand its balance sheet.

Of course, no one should be complacent about the rapid change in the corporate capital structure and escalating leverage. This means that investors need to watch quality spreads closely, because any trouble in the economy will likely be signaled by a blow-up in the credit market. So far, everything has been quite calm.

The bottom line is that the U.S. is going through a mid-cycle slowdown rather than heading into outright recession. With the Fed expected to drop rates and inflation non-threatening, the cycle will likely be extended. Of course, any significant negative shock could still knock the U.S. economy into contraction, but I think that is a small-odds event.

“I believe that it would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio,” the billionaire founder of investment management firm Bridgewater Associates said in a 6,000-word essay posted on LinkedIn.

David Einhorn is shorting U.S. credit. https://t.co/Ec4XaGre7F

— Lisa Abramowicz (@lisaabramowicz1) July 25, 2019

Pension funds Canada Pension Plan Investment Board (CPPIB) and Caisse de dépôt et placement du Québec (CDPQ) are competing to acquire Highway Concessions One, a roads portfolio owned by infrastructure fund manager Global Infrastructure Partners (GIP), two people aware of the development said.

“The two Canadian funds are the only suitors left in the race. They are locked in a close battle to buy these roads," said the first of the two people cited above, both of whom spoke under condition of anonymity.

The two pension funds have bid at around ₹3,200 crore in enterprise valuation for the roads portfolio, he said, adding that the final value at which the roads get sold might be higher as the funds continue to be engaged in negotiations with GIP.

Mint first reported in December 2018 that GIP had started a formal process to find buyers for the Highway Concessions One (HC1) portfolio, which comprises roads totaling 472 route km. In April, Mint reported that the HC1 sale process had garnered interest from several buyers including Italian roads operator Atlantia as well as the Piramal Group, apart from the Canadian pension funds.

Emails sent to GIP and CPPIB remained unanswered. A spokesperson for CDPQ said the firm does not comment on rumours.

The HC1 portfolio, comprising seven road assets—five toll roads and two annuity roads—is spread across seven states and generates a consolidated revenue of ₹620 crore.

The construction of the roads was funded by IDFC Alternatives’ second infrastructure fund, which was acquired by GIP last year.

The HC1 platform’s road projects include Ulundurpet Expressways Pvt. Ltd in Tamil Nadu, Nirmal BOT Ltd in Telangana, Dewas Bhopal Corridor Pvt. Ltd in Madhya Pradesh, Bangalore Elevated Tollway Pvt. Ltd in Karnataka, Godhra Expressways Pvt. Ltd in Gujarat, Jodhpur Pali Expressway Pvt. Ltd in Rajasthan and Shillong Expressway Pvt. Ltd in Meghalaya.

The route length under management has grown at a compounded annual growth rate of 45% since the inception of the platform in 2014, according to the company’s website.

GIP Alternatives completed acquisition of the infrastructure business from IDFC Alternatives last July. The acquisition allowed the infrastructure fund manager, which has offices in the US, UK and Australia, to establish a foothold in India.

Prior to the acquisition, IDFC Alternatives had raised two infrastructure funds—India Infrastructure Fund and India Infrastructure Fund II—aggregating $1.8 billion. As part of its investment strategy for the second fund, it had focused on buyout transactions, clubbing the assets under various platforms to ensure aggregation, better control, and governance.

India’s roads sector has seen significant pickup in deal activity this year with many developers looking to monetize their toll road assets.

IndInfravit Trust, an infrastructure investment trust (InvIT) sponsored by the L&T Group, on 1 July said that it is acquiring nine operational road assets from Sadbhav Infrastructure Project Ltd for ₹6,610 crore.

IndInfravit currently holds a portfolio of five operational toll road concessions.

IndInfravit is acquiring the assets through a mix of cash payment and units of the InvIT. After the completion of the transaction, Sadbhav will likely hold up to 10% units in IndInfravit.

In June, Mint reported that Edelweiss Infrastructure Yield Plus fund, an alternative investment fund set up by the Edelweiss group, is acquiring two annuity road assets from Hyderabad-based Navayuga Group for approximately $150 million.

Earlier in March, Cube Highways and Infrastructure, the Indian roads and highways platform of global infrastructure fund I Squared Capital, agreed to acquire DA Toll Road Pvt. Ltd, which operates a toll road in the states of Haryana and Uttar Pradesh, from Reliance Infrastructure Ltd.

[..] 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."

A post claims that Prime Minister Justin Trudeau “took” two billion dollars from Canada’s retirement fund in order to give it to housing projects in India. This is false. The independent Canada Pension Plan Investment Board (CPPIB) has invested more than $8 billion in Indian ventures since 2009, but the Canadian prime minister plays no role in deciding how Canada Pension Plan funds are invested.

A three year-old YouTube video resurfaced on July 25, when the Facebook page “Justin Trudeau Not” posted it alongside the caption: “Trudeau directs 2 billion from Canada Pension Fund to Mumbai.”

The video was also shared thousands of times via this 2016 article from the Cultural Action Party of Canada. According to data from CrowdTangle, that article was reposted in multiple Canadian Facebook groups in July 2019.

In the video, a man donning a t-shirt supporting a Conservative member of parliament claims that Trudeau took $2 billion from Canadian citizens’ retirement savings in order to fund housing projects in the Indian city of Mumbai.

Based on the comments, several Facebook users understood that the Canadian prime minister stole the money from the pension fund in order to give it to India as a form of grant, as comments such as “he should go to jail until he pays it all back,” suggest.

The claims made in the video are based on a 2016 Reuters article published on the CBC website citing a statement from the chief minister of Mumbai’s state of Maharashtra, Devendra Fadnavis. Fadnavis told reporters, “A week back, the Canadian ambassador … informed me that the Canadian pension fund is ready to invest $2 billion in Mumbai for affordable housing.”

“Everything about that is totally not true,” Darryl Konenbelt, director of media relations for the CPPIB, told AFP. “That alleged $2 billion in housing is not true.”

AFP contacted the High Commission of Canada in India to verify if High Commissioner Nadir Patal has spoken with Fandavis, but it had not answered by the time of publication.

Canada Pension Plan Investment Board’s India ventures

The CPPIB is an independent institution in charge of investing funds from the Canada Pension Plan (CPP), Canada’s federal retirement scheme. The CPPIB manages the retirement savings of 20 million contributors, nearly all working individuals in Canada, outside Quebec, which has its own pension plan.

CPPIB began to invest in India in 2009. In April 2019, Alain Carrier, CPPIB head of international, said in an interview that the investment board had invested Can$8.2 billion in the subcontinent, representing about 2 percent of the fund’s global exposure. India is one of 52 countries in which the CPP funds are invested, far behind the United States, the main recipient with Can$131.2 billion. The fund also invests Can$60.9 billion in Canada.

Since the CPPIB manages public funds, most holdings and investments can be consulted online here. The Real Estate portfolio shows only two companies in India: Indospace Industrial and Phoenix Mills Limited. The former creates industrial and warehouse parks throughout India, while the latter builds “retail-led mixed-use” properties in Mumbai, Pune, Bangalore and Chennai, according to their respective websites.

CPPIB staff did not wish to provide AFP with any further statements on the subject of the board’s investments in India.

Government interference

The claim that Trudeau influenced CPPIB investment decisions is false. Although the CPP is the country’s public pension, the Canada Pension Plan Investment Board Act guarantees CPPIB’s autonomy from the government.

CPPIB’s twelve board directors are approved by the minister of finance. However, “politicians have absolutely no influence on CPPIB’s investment decisions,” Keith Ambachtsheer, director emeritus of the International Centre for Pension Management told AFP in an email. “If any CPPIB board member is contacted by a politician on any investment matter, the Board member MUST report the encounter immediately,” he added.


The CPPIB’s web page also states that, “the assets of the fund are managed in the best interest of the Canadian contributors and beneficiaries who participate in the Canada Pension Plan. These assets are strictly segregated from government funds.”

The Governor in Council shall, on the recommendation of the Minister made after the Minister has consulted with the board of directors and the appropriate provincial Ministers of the participating provinces, designate one of the directors as Chairperson to hold office during good behaviour for such term as the Governor in Council deems appropriate.

IMCO has tremendous potential to become a world-class organization but political interference will destroy this potential and harm current and future members. They need to clean up the governance to make sure this never happens.

IMCO's CEO Bert Clark has a tough enough job running this place and trying to attract new clients to IMCO. He doesn't need them reading these articles and questioning the organization's governance. The same goes for attracting talent to IMCO, nobody will want to embark on the Doug Ford bus, if that's where IMCO is headed.

There's trouble at IMCO, a constitutional crisis of sorts, and the sooner they address it, the better off the organization will be over the long run.

The head of investments at the Canada Infrastructure Bank has resigned after just 10 months on the job amid criticism the Crown corporation has been slow in reviewing and approving projects.

Nicholas Hann, who was responsible for the bank’s investment strategy, departed from his role in mid-July. He was appointed last October by Pierre Lavallée, a former Canada Pension Plan Investment Board executive who was named the bank’s first chief executive in May, 2018.

The Liberal Party promised in the 2015 election campaign to spend billions on infrastructure and said a new bank would be a key element of that plan. The bank launched in late 2017 with $35-billion in funding from the federal government and the chair of the bank’s board said then that projects would likely start to be approved by late 2018.

The bank only made one announcement last year in support of an existing project. Three more announcements came this year, bringing the bank’s planned commitments for spending and loans to just more than $3-billion.

The bank’s mandate is to become a centre for expert advice on infrastructure projects and a vehicle for attracting large institutional investors, such as pension funds, to invest in Canadian projects that generate revenue and are in the public interest.

However, the two main opposition parties – the Conservatives and the New Democrats – say the organization is a poor use of tax dollars and they would wind it down if either were to form government after the October federal election.

That would appear to me to be a strong signal that there needs to be significant changes in the direction and the leadership of the bank and a significant widening of the bank’s mandate,” said Mr. Philpotts, senior vice-president at Ernst & Young Orenda Corporate Finance Inc.

John Casola, a managing director at the infrastructure bank, has replaced Mr. Hann as acting head of investments.

Infrastructure sector sources say there is growing frustration with the pace of the bank’s work to review and approve projects.

At an industry conference earlier this month at the Fairmont Château in Whistler, B.C., infrastructure bank officials – including Mr. Hann – were on hand to update private-sector executives on the bank’s activities. Sources say the executives expressed several complaints with the bank, including the limited number of projects that have been approved to date.

In an interview, Mr. Lavallée said his understanding of the Whistler conference is that it went well and the bank received positive feedback. He challenged the view that the bank’s progress has been slow, stating that project reviews are moving more quickly than he would have expected a year ago.

As for Mr. Hann’s departure, he said he understands why it is attracting attention.

“Nick’s departure was not a planned event for me, and Nick’s very well known in the industry, and he’s respected in the industry, and I expected that his departure would cause some questions to be asked and that’s why I’m here to answer them,” he said. “The bank is bigger than one person and I’ve got full confidence that we’ll be able to continue to deliver and build on the momentum that we’ve generated over the last 12 months.”

Mr. Lavallée said Mr. Hann told him he was leaving to pursue other opportunities and did not provide any other reason. “It was a short conversation,” he said. “Nick’s made a personal decision. We respect it and we’re moving on.”

Janice Fukakusa, the infrastructure bank’s board chair, provided a statement to The Globe supporting the performance of the bank and Mr. Lavallée.

“The Board has full confidence in the CEO and the team that has delivered results and remains focused on improving infrastructure for Canadians,” she said.

Mr. Hann joined the bank in October, 2018, after more than 17 years with Macquarie Group, where he was executive director, focused on the company’s North American infrastructure division. At Macquarie, he advised TransLink on the Canada Line rapid transit project that runs from Vancouver’s downtown core to the airport in Richmond.

The bank’s first project, announced in August, 2018, involved replacing a previous federal government pledge to support a new light-rail line in Montreal. That project is being led by Quebec’s pension fund, Caisse de dépôt et placement du Québec, providing a model for how the bank and a pension fund could work together to build infrastructure.

Since then, the bank has made three other announcements: up to $2-billion in financing toward commuter rail expansion in the Greater Toronto and Hamilton Area; $55-million toward “preprocurement” work on Via Rail’s proposed dedicated passenger rail line from Toronto to Quebec City; and, up to $20-million to help the Township of Mapleton find a private sector consortium to design, build, operate and maintain its water and waste water infrastructure.

Conservative infrastructure critic Matt Jeneroux said he regularly hears private sector complaints about the bank.

“It was supposed to be a new way to build infrastructure, but we’re still faced with the same delays,” he said. “And the issues of actually building infrastructure have gotten worse when we’re tying up this much money in the bank.”

The Toronto-based bank expects to have 74 employees on staff this year and to reach 85 full-time employees by 2022. It expects to incur $257-million in operating expenses over five years.

Ms. Fukakusa was appointed chair in July, 2017. In a December interview that year after the bank announced that it was operational, she told The Globe she was hopeful the bank would start approving projects by the end of 2018. However, she cautioned that the timing would be hard to predict. Mr. Lavallée has also said it is challenging to estimate when projects under review will reach a stage that the bank can support financially.

Ann-Clara Vaillancourt, a spokesperson for Infrastructure Minister François-Philippe Champagne, also defended the bank’s leadership.

“This is a first of its kind organization not only in Canada, but across the globe,” she said in an e-mail. “The current team has done great work establishing this unique organization since its infancy.”

The excess return was largely driven by the outperformance of our private assets, finishing the fiscal year with significant returns from both income generation and capital appreciation. BCI’s managed net assets increased to $153.4 billion from the previous year —reflecting investment gains of $9.0 billion, partially offset by $1.2 billion of client distributions.

As pension plans have long-term financial obligations, BCI focuses on generating long-term client wealth while protecting the value of the funds. Returns are important – for every $100 a pension plan member receives in retirement benefits, on average $75 is provided by BCI’s investment activity. Over the five-year period, the annualized return was 8.2 per cent against a benchmark of 7.1 per cent, adding $6.1 billion in value. Public equities, which represents 40.5 per cent of the overall portfolio contributed more than half of the fund’s overall return and excess return for the five-year period. For the 10-year period, the annualized return was 9.8 per cent against a benchmark of 8.6 per cent. BCI added $10.9 billion in value over this period.

“Our results reflect solid performance from all asset classes despite the uncertainty and volatility in the markets,” said Gordon J. Fyfe, CEO/CIO of BCI. “These contributions signal the success of our strategic focus since 2015 of adopting an active, in-house approach that emphasizes private markets. Adding $6.1 billion in value over the last five years is a proud accomplishment for the entire BCI team. Our investment decisions go a long way towards building the financial futures for our clients in the province of British Columbia.”

As at March 31, 2019:

Public Markets composed of fixed income and equity investments, represents $94.9 billion and totalled 61.8 per cent of assets under management. BCI’s fixed income program’s assets, including Other Strategies were $32.7 billion. The program invests in public and private market debt, as well as oversees our exposure to foreign currency. For fiscal 2019, we introduced a private credit fund and a change in mandate of our Corporate Bond Fund. Our public equities program represents $62.2 billion and 40.5 per cent of assets under management. In fiscal 2019 we internalized about $6.5 billion of net assets, shifting our reliance on external managers to internal management where we seek opportunities to invest directly in public companies as well as cost-effective index programs.

Real Estate represents $24.3 billion and 15.8 per cent of assets under management. QuadReal Property Group, a company owned by BCI and created in 2016, actively manages our clients’ real estate investment portfolios. The program’s domestic assets totalled $17.4 billion and global assets totalled $6.9 billion. Most of the growth was attributed to increased allocations to Europe and Asia Pacific, as well as continued growth within North America. For the year ended December 31, 2018, QuadReal committed $3.1 billion to the global program increasing global assets to 28 per cent of the overall portfolio, compared to 24 per cent in the year previous.

Private Equity represents $13.0 billion and 8.5 per cent of assets under management. With a sector-focused strategy, the program invested a total of $1.8 billion to nine principal investments, increasing the ratio of principal investments to total AUM to 32 per cent. Acquisitions included Verifone Systems, a global provider of payment and commerce solutions, and Springs Window Fashions, a market leader in window coverings specializing in made-to-order products. We committed $3.0 billion to 15 funds, including six commitments to new strategic relationships.

Infrastructure represents $12.8 billion and 8.4 per cent of assets under management. Our program is diversified by geographic region and sector; and consists of a global portfolio of regulated utilities in the water, electricity and wastewater sectors, energy transmission, as well as roads, port terminals, and light rail transit. We seek meaningful equity positions allowing us to adopt an active governance approach. For the year ending December 31, 2018, we committed $1.2 billion in infrastructure assets. Notable investments were acquiring an equity interest in GCT Global Container Terminals Inc., a North American container terminal operator; and increasing our equity position in Puget Sound Energy, a Washington State-based utility company.

Mortgage represents $5.4 billion and 3.5 per cent of assets under management. BCI is a significant lender to the commercial real estate industry, focusing on direct mortgage investments with strong-yielding and attractive risk-return profiles. We have a well-established Canadian mortgage program and, as a global investor, we have expanded the program into the U.S. to provide clients with geographical diversification. Our commitments to both domestic and U.S. commercial mortgages totaled $3.7 billion for the fiscal year.

Renewable Resource represents $3.0 billion and 2.0 per cent of assets under management. We invest in long-life renewable resource assets that are essential to a growing population and increase in economic mobility. Our strategy involves investing in majority or co-controlling positions, or as a strong minority partner. We successfully closed on our first direct U.S. timber transaction, increasing the program’s allocation to both timber and direct investments.

Our costs

BCI’s total costs were 58.4 cents per $100 of net assets under management; compared to 65.4 cents in fiscal 2018 — consisting of internal, external direct, and external indirect costs, all of which are netted against investment returns. By increasing the percentage of assets managed by BCI’s investment professionals, we have transitioned from a reliance on third parties to a more cost-effective model of managing our clients’ illiquid assets. Internal costs are operating costs directly paid by BCI and include salaries, rent, and technology and consulting fees, representing 24.1 per cent of costs for the fiscal year (or 14.0 cents per $100 of net assets under management). External direct costs are investment management fees paid to third parties to manage assets and include fees to asset managers, auditors, custodian, etc., where BCI has discretion over the buy and sell decision of the asset, representing an estimated 27.2 per cent for the fiscal year (or 15.9 cents per $100 of net assets under management). External indirect costs are investment management fees incurred on our behalf by BCI pooled investment portfolios to general partners, who have discretion over the buy and sell decision of the asset. These costs are disclosed for transparency based on underlying reports provided by these third parties and are 48.7 per cent of costs for the fiscal year (or 28.5 cents per $100 of net assets under management).

Fiscal 2019 Highlights

• Increased internally managed assets to 79.3 per cent from 73.3 per cent in Fiscal 2018 by our continued focus on direct investing, the introduction of the Principal Credit Fund, as well as internalizing about $6.5 billion of net assets previously managed by external public equity managers.
• Committed $13.1 billion to illiquid assets — infrastructure, mortgage, private equity, real estate, and renewable resource. Notable direct investments included: Verifone Systems, GCT Global Container Terminals Inc., and increasing our equity position in Puget Sound Energy.
• Added 74 employees to BCI, strengthening our expertise in the areas of portfolio management, asset management, risk management, information technology, and corporate and investor relations.
• Completed final phase of the transfer of property and asset management of real estate investments from BCI’s former external property managers to QuadReal Property Group.
• Publicly released BCI’s Climate Action Plan and Approach to the Task Force on Financial Disclosures Recommendations.

About BCI

With $153.4 billion of managed assets, British Columbia Investment Management Corporation (BCI) is a leading provider of investment management services to British Columbia’s public sector. We generate the investment returns that help our institutional clients build financially secure futures. With our global outlook, we seek investment opportunities that convert savings into productive capital that will meet our clients’ risk/return requirements over time. We offer investment options across a range of asset classes: fixed income; mortgage; public and private equity; real estate; infrastructure; and renewable resource.

This past year, the board approved and established a benchmark governance policy to develop a transparent, objective, and structured process for setting investment and compensation benchmarks and excess return objectives. We recognize that benchmarks and excess returns are important instruments for investment performance measurement, incentive compensation, and risk management.

When I joined BCI five years ago, we set out to better meet our clients’ investment return objectives by shifting our investment focus to private markets and global equities, and securing greater, direct control over investment activities. Today, our in-house, active asset management model is firmly established to deliver on this commitment. However, we continuously benchmark ourselves against the best and constantly seek to improve. BCI remains focused on continuing to internalize the management of more assets within both private markets and public markets, expanding and diversifying our investment strategies, and strengthening our talent pool and technology.

In fiscal 2015, approximately 57.0 per cent of our clients’ assets were internally managed and, today, that percentage has increased to 79.3 per cent. And with no immediate need for liquidity, BCI can take advantage of less liquid opportunities that others cannot — embracing more value-added investment strategies that go toward managing the probability of meeting our clients’ long-term return expectations.

While the markets have been more volatile and the near-term outlook uncertain, the fundamental drivers of returns strongly suggest we are operating in a low return environment for the forseeable future. A large part of BCI’s success is now attributable to our ability to deploy our clients' capital into the private markets. This year we committed $13.1 billion in the illiquid markets, expanding our direct investments and increasing our global exposure.

I thank our team for executing on BCI’s model, both in terms of investment strategy and resulting performance.

Stocks fell on Friday as President Donald Trump stoked U.S.-China trade fears with the announcement of more tariffs while investors digested U.S. employment data.

The Dow Jones Industrial Average closed 98.41 points lower at 26,485.01 after plunging 334.20 points earlier in the day. The S&P 500 lost 0.7% to end the day at 2,932.05. The Nasdaq Composite slid 1.3% to close at 8,004.07. The major indexes dipped below their 50-day moving averages, key technical levels watched by investors.

Equities took a major blow this week. The S&P 500 and Nasdaq dropped 3.1% and 3.9% this week, respectively, their biggest weekly drops of 2019. The Dow had its second-worst week of the year, sliding 2.6%.

Caterpillar and Deere, two stocks associated with trade because of their overseas revenue exposure, both fell more than 1.5%. The VanEck Vectors Semiconductor ETF (SMH) dropped 1.4%, led by a 4.2% decline in Skyworks Solutions.

In a series of tweets on Thursday, President Donald Trumpsaid the 10% charge would be imposed on $300 billion worth of Chinese goods. The levy will take effect starting September 1. Trump said later on Thursday he was open to shelving that tariff if China stepped up its U.S. agricultural purchases.

“The markets were already up to their plateful digesting the impact on earnings and the economy before yesterday’s announcement,” said Tom Martin, senior portfolio manager at Globalt. “But China and the U.S. were working it out and as long as another shoe didn’t drop and it didn’t escalate, things were going to be OK.”

“Then you get this announcement,” Martin said. “There is some real uncertainty introduced with it.”

The move breaks a truce in the long-running trade war between the world’s two largest economies, with investors fearful it could further disrupt global supply chains.

China’s foreign ministry pushed back against Trump’s latest tariff threat on Friday morning, reportedly saying the world’s largest economy should give up its illusions, shoulder some responsibility and come back to the right track on resolving the trade war.

China’s spokesperson at the foreign ministry, Hua Chunying, said at a daily press briefing that Beijing would have to take countermeasures if the U.S. was committed to putting more tariffs on Chinese goods, Reuters reported.

Trump’s tariff threat came as a surprise to financial markets in the previous session, in large part because negotiators for the two sides had just met earlier this week in China.

John Augustine, chief investment officer at Huntington Private Bank, highlighted the consumer discretionary and tech sectors have fallen sharply this week. “The market is anticipating this could affect U.S. consumer spending, which we have seen strengthening recently,” he said.

Jobs growth in line with estimates, wages rise more than expected

The U.S. economy added 164,000 jobs in July, just below a Dow Jones estimate of 165,000. The job gains pushed the size of the U.S. labor force to a record high.

Wages topped analyst expectations. They rose 3.2% on a year-over-year basis, surpassing a Dow Jones forecast by 0.1 percentage points.

The strong wage number could be seen by traders as a sign of rising inflation, which could keep the Federal Reserve from cutting rates multiple times later this year. The Fed cut interest rates by 25 basis points on Wednesday.

“The in-line July jobs report doesn’t really change the macro outlook much. But equities have other problems,” said Alec Young, managing director of global market research at FTSE Russell. “They’re being squeezed by a double whammy. On the one hand, Wednesday’s Fed outlook was less dovish than hoped, while President Trump’s latest consumer-focused China tariffs significantly dented the already soft global growth outlook.”

What is astounding, however, is that equities bounced back strongly after the bad Santa selloff of 2018 and they haven't really let up at all.

Year-to-date, the S&P 500 is up 21% led by tech shares which are up 33%:

And the Fed is cutting rates because inflation expectations remain stubbornly low!

If the dips continue to be bought and we get more record highs on the S&P 500, Nasdaq and Dow Jones, I suspect people are going to be worried about a good old fashion summer stock market melt-up.

In my opinion, things are heating up too much in stocks but the algos are driving them higher and higher and fundamental investors are going to end up chasing them higher or risk another year of severe underperformance.

Some traders are “unhappy with the fact that the Fed viewed these cuts as being more of a mid-cycle adjustment than the beginning of a new easing cycle,” said Scott Buchta, head of fixed-income strategy at Brean Capital. “Some people were expecting future rate cuts to be on autopilot rather than data-dependent.”

This sustained period of exuberance means that it will take more than just a day or two of market drops to work off the excess optimism. That’s why the stock market was unable to sustain its attempt at a big rebound on Thursday of this week, for example. Commentators will attribute Thursday’s reversal — from the Dow Jones Industrial Average up more than 200 points to close down almost 300 —to the new tariffs on Chinese goods announced by President Donald Trump. But, as with the Fed’s rate cut decision, these new tariffs are little more than a convenient excuse for a market that was ripe for a fall.

• If corporate earnings rebound into 2020 as expected, any upcoming Federal Reserve interest rate cuts may well extend the business cycle expansion even further.
• The Fed has a free option to cut interest rates, given persistent low inflation.
• Despite high valuations, I think this 10-year-old bull may well have some life left in it.
• While bears may refer to this bull market as an "everything bubble," the fact is that the S&P 500 is only 10% above its central trend line, far short of its level in previous bubbles.

Japan’s $1.48 trillion Government Pension Investment Fund (GPIF) has created a new performance-based fee structure that it says “drastically” reduces the basic fee rate for its asset managers.

The fund said that under the old fixed-fee structure and partial performance-based fee structure, asset managers were “paid considerable sums regardless of their investment performance, and therefore have little incentive to set target excess return rates appropriately.”

While approximately 20% of the fund’s assets are actively managed by the asset managers, only a small number of funds achieved the target excess return rate from 2014 to 2016, according to GPIF.

“For this reason, we revised the current fixed fee structure and partial performance-based fee structure,” said the fund.

In a move that the GPIF believes will align the interests of the fund and its asset managers, it lowered its base fee rate to the rate of a passive fund, and eliminated the maximum fee rate. However, a carryover mechanism has been included to even out the amounts of fees paid, and a portion of the fees will be held back to ensure that the amount of fees is linked with medium- to long-term investment performance.

And to enable asset managers to achieve target excess returns over the medium- to long-term, the fund said the introduction of the performance-based fee structure will normally involve the termination of multi-year contracts with asset managers.

The performance-based fees are based on “the precise measurement of the monetary contribution of investment performance,” said the fund. This, it said, is reached by multiplying the excess return rate on the portion in excess of the basic fee rate by the share of alpha and the average daily balance. Additionally, there is no cap on the fee rate; the share of alpha is computed based on the target excess return rate, and the fee rate paid when the target excess return rate under the current contract is reached.

The GPIF also said the full amount of the performance-based fees calculated each year will not be paid. Instead, 45% of the cumulative amount will be paid to the asset manager, with the remaining 55% to be deferred to the following year as a carryover.

“We hope that introducing this new performance-based fee structure will lead to further evolution of active management institutions,” said the fund.

This is an interesting fee structure, almost treating the external managers as internal managers, i.e., you will get a fixed salary and a fixed portion of bonus and another trunk of bonus is pending on performance, moreover, the performance based bonus is not paid out right away and is paid over the long term aligning the long term interests between the fund and the managers. Very interesting and make perfect sense. I personally would like to see a clawback clause, that is, if the manager is losing money in a particular year, the performance based bonus is cut back. Not sure how wide this fee structure will be accepted by the industry. Let's wait and see.

I've already covered Norway's giant beta problem and GPIF is in the same boat and worse because its allocation to alternatives is much lower. Norway has started investing in real estate all over the world but it recently lowered its target for real estate in its portfolio to 3 to 5% from 7% on concerns the global boom is nearing an end (a wise decision, especially now that real estate vulture funds are building up their fire power).

The swings in Japan are making people very nervous and some are saying it will cost GPIF's CIO his job. I wouldn't be so quick to blame Hiromichi Mizuno, it's not his fault the fund's returns swing hard with equity markets. He's steering a giant ship which moves at a snail's pace.

But both Mizuno and Slyngstad need to ramp up their allocations to private markets and to do this properly, they really need to think outside the box. Given their giant size, it won't be easy to scale up private markets, something they're both very aware of.

Why ramp up privates and why is the strategy so important? Because the volatility of these giant funds is quite frankly, unacceptable even if they invest over the long run, and they need to to reduce it by partnering up with the right partners, getting the most bang for their buck while reducing overall fees.

To be blunt, they are both late to the private markets game but if they have the right partners and strategy, that doesn't matter.

The world’s largest pension fund, which oversees the equivalent of $1.46 trillion, revealed in its annual report last month it was buying overseas bonds with hedges against possible yen fluctuations for the first time. Earnings reports from Japanese life insurers show they cut the proportion of the portfolio they hedge to 55% in March, from as high as 63% in September 2016.

Whether or not to hedge is a tricky equation for many Japanese firms that hold overseas assets. While adopting protection can safeguard their foreign-currency denominated assets from losing value if the yen strengthens, purchasing hedges comes with a price. The cost of hedging for dollar assets has become particularly expensive due to interest-rate differentials and rising demand for the U.S. currency.

“It’s hard to imagine Japanese investors being in a rush to boost yen hedging,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities Co. in Tokyo. “The investment environment is really dire, and hedging inevitably erodes returns.”

GPIF’s latest annual report showed it held a total 588.2 billion yen ($5.4 billion) of assets tracking an FTSE Russell Index of U.S. government bonds that incorporates currency hedging, along with 668.6 billion yen of hedged European sovereign debt. While that equates to only about 4.6% of its total overseas bond portfolio, this is the first time the fund is buying bonds with hedges in place, according to its annual reports. The fund will release its quarterly performance results on Friday.

Nine of the largest life insurers held a combined 31.5 trillion yen of bullish wagers on Japan’s currency using forwards as of March 31, compared with a total 57.2 trillion yen of overseas assets. Their hedging proportion for dollar assets is 47% and for euro ones is 78%, a Bloomberg analysis of their reports shows.

Hedging euro-denominated assets by yen-based investors pays a premium of 0.22%, meaning it contributes to the total profit that can be earned. In contrast, hedging of dollar assets costs an annualized rate of about 2.6%, which means even holders of U.S. 30-year Treasuries would not earn enough yield to cover the expense.

The Bank of Japan at a policy meeting Tuesday reaffirmed its commitment to keeping interest rates low. Given yields are negative for all Japanese government bonds up to 10 years left to maturity, the country’s investors are set to keep sending money abroad in search of higher returns, which means whether or not to hedge will remain a key question.

The agreements include commitments of USD 250 million each in the Master Fund and co-investment rights of up to USD 750 million each in future opportunities alongside the Fund.

This marks the third close of the NIIF Master Fund. AustralianSuper and Ontario Teachers’ will now join the Government of India (GOI), Abu Dhabi Investment Authority (ADIA), Temasek, HDFC Group, ICICI Bank, Kotak Mahindra Life Insurance and Axis Bank as investors in the Fund.

AustralianSuper and Ontario Teachers’ will also become shareholders in National Investment and Infrastructure Fund Limited, NIIF’s investment management company. Domestic investors HDFC Life and Kotak Bank have further committed INR 600 million in the third round.

With this, NIIF Master Fund becomes the largest infrastructure fund in India with assets under management of over USD 1.8 billion and a co-investment pool of USD 2.5 billion, which will enable the Fund to invest at the scale required for the large infrastructure requirements in India. The Fund invests in equity capital in core infrastructure sectors in India with a focus on transportation, energy and urban infrastructure. The Master Fund, has a tenure of 15 years and is denominated in Indian Rupees to suit the requirements of the infrastructure sector.

Sujoy Bose, Managing Director & Chief Executive Officer of NIIF, said: “We are delighted to welcome two of the world’s leading pension funds as investors in the NIIF Master Fund and as shareholders of National Investment and Infrastructure Fund Limited, alongside other eminent investors. AustralianSuper and Ontario Teachers’ are among the most respected infrastructure investors in the world and bring considerable global perspective and value to NIIF. Their significant investments demonstrate the international interest in Indian infrastructure and reconfirms the many strengths of NIIF, which positions it as one of the primary Indian pooling vehicles for global capital”.

Dale Burgess, Senior Managing Director, Infrastructure & Natural Resources of Ontario Teachers’, said: “NIIF's investment strategy aligns with the long-term and partner-oriented investing approach we have successfully used in other regions.”

Ben Chan, Regional Managing Director, Asia Pacific of Ontario Teachers’, said: “A commitment to NIIF will substantially bolster Ontario Teachers’ presence in India, providing us with on-the-ground market insights and capabilities to be well-positioned in a large market with significant expected growth.”

Mark Delaney, Chief Investment Officer with AustralianSuper, said: “India's burgeoning infrastructure market is among the largest in Asia, which presents many opportunities for investment. We are pleased to have entered into this agreement with the NIIF Master Fund and to be shareholders of National Investment and Infrastructure Fund Limited and look forward to participating in a strong pipeline of projects across a range of sectors.”

About NIIF

NIIF is a fund manager that invests in infrastructure and related sectors in India. An institution anchored by the Government of India, NIIF is a collaborative investment platform for international and Indian investors with a mandate to invest equity capital in domestic infrastructure. NIIF benefits from its association with the Government yet is independent in its investment decisions being majority owned by institutional investors and managed professionally by a team with experience in investments and infrastructure. NIIF aims to make commercial investments in the sector at scale. NIIFL manages over USD 4 billion of capital commitments across three funds, each with its distinct investment strategy. The funds have investment mandates to invest in infrastructure assets and related businesses that are likely to benefit from the long-term growth trajectory of the Indian economy.

For more information on NIIF, please visit www.niifindia.in or follow us on LinkedIn at https://www.linkedin.com/company/national-investment-and-infrastructure-fund-niif/

About AustralianSuper

AustralianSuper is the largest superannuation fund in Australia with member assets of more than $165 billion, making it one of the 40 largest pension funds in the world. The Fund’s core focus is maximizing long-term investment returns, with the Balanced Investment Option ranked in the top performing funds over the last three, five, 10, 15 and 20 years. AustralianSuper has a broad investment mandate and invests across multiple asset classes, geographic markets and at different points in the capital structure. Investment management and origination are undertaken directly by the in-house investment team, and through a global network of investment partners and managers who provide access to valued skills, insights and investment opportunities. AustralianSuper is headquartered in Melbourne Australia. The Fund has growing global footprint, with offices in London and Beijing. For more information, visit: www.australiansuper.com

About Ontario Teachers'

Ontario Teachers' is Canada's largest single-profession pension plan, with CAD $191.1 billion in net assets (all figures as 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.

RPMI Railpen aims to boost its exposure to private debt to as much as 40% within a private investment strategy totaling 4.5 billion pounds ($5.5 billion) across two funds. While still a fraction of the scheme’s 30 billion pound asset total, the value of one of the funds dedicated to private markets doubled to almost 1 billion pounds in 2018 from a year earlier.

“When the cycle turns, debt will be affected, but likely to a lesser degree than the equity piece, hence including the strategy in a wider private markets portfolio,” Andrea Ash, investment director at RPMI Railpen, said in an interview.

Institutional investors such as RPMI Railpen are pivoting toward private credit as they search for returns amid ultra-low interest rates and negative yields. A July survey of more than 550 European buy-side firms revealed that private debt would be among the most favored investment asset classes in the next three years, alongside private equity and infrastructure.

Return Kicker

The railworker pension scheme’s private debt push goes beyond direct lending by also targeting distressed and niche strategies such as credit risk transfers. The fund, which hired two investment directors for its in-house private markets team last November, is currently “below target” when it comes to private debt, according to Ash.

“In the distressed space, we’re at the end of the cycle so you have to be careful as it’s like trying to catch a falling knife on the way down, but you can generate a real return kicker on the way up,” Ash said.

The renewed hunt for yield among investors is helping drive a boom in fundraising, with global dry powder reaching an all-time high, according to law firm Akin Gump Strauss Hauer & Feld LLP. In the direct lending space, the flood of capital has intensified competition and led to higher leverage and weaker underwriting standards.

While quantity and quality of covenants and use of leverage are natural concerns for investors given the end of the cycle, “there remains a good case for having private credit in the portfolio,” Ash said.

The Church of England Pension Board plans to increase its allocations to private credit to 8% percent over the next 10 years, from 3% at the end of 2017, according to its chief investment officer Pierre Jameson. The pension fund manages 2.6 billion ($3.3 billion) pounds of assets.

This is part of a broader change of tack by the 38,000-people member fund toward private investments and away from equity, Jameson said in an interview.

The strategy is another example of how pension funds are being drawn to private assets as they seek to lift returns and meet payout commitments amid ultra-low interest rates. The asset class is also less sensitive to market volatility, according to Jameson.

“Escaping from price swings is key for U.K. pension schemes given we’re required to mark to market,” he said. “Private assets’ values are based on realistic expectations and cash flows for the underlying businesses so we feel our actuarial assumptions are solid and not vulnerable to market sentiment.”

The church’s pension scheme aims to slash its public equity allocation to 35% from 66% currently within its “return-seeking assets,” which account for 85% of the fund. It will reallocate the proceeds into infrastructure, private debt and private equity. The scheme expects returns of 6% to 8% on its private credit investments, Jameson said.

Asset Growth

The number of Europe-based public pension funds investing in private debt has jumped from 60 in 2015 to 136 last year, with their median allocation to the strategy increasing from 1.28% to 2% in the period, according to Preqin, a London-based research firm.

“The return profile from private credit looks interesting given how low yields are in the public fixed income market. Many are also moving away from equity due to high valuations,” said Samuel Gervaise-Jones, a senior director at bfinance, a consultancy firm that advises pension funds and other end-investors.

“There remains room for growth as there are plenty of pension funds with no exposure to the asset class,” Gervaise-Jones said.

Investors’ appetite for higher-yielding assets, together with banks pulling back from riskier lending, is helping drive a boom in private debt fundraising. Preqin noted that assets under management had soared to $770 billion in June 2018 from $275 billion in 2009.

But as capital floods into private credit and competition intensifies, more leverage has crept into deals and underwriting standards have loosened. This has prompted regulators to look at the sector more closely.

End-investors “acknowledge that the market has changed and are putting much more focus on managers’ origination and underwriting processes,” bfinance’s Gervaise-Jones said.

Canadian institutional investors are taking on more private credit, both as a replacement for equity, as well as a tool to enhance their fixed income allocations, said Janet Rabovsky, partner at Ellement Consulting Group in a webinar presented by the Canadian Investment Review on Tuesday.

For pension plans in particular, the equity-like return that private credit can yield, accompanied by significantly lower volatility than equities, has major appeal, she said.

But what is private credit?

“Private credit is exactly as the word states, credit that’s not publicly traded,” said Rabovsky.

There’s no strict definition for the asset class, she added, noting it’s a catch-all term that encompasses a range of solutions, the most popular of which is direct lending. Debt tied to infrastructure and real estate also fall into this category.

As with any asset class, there are pros and cons to investing, and the choice to take on private credit should be determined by both financial and non-financial factors, said Rabovsky.

Liquidity is one factor to consider. “As with other private asset classes, one hopes to access an illiquidity premium. Some might argue that this is diminishing given the popularity of this asset class. But it still remains, especially outside of core holdings.”

Private credit’s lower volatility and tendency to be floating rate, meaning returns will go up as interest rates do, are also attractive aspects of the asset class, added Rabovsky.

Picking the right manager when first entering the asset class is extremely important, she noted. “Disciplined and skilled managers who have experience in negotiating covenants and asset security have an advantage, as do those who have invested through the global financial crisis.”

It’s also important for investors to understand what they’re getting into. The asset class is more complicated than traditional fixed income, using vehicles investors may not be familiar with, while higher fees and different tax considerations are also in play, said Rabovsky.

“As with any asset class, investors should not invest in something they don’t understand and don’t have the time to monitor.”

As with all debt-based investment, default risk goes hand-in-hand with private credit, she said. “It’s fair to say there will be defaults. These are higher risk loans, but many don’t experience any permanent capital loss or very little capital loss ratios, with ratios which are well below those of high-yield debt.”

When specifically considering direct lending, the most popular form of private credit, there are several sub-categories and distinctions, noted Rabovsky.

“Loans can be sponsored or non-sponsored,” she said. “A sponsored deal is where money is lent to a private equity sponsor who will usually purchase the company with 50 per cent equity and 50 per cent debt. This means that when there are issues with the company, there are equities backing the company which can be drawn on and the sponsor may be asked to provide more capital.”

Non-sponsored lending, on the other hand, is lending directly to the business owner. This method is less popular because it often requires more hand-holding from the lender, though returns are generally higher, congruent with the added effort, said Rabovsky.

Within real estate debt, a borrower is leveraging a real asset — in this case, physical property. “It includes both commercial mortgage and senior-secured and mezzanine debt. Real estate debt funds have become popular as they can close on a deal much more quickly than a bank and offer the borrower more flexibility.”

One increasingly popular form of real estate debt is commercial mortgages, especially in the current low interest rate environment, noted Rabovsky.

Infrastructure debt is also secured against physical assets. As with real estate debt, infrastructure tends to be purchased through a combination of debt and equity, she said, noting a social infrastructure asset, like a hospital, is likely to be closer to 90 per cent debt, since it probably includes a guaranteed government payment to the investor.

A port, on the other hand, is an example of economic infrastructure, and would be with about 50 per cent debt and 50 per cent equity, said Rabovsky.

When investors are considering a private credit investment, they should ask themselves two key questions, she added. “What are you hoping to achieve? And where in the portfolio are you going to be placing this? Is this an equity replacement or is this a fixed income enhancer? And that may determine whether you’re looking at the more public or private forms of credit.”

Stocks fell on Friday as Wall Street concluded a wild week amid trade war fears and worries over the global economy.

The Dow Jones Industrial Average closed 90.75 points lower, or 0.3% at 26,287.44. The S&P 500 dipped 0.7% to 2,918.65 while the Nasdaq Composite pulled back 1% to 7,959.14.

President Donald Trump told reporters on Friday the U.S. is not ready to strike a trade deal with China. “China wants to do something, but I’m not doing anything yet,” Trump said. “Twenty-five years of abuse. I’m not ready so fast.”

Chris Gaffney, president of world markets at TIAA Bank, said Trump is digging in on the U.S.-China trade war. “He believes the trade war impacts China much more than the U.S. In his mind, you can close up the U.S. economy,” he said. “At the same time, you’ve got China doing the same thing.”

“The reactions in the markets this week are maybe more of a realization that this trade war is not going to come to a quick end,” Gaffney said.

On Wednesday, stocks resumed their sell-off as investors loaded up on traditionally safer government bonds and gold before staging a sharp comeback. By Thursday’s close, the indexes had recovered most of their losses from Monday’s drop.

Trump also said the U.S. will not do business with Huawei. However, stocks came off their lows after Fox Business reported the White House clarified Trump’s statements on Huawei, highlighting it is only the U.S. government that is not buying Huawei products. CNBC’s Ylan Mui confirmed the clarification.

Chipmakers Micron Technology and Skyworks Solutions both closed more than 2.5% lower.

This comes after China decided to stop buying American crops and after the U.S. officially declared China a currency manipulator earlier this week. The U.S. designation came after China let its currency, the yuan, fall to its lowest level in a decade relative to the dollar, sparking the biggest sell-off of 2019 for stocks.

“If there was any doubt, President Trump has clearly moved from trade wars to currency wars,” said Harvinder Kalirai, chief fixed income and FX strategist at Alpine Macro, in a note. He said the Federal Reserve will be pushed towards aggressive easing measures if President Donald Trump keeps pressuring China. “Investors should incorporate intrinsic hedges to ride out market volatility and protect themselves from policy errors.”

Stocks had a wild week, with the major indexes recording their biggest one-day sell-off of the year on Monday. The indexes recovered some of those losses on Tuesday.

On Wednesday, stocks resumed their sell-off as investors loaded up on traditionally safer government bonds and gold before staging a sharp comeback. By Thursday’s close, the indexes had recovered most of their losses from Monday’s drop.

The Dow ended the week on Friday down 0.75%. The S&P 500 and Nasdaq lost 0.5% and 0.6%, respectively.

You can say that again. pic.twitter.com/dRDIaglOTn

— Bespoke (@bespokeinvest) August 8, 2019

Traders also kept a close eye on the bond market, where the recent appetite for U.S. debt has pushed a bond market recession indicator close to a warning zone. If investors trigger a recession warning in the bond market that tends to be negative for stocks.

In Europe, bank stocks led markets lower Friday as Italian lenders tumbled on political uncertainty in the country. Italy’s coalition government imploded on Thursday evening, as deputy prime minister and leader of Italy’s ruling Lega party, Matteo Salvini, declared the arrangement unworkable and called for fresh general elections.

“I think what we went through was a retest of the May pullback and it ended up being successful,” he said. Stovall said he has been watching the sub industries of the S&P 1500, and as of July 12, 91% were above their 50-day moving average, an unusually high number.

But as of Monday, when stocks were cratering, just 10% were above their 50-day moving average.

“That to me was an indication of a washout,” Stovall said. He added that it was also a rapid move to the 5% decline level from the peak, indicating the market could make a quick comeback.

“We are probably coming out of this pullback, and we’ll probably get there quickly. History says we’ll get there by the end of the month, meaning by the end of the month we’ll probably close with a new all-time high,” he said.

Illinois is running out of time to fix its public sector pension problem. A new report from Moody's Investors Service identified the Prairie State as one of the two most likely to suffer during an economic downturn. Illinois towns and cities are already paring back government services to pay for generous benefits packages for retirees, and Chicago's pension debt alone is larger than that of 41 states. That arrangement can't last forever.

"The worst-case scenario is there's another national recession, which would cause our pension funds to lose a bunch of their assets again," says Adam Schuster of the Illinois Policy Institute. "As the assets shrink, the pension funds go into a financial death spiral. We might end up with some kind of Puerto Rico–style pseudo-bankruptcy or federal bailout. Everybody in the nation is now on the hook for Illinois politicians' irresponsible decisions."

The best-case scenario would involve repealing an automatic 3 percent raise that pensioners receive each year of their retirement and requiring workers to pay more into their own plans. Democratic Gov. J.B. Pritzker would prefer to scrap Illinois' flat income tax and replace it with a progressive tax scheme, which could cause even more people to flee the state. In May, Schuster spoke to Reason's Mike Riggs about the pension conundrum.

Q: If somebody had been paying attention 30 years ago, could they have anticipated this pension problem?

A: Thirty years ago would be just about enough time to stop some of the mistakes. We changed the state constitution in 1970 to add a pension protection provision, which essentially says that as of the day of hire, an employee's benefit formula cannot be changed in any way. So it doesn't only protect benefits that somebody has already earned. It protects the future growth rate of those benefits for life and gives the state legislature no flexibility to change them.

Q: What happened next?

A:In 1990, Illinois implemented a guaranteed 3 percent compounding cost of living adjustment. So a person's pension goes up by 3 percent every year regardless of how much inflation there is in the economy. It basically doubles the size of somebody's pension over the course of 25 years.

We also had a series of governors, both Republican and Democratic, who habitually shorted the system by putting in less than the required contribution. The reason they did that is that the required contributions were unaffordable and never would have been affordable because we overpromised the benefits.

Q: Do Illinois taxpayers know what's going on?

A: I think there is pretty widespread knowledge about the problem, but there's also a defeatist apathy. We've had five straight years of population loss. We're losing our prime working-age adults, and poll results say that the No. 1 reason they're leaving is that the taxes are too high here. And the No. 2 reason they're leaving is job opportunities are better elsewhere, which is related to No. 1.

Q: What do public sector union leaders say about the pension crisis? How about union members?

A: I appreciate that you make that distinction, because I've found there is a huge disparity in how they react to this kind of thing. Union leaders, who are involved in politics and lobbying, are against having this conversation at all. But when I talk to regular rank-and-file union members, they actually think the plan we put forward is a very fair and very reasonable compromise.

Q: What is the short version of your plan?

A: It would amend our constitution so that instead of protecting the future growth rate, it would only protect the pension benefit that somebody has earned to date. So if you retired today, your annuity would be protected, but it would give the legislature flexibility to change retirement ages for younger workers and to change that 3 percent cost of living adjustment, for example.

Q: What happens if Illinois does nothing?

A: I don't know if you followed at all the story of Harvey, Illinois, but it's a South Chicago suburb, and they have one of the highest effective property tax rates in the nation. Even still, their police and fire pensions are so underfunded that in order to make their pension payment, they had to lay off dozens of current police officers and firefighters.

Q: That's what people pay taxes for: government services!

A: Harvey was the canary in the coal mine. Down in Peoria, they've had to lay off municipal workers, people who plow the streets. In Rockford, they're being told they need to sell their city water system. Municipalities around the state are laying off public safety workers today to pay for yesterday's pensions.

It's easy-peasy, really.

There's a way to reduce the Illinois and Chicago pension liabilities by half, with no constitutional amendment required, no hard political truth-telling or compromises, no cuts at all.

And considering that Chicago's pensions are 23% funded, and Illinois', 40%, this is not a minute too soon.

Here's the scoop:

The basic structure of Illinois' and Chicago's pensions are the same. In general, Tier I employees/retirees, those hired before 2011, receive a pension based on final pay and service with a fixed 3% per year Cost-of-Living Adjustment; whenever inflation is lower than this (the last ten years, it's averaged 1.8%, the last 20 years, 2.2%), they come out ahead, to the extent that some retirees get pension checks greater than any paycheck they ever received. Tier II employees, on the other hand, keep the same benefit formula, but averaged out over a longer period of time, receive pseudo-COLAs at half the rate of inflation, without compounding, and have their pensionable pay capped at a level that (unlike, for instance, the Social Security ceiling) doesn't rise based on average wage growth or even inflation but at half the rate of inflation, so that, to take the teachers as an example, any teacher who earns above-average pay levels will be affected as soon as 2027, based on current inflation projections and average wage data.

Now, the value of any pension without a true CPI-based cost-of-living adjustment will be eroded over time due to inflation, and eroded in very short order in instances of high inflation. And in countries with a history of inflation, employer-sponsored pensions are more likely to include true cost-of-living increases. In some cases, the entire actuarial valuation is done on a "real" basis, evaluating all of the inputs on the basis of "value in addition to inflation"— that is, using the assumed salary increase in excess of inflation and the interest rate in excess of inflation. When both these hold true - true-CPI increases and assumptions all relative to inflation, in principle, neither the liabilities nor the pension benefits' real value are affected by fluctuations in inflation. (Random trivia: in Brazil, the government even issues its bonds on a "real" basis.)

At the same time, back in the spring, the latest buzzword was Modern Monetary Theory (here's an explainer), which was the means by which various progressive politicians promoted the idea that there was an awful lot more room for government deficit spending than appears to be the case; concerns about inflation were waved away with the assurance that the government would be able to tack as needed by increasing tax rates.

You see where I'm going with this, don't you?

If the United States were to hit a period of high inflation rates, sustained over a long period of time, these liabilities would shrink considerably— and I'm not even speaking, snarky photo aside, of hyperinflation. Based on my calculations (and yes, these are real calculations, using real data for this plan collected for another project, not merely back-of-the-envelope estimates, however unlikely the very even numbers make it appear), an inflation rate of 10%, and assumptions for interest rate/asset return rate and salary increases over time which reflect the same net-of-inflation rates as at present, would halve the pension liabilities of the Illinois Teachers' Retirement System.

Sounds preposterous, I know. And admittedly, beyond all the ill-effects of high inflation, individual state governments don't control monetary policy anyway. But is it really any worse a proposal than the idea of selling the Illinois Tollway to a private firm which would do the dirty work of raising tolls so as to indirectly fund the pensions by making the tollway an attractive and profitable purchase? Or more ill-conceived a notion than the notion that public pensions can function perfectly well as pyramid schemes in which each cohort of employees funds their predecessors' benefits?

Or maybe the politicians of Illinois have some better idea? If so, I'm all ears.

• Make all contribution holidays constitutionally illegal;
• Adopt Canadian-style pension governance (separate the government from public pensions) 
• Adopt conditional inflation protection immediately and never guarantee COLAs, ever.