CAAT continues to grow and diversify its membership, adding two new organizations to its growing roster of participating employers.

As part of their new collective agreement, workers from the University of Saskatchewan and Federated Colleges Non-Academic Pension Plan, represented by CUPE 1975, joined DBplus on a go-forward basis effective September 1. As well, employees from Community Living Toronto joined the CAAT plan effective October 1st. Pending regulatory approval, Community Living Toronto will merge their prior defined benefit pension plan liabilities and assets into CAAT. Members of the Community Living Toronto pension plans consented to the merger, voting an overwhelming 93% in favour, with unionized members represented by their local CUPE 2191. The consent period concluded on September 30.

These two new employers add over 2,000 new members to DBplus – 700 from Community Living Toronto and 1,300 from the University of Saskatchewan.Members will pay into the DBplus plan at fixed contribution rates, with their respective employers matching dollar for dollar.

In the coming months, an application will be made to the Financial Services Regulatory Authority of Ontario (FSRA) for its consent to the transfer of plan assets and liabilities from Community Living Toronto’s plans.

The CAAT Pension Plan is open for growth in membership where it is mutually beneficial, from the public, private or not-for-profit sectors in Canada. This includes workplaces currently offering defined benefit pension plans, defined contribution plans, group RRSPs, and those with no current workplace retirement savings plan.

“I am grateful that our newest members from the University of Saskatchewan and Community Living Toronto have endorsed our DBplus plan. This innovative pension design provides secure, predictable retirement income for life at a fixed contribution rate – meeting essential needs and eliminating key risks for both employees and employers”

Derek Dobson,
Chief Executive Officer and Plan Manager, CAAT Pension Plan

“The CAAT DBplus plan has proved to be a timely solution to the long-term financial sustainability challenge we were facing with our non-academic defined benefit pension plan. DBplus ‘ticked all the boxes’ for us as an employer in terms of cost certainty for our institution while providing our employees with a competitive pension plan. The team at CAAT has been there every step of the way through the implementation process and we are looking forward to working with them for years to come.”

Cheryl Carver
Associate Vice President, People and Resources, University of Saskatchewan

“We are so pleased to be joining the CAAT DBplus plan. This will allow us to provide a sustainable, predictable retirement benefit for our employees and reduce the significant effort associated with providing our own plan.”

Brad Saunders
Chief Executive Officer, Community Living Toronto

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Catholic Charities of the Archdiocese of Toronto and Participating Member Agencies voting to join the Plan

Catholic Charities of the Archdiocese of Toronto and Participating Member Agencies (“CCAT”) have entered into an agreement to merge their pension plan with the CAAT Pension Plan. As with previous mergers of this type, active members of the CCAT pension plan must consent to the merger through a voting process, with unionized members being represented by their local OPSEU 594 This voting process will conclude on December 29, 2019. If the merger proceeds, employees will start contributing to and earning a benefit under the CAAT Pension Plan as of January 1, 2020. The assets of approximately $35 million from CCAT’s existing defined benefit plan will be transferred and benefits will be replicated under the CAAT Pension Plan after approval from the Financial Services Regulatory Authority of Ontario.

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FP Canadian Newspapers Limited Partnership voting to join the Plan

FP Canadian Newspapers Limited Partnership (“FPCNLP”) has entered into an agreement to merge its Winnipeg Free Press and Canstar Community News Pension Plan (“WFP/Canstar Pension Plan”) with the CAAT Pension Plan. As with previous mergers of this type, active defined benefit members of the WFP/Canstar Pension Plan must consent to the merger through a voting process, with unionized members being represented by Unifor Local 191. This voting process will conclude on December 29, 2019. If the merger proceeds, employees will start contributing to and earning a benefit under the CAAT Pension Plan as of January 1, 2020. The assets of approximately $56 million from the FPCNLP’s existing defined benefit plan will be transferred and benefits will be replicated under the CAAT Pension Plan after approval from the Manitoba Office of the Superintendent and the Financial Services Regulatory Authority of Ontario.

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United Way of Greater Toronto voting to join the Plan

August 14, 2019 - United Way of Greater Toronto has entered into an agreement to merge its pension plan with the CAAT Pension Plan. As with previous mergers of this type, active members of the United Way of Greater Toronto pension plan must consent to the merger through a voting process, with unionized members being represented by their local COPE Ontario (Local 343). This voting process will conclude on November 12, 2019. If the merger proceeds, employees will start contributing to and earning a benefit under the CAAT Pension Plan as of January 1, 2020. The assets of approximately $25 million from United Way’s existing defined benefit plan will be transferred and benefits will be replicated under the CAAT Pension Plan after approval from the Financial Services Regulatory Authority of Ontario.

Derek W. Dobson, Chief Executive Officer and Plan Manager
Since joining as CEO in April 2009, Derek has applied his expertise in funding, risk management, strategic planning, governance, and stakeholder relations to strengthen the CAAT Plan, and more recently, guide its growth. In addition to leading one of Canada’s model pension plans, he plays an active role in various industry groups, notably as Co-Chair of the Canadian Public Pension Leadership Council, as a member of the Board of Directors for the Association of Canadian Pension Management, and as a founding faculty member of the Masters of Trust Management Standards of the International Foundation of Employee Benefits and Pensions. Derek’s pension management expertise and engaging presentation style make him a sought-after speaker in Canada and abroad on a variety of topics, including the need for national aging and retirement strategies. Derek is an Associate of the Canadian Institute of Actuaries with a degree in mathematics from the University of Waterloo. 

DBplus by the CAAT Plan combines the cost certainty of a DC arrangement with the advantages of the lifetime pensions and survivor benefits from a traditional DB plan. DBplus offers the advantages of both, without the downside risks of either model. DBplus is simple, secure, stable and sustainable.

The CAAT Plan is pleased to share an update on the merger process with Torstar Corporation.  On June 21 (2018), the CAAT Plan entered into an agreement to merge Torstar’s eight registered defined benefit pension plans, effective October 1, 2018.

Members of the Torstar pension plans will have 90 days to vote on the merger. Ontario pension regulations require that at least two-thirds of active members consent to the merger, while no more than one-third of retired members vote against it. Final consent of the transfer of assets for past benefits rests with Ontario’s pension regulator.

There are about 3,000 members of the Torstar defined benefit pension plans. If approved, this will be the third merger of a single-employer, defined benefit pension plan with the CAAT Plan. The Youth Services Bureau of Ottawa joined at the beginning of 2018, while the Royal Ontario Museum pension plan merged with the CAAT Plan in 2016.

“We’re excited about the possibility of the merger with the Torstar pension plans,” says Derek W. Dobson, CEO of the CAAT Plan.  “With the signing of the agreement, the approval process is now in the hands of about 3,000 Torstar plan members. Our focus will remain on educating members to ensure they are informed before voting on joining DBplus.”

Torstar businesses include the Toronto Star, Canada’s largest daily newspaper, six regional daily newspapers in Ontario including The Hamilton Spectator; English-language Metro newspapers in several Canadian cities; more than 80 weekly community newspapers in Ontario; flyer distribution services; and digital properties including thestar.com, wheels.ca, save.ca, toronto.com, a number of regional online sites and eyeReturn Marketing.

The head of one of the country’s largest pension plans is a skeptic on the matter of whether people will save enough for retirement all on their own.

“My level of confidence is zero,” said Jim Keohane, president and CEO of the Healthcare of Ontario Pension Plan, or HOOPP. “Life gets in the way of saving.”

That’s kind of bad news because people can barely afford life these days – how will saving for retirement ever fit in? HOOPP is hoping to generate some discussion about this question by releasing the results of a survey about retirement on Tuesday.

The poll results validate the personal-finance theme of the federal election campaign so far, but also highlight a deficiency in all the talk about families struggling to get ahead. People are nearly as worried about the state of their retirement savings as they are about the affordability of everyday life.

Three-quarters of the 2,500 poll participants said they were concerned to some degree about having enough money in retirement, while 82 per cent said they worried about the cost of living. Concern about both issues ranked well ahead of taxes, physical and mental health, personal debt and government.

As part of their focus on helping people get ahead, federal parties have promised to cut cellphone bills, help first-time home buyers, lower taxes and give parents and seniors more money in government benefits. Retirees have rated some attention, but retirement itself has hardly been talked about.

Tax cuts and benefit increases are easy to explain and understand, and they speak directly to the feeling of falling behind financially as a result of living costs rising faster than incomes. You can also argue that they address retirement worries by helping people find more money for their registered retirement savings plans and tax-free savings accounts.

The HOOPP poll suggests people instinctively know that this money won’t trickle down to their retirement savings. Asked whether they’d take a slightly lower salary in return for a work pension plan (or an improved work pension plan), 76 per cent went for the pension.

As a defined benefit pension plan that pays its members benefits for life based on their earnings while in the work force, HOOPP has a particular position on how people can best save for retirement. You can sum this view up as more pensions, please, and preferably defined benefit plans.

The latest Statistics Canada numbers on pensions show that 37.1 per cent of workers were covered by a registered pension plan in 2017, down from 37.5 per cent in the previous year. In the HOOPP survey, 44 per cent of participants were in a pension.

HOOPP thinks politicians at all levels could be more creative and open-minded in figuring out ways to adapt the defined benefit pension model in ways that would make it attractive for employers. DB pensions are slowly fading because employers don’t want to carry the financial obligations.

Mr. Keohane said pensions, with their forced saving, professional management and low costs compared with retail investment products, are a more efficient way for people to save for retirement. “One of the best ways you can put more money in people’s pockets is by making their savings more efficient,” he said.

In the HOOPP poll, it’s clear that people who don’t have pensions struggle to put money away for their retirement. Of those who said they didn’t have a workplace pension, 49 per cent had not saved at all for retirement.

Superficially, it sounds like giving people more money through tax cuts and higher benefits would address this shortfall. But as Mr. Keohane said, life gets in the way of carving out part of your paycheque for saving.

This leads us back to pensions, a strong remedy for financial anxiety that hasn’t been talked about at all in an election campaign mostly about money.

New research released today by the Healthcare of Ontario Pension Plan (HOOPP) shines a stark light on Canadians’ concerns about retirement security, and their expectations for a solution.

Findings from the public opinion research included:

• More Canadians are worried about saving enough for retirement (75 per cent) than are worried about current personal debt (55 per cent) or government debt (64 per cent);
• Eight out of 10 said they would rather have a better pension (or any pension) than a higher salary; and
• Eighty-one per cent believe the shrinking of workplace pension coverage will reduce the quality of life of Canadians.

The findings are based on a recent survey of 2,500 Canadians conducted by Abacus Data. It gauged their feelings of retirement preparedness, their views on workplace pensions and the implications of decreasing pension coverage. Read the executive summary and additional materials related to the Abacus survey.

“It is clear that Canadians have a high level of anxiety around retirement security and that we, as a country, need to talk about how to address this growing concern,” said Jim Keohane, President & CEO, HOOPP. “HOOPP’s research from last fall, about the five value drivers that make retirement more affordable, show there are options. Today’s survey results, combined with our research on the value drivers, can help drive a conversation and meaningful action toward more affordable retirement savings for more Canadians.”

David Coletto, CEO of Abacus, said: “These results present a clear call to action to enhance retirement affordability. Canadians see the problem, understand its impacts, believe that an affordable retirement can be achieved, and want to collaborate with employers and government to find a solution. At the same time, they are prepared to do their own part by choosing better pensions over salary increases.”

Other key findings from the research include:

• Seventy-eight per cent believe there is a moral obligation to ensure children today have pensions of the same coverage and quality their parents and grandparents had.
• Eighty-three per cent believe government should modernize regulations to allow for more innovative pension plans and savings arrangements.
• Eighty per cent would rather employers make direct contributions to a retirement plan over receiving that money as salary.
• Seventy-six per cent believe governments can save money by supporting pensions that are more affordable.

Keohane added: “HOOPP commissioned this research to help inform a public dialogue between individuals, employers and governments. When workers and retirees know they have financial security, it is good for their personal well-being and for the strength of the economy overall, so this is an important issue for our members.”

HOOPP released the report at an event today in Toronto, featuring a panel discussion on the findings and how we can help improve retirement security. In addition to HOOPP’s Keohane and Abacus’ Coletto, the panel featured notable employer and employee perspectives.

“All across the country, we hear from workers who a want better workplace pension for their retirement. Moreover, they’re ready and willing to pay their fair share for that peace of mind,” said Hassan Yussuff, President, Canadian Labour Congress. “We recognize that there are challenges for employers, which is all the more reason we are eager to collaborate to develop solutions for investing in workers’ futures.”

Susan Nickerson, Partner with Torys LLP’s Pensions and Employment Practice, said: “While employers that I speak with do have concerns about the complexity and cost of offering pension plans, they also know the value of having employees who are financially healthy. We need to develop more innovative options outside of conventional DB and DC plans, and we need to supplement these offerings with financial literacy programs that help ensure employees of all ages recognize the value of workplace pensions.”

About the Healthcare of Ontario Pension Plan

HOOPP is the pension plan serving Ontario’s hospital and community-based healthcare sector, with more than 570 participating employers. HOOPP’s membership includes nurses, medical technicians , food services staff, housekeeping staff, and many other people who provide valued healthcare services. In total, HOOPP has more than 350,000 active, deferred and retired members.

HOOPP operates as a private independent trust, and is governed by a Board of Trustees with a sole fiduciary duty to deliver the pension promise. The Board has representation from the Ontario Hospital Association (OHA) and four unions: the Ontario Nurses' Association (ONA), the Canadian Union of Public Employees (CUPE), the Ontario Public Service Employees' Union (OPSEU), and the Service Employees International Union (SEIU).

About Abacus Data

Abacus Data is a market research and public opinion firm based in Ottawa. We conduct research for and provide strategic counsel to some of North America’s leading corporations and advocacy groups by delivering global research capacities with the attention to detail and focus of a boutique firm. Our team has over 45 years combined research and consulting experience working with associations, using public opinion research to inform internal strategies and raise issues on the public and government agenda.

Watching the debate last night was brutal, much like watching paint dry. The narrow focus on climate and indigenous rights was ridiculous, as if health, education and the economy need to take a back seat to these two issues. At one point, I was so disgusted, I flipped the channel to Dancing With the Stars because I figured if I’m going to waste my time watching mind-numbing nonsense, I might as well be entertained. Oh, Scheer won, but that’s not hard given his opponents set the bar low. (end of political rant)

With baby boomers starting to turn 75 next year, time is running out to improve system sustainability and the availability and quality of long-term care options in Canada. A generation of Canadian seniors is at risk of going with unmet care needs as they age. This projected increase in cost would amount to 19 per cent of personal income tax by 2050, up considerably from 9 per cent today - expressed as proportion of total provincial and federal personal income tax revenue.

4 of 5 Canadians would trade pay hike for pension, according to new research from HOOPP and Abacus. Our #HOOPPAdvocacy panel talks about creative ways to make retirement saving more affordable. pic.twitter.com/5LjCXILvQi

— James Geuzebroek (@JGeuz) October 8, 2019

I recently came across a fascinating paper from the Board of Governors of the Federal Reserve that investigated the financial situation of public pension plans in the US and their reaction to low interest rates. In three simple charts this paper clearly demonstrated the dire straits public pension funds are in.

Let’s first take a look at the official funding ratios (the ratio of assets relative to the present value of future liabilities) of the 100 or so public pension plans in their sample. In 2001, the average funding ratio was close to 100% but despite the strong returns of stock markets and declining yields in Treasuries that boosted returns on all fixed income asset classes the average funding ratio declined to about 70% in 2016.

Funding ratios of public pension funds in the US

Source: Lu et al. (2019).

And these are only the official funding ratios. Currently, generally accepted accounting standards require pension fund liabilities to be discounted by a discount rate derived from the asset mix of the pension fund. But why the risk and timing of liabilities should be related to the risk and timing of equity returns, for example, is anyone’s guess. It makes no sense to use equity returns as input into the discount rate for pension fund liabilities. Instead, as practically every pension fund expert in the world has pointed out by now, one should use discount rates that reflect the risk and timing uncertainty of the liabilities of the pension fund.

Unfortunately, this data is not publicly available but in the paper the researchers made an effort to estimate the true funding ratio of the public pension funds in their sample. And the results are disastrous. The average funding ratio is more likely around 40% than 70%!

Estimated actuarial funding ratios of public pension funds in the US

Source: Lu et al. (2019).

In most countries, private pension funds with such massive underfunding would be forced to either restructure or close. Yet, thanks to some simple accounting tricks, the true level of underfunding has been covered up for years.

One of the tricks to use to keep funding ratios high is to keep expected returns for risky assets, such as equities high because that will allow the pension fund to discount liabilities at a higher discount rate. And despite a ten-year equity bull market and steadily declining Treasury yields, the expected returns of public pension funds remain stable at 8% per year. Every investor knows that expected returns vary over time, depending on the valuation of the assets today. But public pension funds seem to be oblivious of that fact.

Of course, they aren’t. They know full well that their expected returns are too high at the moment and that their true funding ratios are lower than their published numbers. But they can’t say that out loud because that would start a discussion about who is going to fund the gap. And in the case of public pension funds the answer to that question is very simple: it’s taxpayers.

So instead of owning up to the problem, politicians and trustees of public pension plans rather kick the can down the road and assume unrealistically high expected returns and discount rates for liabilities. And to achieve these high returns, they have to reach for yield, particularly in the fixed income space where current yields are extremely low. No wonder, bank loans, high yield and private debt are so popular with pension funds these days…

Expected returns of public pension funds in the US

Source: Lu et al. (2019).

1. The effect that the funding ratio has on risk-taking captures the effect of reach for yield. In our regression analysis we interpret the coefficient on the funding ratio as capturing reach-for-yield effects. 
2. After controlling for funding ratios, interest rates may also affect risk-taking because they affect risk-premia. We interpret the coefficient on interest rates in our regression analysis as the risk-premium effect. 
3. The reach-for-yield and risk-premium effects interact in theory. We allow for their interaction in our empirical specification. 
4. How state finances affect risk-taking depends on whether states can shift risk to their debt holders. If they do shift risk, then state debt-to-income ratios that are large enough lead to higher risk-taking, especially for underfunded pension plans. If states don’t shift risk, then greater state debt is predicted to lead to lower risk. 
5. The effect that state finances have on risk-taking also interacts with the risk premium channel of risk-free rates. If states can default on their debt, then for state debt-to-income ratios that are high enough, lower risk-free rates lead to higher risk-taking.

I couldn't resist but ask her about Gina Raimondo and whether her critics are right or wrong. She told me they are wrong and Rhode Island implemented three important things to address their shortfall:

1. Adopted a hybrid DB/ DC model where if returns are over 7.5%, you're ok in DB model
2. Made ARC payments, made sure budget surpluses are used to pay pension payments
3. And most importantly, adopted conditional inflation protection where COLAs are partially lowered if the return target is not met (based 1/2 on CPI and 1/2 on return target).

US headline inflation was flat on the month versus expectations of a 0.1% month on month gain, which leaves the annual rate of inflation at 1.7%.

Meanwhile core inflation, which strips out volatile food and energy products and services, also undershot. It rose 0.1%MoM - the weakest rise for four months, leaving the annual rate of core CPI at 2.4%. This is important because there had been some concern that inflation pressures were starting to build following three consecutive 0.3%MoM increases. If the pick-up had continued it could have been perceived as a constraint on potential future Fed stimulus.

Looking at the details energy was a drag given the declines in gasoline prices, but there was also a big fall in used car prices (-1.6%MoM) and apparel prices fell 0.4% - the first decline since April. Medical care costs also showed a slower rate of inflation, but the shelter component remains firm, rising 0.3%.

Tariff hikes felt in goods prices, but pipeline price pressures look to be easing

A focus on growth

There continues to be evidence to suggest that tariff hikes are putting upward pressure on consumer prices, given the marked pick-up in goods price inflation in recent months. However, inflation is a lagging indicator and service sector inflation doesn’t show a broader threat. With PPI and wage growth slowing we may already be seeing a moderation in pipeline price pressures that results in the Fed retaining a relaxed attitude to inflation, especially given the weakness in forward-looking activity survey such as NFIB and ISM. Moreover, with real wage growth softening the outlook for consumer spending may also be a little less rosy.

Real wage growth no longer accelerating

Between now and October 30

Looking at the data flow between now and the October 30 FOMC meeting, we have to say the odds of a third rate cut from the Fed are likely to increase.

Next week’s retail sales will have positives from autos, but gasoline will be a drag and chain store sales have been softer. Industrial production will fall, led by manufacturing, given employment in the sector fell and the ISM production component is firmly in the contraction territory. Housing data may be supported by falling mortgage rates, but the declines in consumer confidence suggest this may not last.

Other than that it is durable goods orders, which is already pointing to a contraction in investment spending in Q4 and then we have 3Q GDP the day of the Fed meeting – we are forecasting 2% growth with the Atlanta Fed Nowcast currently at 1.8%. The last Fed official scheduled to speak are Charles Evans and John Williams on October 17th, but by that point, we suspect a 25bp cut will be virtually certain in the market’s mind versus the 76% (19bp) currently priced.

"This is a classic lagging indicator, you should draw it with the yield curve to appreciate how it lags. Above this, I’d be curious to see G7 CPI trends ex US. Did you see the PPI numbers earlier this week? Lastly, if inflation is trending up why are bond yields trending lower? The bond market knows it’s a lagging indicator."

I know inflation is a lagging indicator in relation to recessions. But I wasn't asking about that.

Regarding PPI, I don't know much about it and I'm not interested in one month readings on any inflation indicator.

As for the bond market, you can't have it both ways. For over a year you argued that the bond market had it wrong, selling off and indicating rates were going higher. Now you argue it's prescient. Either it's prescient or not. It's not credible to suggest its prescient only when it agrees with you. To be sure, I think it is generally the "smart" money, and I would never ignore it. But when the buying or selling looks panicky, as it has recently, just as the selling did last summer, then I tend to discount it.

My real point is just this: if inflation has been flat or trending down, and the forces of disinflation have been overwhelming the forces of inflation, over the last six years, which appears to be the dominant narrative, how do you explain median CPI? I have no doubt it will peak and roll over at some point. My question, however, is about the trend. Will it roll over to a higher low, and thereafter roll back up to a higher high, continuing the trend over the last six years; or will it roll over and thereafter conform to the aforementioned disinflation narrative.

As you know, I have for a very long time subscribed to the disinflation argument. So it's not as if a long-time inflationista is posing this question. But I always looks for ways I might be wrong. This one indicator, a solid indicator of core inflation trends, has been running counter to my long-standing argument. It behooves me to sit up and take notice. Hence my quest to try and make sense of it.

While the data on economic growth (more on that in a moment) gets the bulk of the attention, there is reason not to overlook the inflation data. The inflation picture is not totally benign. The six-month change in the trimmed-mean PCE inflation indicator has risen to its highest level in a decade. This measure (published by the Dallas Fed) is moving in the direction of the median CPI (published by the Cleveland Fed). These academically-rigorous inflation measures show more price pressure than the politically expedient core inflation measures that exclude food and energy prices. This could complicate the market’s expectation of additional easing by the Fed.

“Core CPI increased slightly less than expected in September, while remaining unchanged at 2.4% y/y. The main culprits of the weaker-than-expected momentum in core CPI was a 1.6% drop in used-car prices during September, while new vehicle costs were down 0.1% and apparel prices fell 0.4%. Headline CPI also increased slightly less than expected and headline CPI inflation is trending lower due to decreasing energy prices.”

“Core CPI has been above or at 2% since March-2018, to a large extent driven by growth in core services prices. However, over the last months core goods prices have clearly increased and now stand close to the highest level since 2012 in year-over-year terms.”

“Stronger inflationary pressure has also started to appear in Fed’s favourite inflation measure, Core PCE, which hit 1.8% y/y in August. Even if Core PCE converges towards the 2% target over the next months, we don’t expect it to have much implication for monetary policy. Fed has earlier indicated that they would like to see inflation above 2 % for a prolonged period to be in line with its symmetrical 2% target.”

“More importantly is the contraction among US manufacturers and weaker growth among US non-manufacturers. Therefore, we expect another 25bp rate cut in both October and December with risks tilted towards another cut in 2020.”

The New York Fed’s monthly survey of consumer expectations, which Fed officials look at along with other data on pricing, showed consumers’ one-year inflation outlook declined 0.2 percentage point to 2.4% last month, the lowest since the survey was launched in 2013. The three-year outlook for inflation expectations fell by 0.1 percentage point to 2.5%.  

Farmland is gaining attention from pension funds, corporations and investors alike. Recently, relevant conferences are growing in size and number, showing there is a real desire for education on farmland investing, and many institutions have begun taking the necessary steps to find a spot for farmland within their portfolios – often under “real assets”, an umbrella that also includes real estate and infrastructure.

Farmland’s fundamental role in food production, a necessity to life, ensures its market stability even in the most uncertain of times – no matter what the economy does, people still need to eat. Due to increases in population and the westernization of diets, the demand for farmland is actually increasing faster than supply, globally. Whether it is through higher productivity that enables supply to meet demand, or higher crop prices that generate more profit on the same acres, profitability seems poised to continue to rise, and land prices will follow. Institutional investors are taking notice.

As the fifth largest agricultural exporter globally, with a strong history of consistent land appreciation and a stable political environment, Canada is a prime investment opportunity in the space.

Why is now the time to look at farmland investments?

Canadian farmland sits on a foundation of strong historical performance, and is expected to continue to hedge inflation and add much needed diversification to most portfolios, while it continues to appreciate in value. Some of the key characteristics of Canadian farmland as an investment are:

• Historical performance: Canadian farmland typically has volatility levels similar to that of bonds, while offering returns more in line with equities, creating an attractive risk-return profile for institutions;

• Inflation Hedge: The market value of Canadian farmland has historically correlated with inflation, and therefore may be a partial hedge for investors seeking to protect their portfolios;
• Diversification: Canadian farmland has a low correlation with other asset classes – profitability changes resulting from the increase in physical crop yields and the addition of higher value crops keep North American farmland drivers distinct from that of real estate, infrastructure and private equity at large;

• Stable appreciation: The national average appreciation is 7.4% per acre (p.a.) for 1949 – 2018, and 7.1% p.a. for 1999 – 2018 with a standard deviation of 2.8%. Further, the Canadian dollar (“CAD”) acts as a hedge for crop prices, which stabilizes Canadian farmland prices;
• Projected improvement: As a result of technological advances and a longer growing season, a result of climate change, Canada has benefited from the from higher crop yields and the introduction of more profitable crops like canola, corn and soybeans:
• The 10-year average canola yield growth increased from 1.0% p.a. (1998 – 2007) to 5.7% p.a. (2008 – 2017); comparative annual yields for wheat increased from 1.7% to 5.1%, respectively; and for oats from 1.4% to 1.9%, respectively; and
• Between 2014 and 2018 seeded acres of crops increased by 6.6%, and seeded acres of the most profitable crops (soybeans, corn and lentils) increased by 20%, in aggregate.

What is holding back institutional investments into Canadian farmland?

Though Canada has a very active market, with over $10 billion of farmland trading annually, it also has significant barriers to access:

• It is estimated that over 80% of Canadian farmland trades off market;
• The majority of Canadian farms are small, in terms of scale, and therefore about 7 – 10 acquisitions are required to build at-scale (+7,000 acre), efficient properties; and
• Protectionist legislation prevents institutional investment in Manitoba, Saskatchewan and Prince Edward Island.

It is perhaps because of the barriers to access that Canada has remained owner-operated, which has created a significant opportunity for investment. Canadian farmers, generally a risk averse community who shy away from taking on high debt levels, are seeking alternative means to scale. Farmers are proving hesitant to take on large bank loans, and traditional lease-back models leave the farmers worried that one bad year could lose them their land. Additionally, financial institutions are not set up in a way which enables them to finance certain capital improvement projects that don’t have same-year cash-flows, such as land conversion, even when they add significant value over the long-term.

While some Canadian institutions have started investing in farmland directly, they have found difficulties operating in the Canadian market due to the lack of large-scale assets available. However, as the desire to make a play in the Canadian market grows, a number of funds driven to enable domestic investment in this space have emerged. There are two primary investment models in Canada: lease-back, which sees investors purchasing the land and renting it back to the farmers, often at high annual rates, and partnership, which functions similarly to a private equity investment alongside the farms themselves. Area One Farms (“Area One”) employs the latter, and has done so successfully.

The Partnership Model – a new way to look at farmland investments:

Area One partners with farmers, and co-invests in land acquisitions and improvement projects. Its unique partnership approach was developed on the principal that by doing well for the farmer Area One can create a sustainable model that benefits both the investors, and Canadian agriculture industry as a whole. The partnership model hinges on providing the farmers with the tools and resources they need to work their land their way, in the most efficient and sustainable way possible.

To date, Area One has 160,000 acres under management, has deployed $250 million of capital, and is currently raising its fourth fund (“Fund IV”). Through its partnerships, Area One has achieved access to the vast landscape of Canada’s off-market transactions, which enables it to build at-scale farms (+7,000 acres). From investing in improvement activities, Area One has realized farmland appreciation beyond that of the ‘natural’ market. Moreover, because Area One offers a different funding solution to Canadian farmers, it has access to a deep pipeline of potential farm partners and opportunities. In the first half of 2019 alone, the fund was approached for over $200 million of investment from over 65 farmers across the country. This is to illustrate that there is no shortage of demand for capital in the Canadian farmland space, and further that there is a need for innovative solutions which allow the farmers to do what they do best: farm.

Joelle Faulkner talked a lot about farmland and she really knows her stuff. She said it's not correlated, non-leveraged and you can get anywhere from 8 to 12% return (she cited development projects for higher returns). She said most Canadian farms are small (2000 acres on average) relative to Australia's massive farms (20,000 acres).

She prefers the equity participation model over the own and lease model and I asked her to come back to me on a blog comment to cover farmland in more detail.

Want to expand your farm for the next generation? Want to buy out some of your landlords? Want to work your way out of a difficult financial situation? A Canadian company called Area One Farms partners with producers to meet these sorts of objectives.

The company has relied on word-of-mouth advertising and even though it has been running for seven years, most producers have never heard of what it offers. According to chief executive officer Joelle Faulkner, it has $250 million invested with 18 farm operations in Alberta, Saskatchewan, Manitoba and Ontario.

It’s an equity-based model in which Area One Farms becomes an equity partner in the farm. Farmers get 100 percent of the income and appreciation from their portion of the joint venture, plus 15 percent of the income and appreciation from the portion owned by Area One Farms.

In addition to the land, Area One Farms will also share in the cost of equipment and grain storage. Each deal is designed around the needs of the particular farm operation. No rent or other expenses are charged by Area One.

The initial agreement runs for 10 years at which time the farmer can renew or buy out as much of the joint venture as he can afford. Area One never owns land by itself. The land is either in a joint venture or it’s sold to another farmer.

Faulkner says the biggest challenge has been finding investors. Most private investors prefer the model where they buy land and rent it out. However, some institutional investors are comfortable with becoming equity partners, realizing the deal allows them to do well over the long term.

“By carefully and slowly finding investors, we have been able to maintain our farmer-centric approach,” says Faulkner.

It is now at a stage where it is able to enter into more equity partnerships.

The farmer never deals with any of the investors, but there is a very close relationship with Area One Farms. In fact, Area One has to approve the budget and crop plan as well as capital decisions. It keeps the books, pays the bills and offers advice.

The traditional ways to expand the farm are to take on debt and/or rent more land. There’s a limit to how much you can borrow and debt obligations can be tough to service in a bad year. Renting land can lead to significant losses and rental agreements are seldom secure for more than a few years.

Forming a joint venture with an equity partner is a very different approach. You certainly give up some autonomy, but you don’t have interest and cash rent payments to worry about. Sometimes a farm’s existing land base is rolled into the joint venture and sometimes it isn’t. Each deal is a bit different.

While Faulkner says Area One is happy to have more farm partners, they are selective. They look at a farm’s financial and cropping history before agreeing to be part of a joint venture. And in certain regions, farmland is just too expensive for their liking.

Equity partnerships may never be a mainstream practice in Canadian agriculture, but for some producers it appears to be an option worthy of consideration.

Private equity is too big to ignore — for both investors and regulators.

“It’s critical,” said Peter Witte, associate director of Ernst & Young’s private equity group, in a phone interview. “If you’re not invested in private equity, or private capital, then you’re really missing out on where our economy is growing.”

Private equity firms now manage $3.4 trillion of investor commitments globally, up from less than $500 billion in 2000, according to a report, expected to be released Wednesday, from EY and the Kenan Institute of Private Enterprise at the University of North Carolina at Chapel Hill. Citing Preqin data, they said private capital assets have risen to $6 trillion, including infrastructure, real estate, private debt and natural resources.

At the same time, the pool of publicly traded companies in the U.S. has shrunk by almost half in the past 20 years, according to the report, which cited data from The World Bank. Companies backed by private equity firms employ almost nine million people in the U.S., the report shows, underscoring their broad and growing reach in the economy.

“We’re in a place now where private equity firms have a super abundance of capital,” said Witte. “As more capital flows into private equity, or private capital, there’s naturally going to be a more important role for regulators to play.”

Witte declined to comment on the private equity reform that Elizabeth Warren, the U.S. Senator and Democratic candidate for President, has proposed under the “Stop Wall Street Looting Act.” Warren announced the bill in July, raising concerns about the potential for bankruptcies and job losses when private equity firms load companies with debt to increase their returns.

Regulators could have a role in opening private equity to ordinary investors, said Witte, adding that the Securities and Exchange Commission is evaluating ways to give them access to private markets. While institutional investors such as pensions and endowments have long locked up their capital in private equity funds, average investors don’t have such access.

“There is a liquidity trade off,” he said. “That is why private capital has been limited — at least so far — to large sophisticated investors.”

Firms have experimented with structures that might allow private equity to make a breakthrough in 401(k) plans, where trillions of dollars are invested for retirement savings, according to Witte. In the meantime, many large and wealthy investors are planning to increase their allocations to private equity in hopes of finding returns that beat public markets.

About two-thirds of institutional investors have exposure to private equity, allocating an average 10 percent of their portfolios to the asset class, according to the EY report. A “modest shift” among existing investors could result in “significant additional inflows” to private equity, the report said.

Households, including family offices, wealthy individuals and ordinary investors, could really move the needle on inflows to private equity. Moving a mere one percent of their total equity holdings to private equity would translate into $149 billion of capital for the alternative investment industry, the report showed.

Private equity firms use different strategies, raising funds that invest in early-stage venture capital deals, growth capital strategies, and large leveraged buyouts. Companies can also turn to private equity firms as lenders, as seen in the growth of shadow banking over the past decade.

“We’re in the middle of this shift in the way that companies are getting funded,” Witte said. “Companies can spend more of their lifecycle on the private side.”

The boom in private equity is coinciding with stagnation in the public markets. The report described the growth as “one of the most profound shifts in the capital markets since the 19th century,” when public equity markets became widely accessible to investors and companies.

“It’s become increasingly clear that the model of public ownership is increasingly falling out of favor, at least for many companies in the middle-market space and those in the more growth-oriented stages of their maturity curves,” the report said.

While some businesses fare well under the scrutiny of a large shareholder base in public markets, others are better suited to private equity owners who can fund “transformational changes” beyond the public eye, Witte explained.

“It really boils down to who’s the best owner for a particular company or asset,” he said.

• Opportunities outside the US and Europe, where penetration is much lower: PE activity in the emerging markets has seen tremendous, albeit uneven, growth.  According to data from the Emerging Markets Private Equity Association (EMPEA), activity in the emerging markets represented 23% of global PE investment activity in 2018, up from just 9% a decade ago. Powerful secular trends, including a growing middle class, an emerging consumer culture and strong demographics, make the emerging markets one of the industry’s clearest growth opportunities. In the US and UK, for example, average annual PE investment activity represents 1.7% and 2.1%, of GDP, respectively. In emerging markets such as India, China, Brazil, and sub-Saharan Africa, the penetration rate of PE is far lower – just 0.36% in India, and 0.16 in China, for example.
• Opportunities outside the equity stack: Some of private capital’s most significant growth may not come on from the equity side at all. Assets in the private credit space, including direct lending, distressed, and mezzanine funding have grown dramatically in recent years – from approximately US$240b a decade ago, to US$837b as of September 2018, according to Preqin. Investors appreciate the diversification benefits of the space as well as the opportunity to access returns (and risk profiles) that are generally higher than their other fixed-income portfolios. And while the industry is certainly subject to the economic and credit cycles, the longer-term trend is toward more activity shifting from traditional lenders to nonbank lenders. Recent years in particular have seen PE-backed credit funds underwrite larger deals that would once have been the exclusive province of the leveraged loan and high yield markets.
• Additional areas of growth: Many opportunities may come from companies that have traditionally been outside of PE’s purview. Longer-term funds, for example, are designed to hold companies for periods of 15 – 20 years or more, opening the investable universe to companies which may not be suitable for shorter hold periods.

This latest buy-out fund, Permira’s seventh, will invest in businesses in the technology, consumer, financial services, healthcare and industrial technology industries. It has so far committed to two new investments.

Permira began raising cash for this fund at the start of 2019, and it said that existing investors as well as new ones had made commitments.

Earlier this year, the California Public Employees Retirement System disclosed it had committed 520 million euros to the fund.

Investors are wary of making new hedge fund allocations after managers stumbled into their first quarterly loss of the year.

The industry declined 0.21 percent during the three months through September, dragged down by losses in August, according to a Preqin report Thursday. The number of hedge funds created in the third quarter dropped about 45 percent from the previous three months, “perhaps as managers put plans on ice in a difficult macroeconomic climate,” the alternatives data provider said in the report.

The majority of investors seems to be taking a “cautious approach” to the asset class, with 73 percent expecting to allocate less than $50 million in fresh capital to hedge funds over the next year, according to Preqin. Sixty-one percent of investors said they wanted more diverse portfolios regionally, and were seeking global mandates to mitigate geopolitical risks and heightened market volatility.

“As recessionary fears grow, the hedge fund sector is facing challenges – and opportunities – on multiple fronts,” Preqin said. “Long/short equity remains the most sought-after core strategy.”

Fifty-one percent of hedge fund mandates are targeting long-short equity over the next 12 months, the data tracker said. Macro is the next most popular strategy in fund searches, followed by multi-strategy hedge funds.

Macro was the best-performing core hedge fund strategy in the year through September, with a 5.61 percent return, according to Preqin. That’s more than double the 2.14 percent gain produced by hedge funds across all strategies over the same period, according to the firm’s benchmark index.

“The proportion of macro strategies funds also rose significantly between quarters,” Preqin said of the number of funds launched during the third quarter. “Perhaps investors are increasingly looking for downside protection.”

Hedge funds focused on credit strategies had the second biggest returns in the year through September at 3.96 percent, followed by multi-strategy at 2.95 percent, the report shows. The same categories were top performers in the third quarter with gains of about 1 percent each.

Event-driven hedge funds, meanwhile, saw the worst performance in the third-quarter, tumbling 1.36 percent to increase their losses to 1.5 percent for the year through September.

Investors have faced “an increasingly turbulent political backdrop,” while central banking moves haven’t quelled fears of an economic contraction, according to Preqin.

Two rate cuts by the Federal Reserve during the third quarter failed to “ignite investors,” the firm said. “When the U.S. yield curve inverted in August, fears of an impending recession intensified.”

A survey released Thursday found that 37% of institutions polled reduced hedge fund wagers, while 14% increased them and about half remained unchanged. About a fifth said they plan to cut their exposure to the asset class in the coming year, according to the report by investment consultant NEPC.

Endowment returns slumped in fiscal 2019, hurt by their exposure to international equities. Schools have also piled into hedge funds. The average fund was flat in the 12 months through June while the S&P 500 rose more than 10%.

Most of the endowments and foundations surveyed have a fifth or less of their portfolios committed to hedge fund managers. For those that made cuts, 20% was redeployed to fixed-income, while 17% went to private equity and credit, the poll found.

A quarter of those surveyed said the biggest challenge with hedge funds is high fees while 16% cite low or disappointing performance.

NEPC’s results are based on about 50 respondents covering the 12 months ended in September.

The Dow Jones Industrial Average fell sharply on Friday, weighed down by steep losses in Boeing and Johnson & Johnson. The broader market was also pressured by a decline in Netflix shares that led other Big Tech stocks lower.

The 30-stock index ended the day down 255.68 points, or 0.95% to close at 26,770.20. Boeing dropped 6.8% — its biggest one-day drop since February 2016 — on news that company instant messages suggest the aerospace giant misled regulators over the safety systems of the 737 Max. Johnson & Johnson slid 6.2% after the company recalled some baby powder upon finding traces of asbestos.

Friday’s losses wiped out the Dow’s gains for the week. The index closed down 0.2% week to date.

Meanwhile, S&P 500 pulled back 0.4% to end the day at 2,986.20 while the Nasdaq Composite slid 0.8% to 8,089.54. Netflix shares dropped more than 6%. Facebook, meanwhile, slid 2.2% while Amazon fell 1.6%. Alphabet shares pulled back 0.4%.

Both indexes were able to post solid gains for the week despite Friday’s decline. The S&P 500 rose 0.5% week to date while the Nasdaq gained 0.4% as enthusiasm around the first batch of corporate earnings lifted market sentiment.

More than 70 S&P 500 companies reported calendar third-quarter earnings this week. Of those companies, 81% posted better-than-expected results, FactSet data shows.

Some of the companies posting stronger-than-forecast results this week include Bank of America, Netflix, J.P. Morgan Chase and Morgan Stanley. Coca-Cola continued that trend on Friday, rising more than 2%.

“There was so much nervousness coming into the earnings season about what they would bring, there is some happiness that this is pretty good,” said JJ Kinahan, chief market strategist at TD Ameritrade. “What they’ve really done is two things: Show the financials are incredibly resilient, and confirm that the consumer is ridiculously healthy.”

Optimism around Brexit also gave stocks a boost this week. The U.K. and European Union struck a long-awaited draft Brexit deal. British and EU officials reached the agreement after successive days of late-night talks and almost three years of tense discussions.

British Prime Minister Boris Johnson will now attempt to persuade U.K. lawmakers to back his agreement, ahead of what is expected to be a knife-edge vote on Saturday.

“There seems to be an underlying eagerness to see the SPX sustainably break above 3K and hit fresh highs,” Adam Crisafulli, founder of Vital Knowledge, said in a note. “But in reality this feels like an attempt by people to wrap a fundamental justification around a bullish bias that is really being motivated by positioning pain, performance anxiety, and general ‘FOMO.’”

“In the very near-term, a 3K upside break might happen, but this will probably wind up being nothing more than a brief ‘head fake’ rally,” Crisafulli wrote.

• The first and most important thing is Fed is easing mode. In fact, since last December when stocks got slammed, the Fed and other central banks are in easing mode, and that monetary stimulus typically works itself into the market with a lag of about 12 to 18 months.
• Still, that doesn't mean stocks can't get hit at any time, especially in the near term as geopolitical risks reign. And there is something else to keep in mind, we are headed towards US elections next November. That means big money is trying to position itself ahead of the trade. If Trump gets re-elected, stocks will likely have a relief rally, if Elizabeth Warren or Bernie Sanders get elected, stocks will likely get slammed. I say likely because nobody really knows who will win or what will happen to the stock market after regardless of who wins. The big wildcard is if Trump gets impeached but without support from the Senate, I don't see this happening.
•  We already had the Quant Quake 2.0 in September, so it remains to be seen whether another one hits us going into year-end. It might but my hunch is it won't because typically investors want to wrap up the year in cruise control, locking in their gains and waiting for the new year to come.

The global over indebtedness has clearly restrained growth, and therefore has had a profound disinflationary impact on every major economic sector of the world. This fact, coupled with an overzealous U.S. Central Bank have created the conditions for an economic contraction in the U.S. and abroad. This has also created a worldwide decline in inflation and inflationary expectations. It is therefore unsurprising that record lows in long term interest rates have been established in all major economic regions. A quick and dramatic shift toward greater accommodation by the Fed could begin to shift momentum from contraction toward expansion. However, policy lags are long and slow to develop, therefore despite the remarkable decline in long term yields this year, we are maintaining our long duration holdings. A shift towards shorter duration portfolios would be appropriate when the forward-looking indicators of expansion, in the U.S. and abroad, begin to appear.

Matthew Burgess of Bloomberg reports on the best and worst pension systems in the world:

The Netherlands and Denmark have the best pensions systems in the world, according to a global study that shines a light on how nations are preparing aging populations for retirement.

The countries took the top two slots in the Melbourne Mercer Global Pensions Index published Monday, both earning an A grade for the level of financial security provided in retirement. Australia came in third, with a B+ grade, while the top 10 was rounded out with Finland, Sweden, Norway, Singapore, New Zealand, Canada and Chile all on B.

The survey of 37 nations, which covers almost two-thirds of the world’s population, uses 40 metrics to assess whether a system leads to improved financial outcomes for retirees, whether it is sustainable and whether it has the trust and confidence of the community.

The Netherlands again took the top spot in 2019 with most workers benefiting from defined benefit plans based on lifetime average earnings. The U.K. and the U.S. both earned a C+ grade, coming in 14th and 16th place respectively. Both could boost their scores by raising the minimum pension for low-income pensioners, according to the report.

Japan came in at No. 31 and was ranked with a D — a grade that reveals “major weaknesses and/or omissions that need to be addressed.” A key recommendation included raising the state pension age as life expectancy continues to increase in the nation. Thailand was in the bottom slot and should introduce a minimum level of mandatory retirement savings and increase support for the poorest, the report said.

The study comes as policy makers grapple with more people entering retirement, living longer and needing a steady flow of income on which to survive. Almost one-fifth of the world’s population is forecast to be of retirement age by 2070, up from about 9 per cent this year, United Nations data show.

“Systems around the world are facing unprecedented life expectancy and rising pressure on public resources to support the health and welfare of older citizens,” said David Knox, the report’s author and senior partner at Mercer. “It’s imperative that policy makers reflect on the strengths and weaknesses of their systems to ensure stronger long-term outcomes for the retirees of the future.”

While retirement systems in many Asian nations improved from last year the report found they lack transparency and workers aren’t saving enough for retirement compared to their global peers.

The study also explores the so-called wealth effect — the tendency for spending to increase with rising wealth. Mercer found that as pension assets increase, people feel wealthier and are more likely to borrow.

“Such an outcome is not a bad thing,” Knox said in the report. “The assurance of future income from existing pension fund assets enables households to improve both their current and future living standards.”

You can read the full Melbourne Mercer Global Pensions Index2019 report here.

Dr. David Knox, Senior Partner at Mercer, wrote the preface to the report:

Pension systems around the world, including social security systems and private sector arrangements, are now under more pressure than ever before. Significant ageing of the population in many countries is a fact of life. Yet this is not the only pressure point on our pension systems. Others include:

• The low-growth/low-interest economic environment which reduces the long-term benefit of compound interest, particularly affecting defined contribution arrangements
• The increasing prevalence of defined contribution schemes and the related increased responsibility on individuals to understand the new arrangementsƒ
• the lack of easy access to pension plans for some workers in both developed and developing economies, whether it be due to informal labour markets or the growing importance of “gig employment”
• government debt in some countries which affects the ability to pay benefits in pay-as-you-go systems while high household debt in other countries will affect the long term adequacy of the benefits provided
• the need to develop sustainable and robust retirement income products as retirees seek more control and flexibility over their financial affairs

As significant pension reform is being considered or implemented in many countries, it is important that we learn together to understand what best practice may look like, both now and into the future. This 11th edition of the Melbourne Mercer Global Pension Index presents such research and compares 37 retirement income systems which encompass a diversity of pension policies and practices.

The primary objective of this research is to benchmark each retirement income system using more than 40 indicators. An important secondary purpose is to highlight some shortcomings in each system and to suggest possible areas of reform that would provide more adequate retirement benefits, increased sustainability over the longer term and/or a greater trust in the private pension system.

Many of the challenges relating to ageing populations are similar around the world, irrespective of social, political, historical or economic influences. Further, the policy reforms needed to alleviate these challenges are also similar and relate to pension ages, encouraging people to work longer, the level of funding set aside for retirement, and some benefit design issues that reduce leakage of benefits before retirement. However, it should be noted that these desirable reforms are often not easy and may require long transition periods.

The preparation of this international report requires input, hard work and cooperation from many individuals and groups. I would like to thank them all.

First, we are delighted that the Victorian Government continues to be the major sponsor of this project.

Second, the Monash Centre for Financial Studies within Monash University has played an important role in this project, particularly in establishing an expert reference group of senior and experienced individuals who have provided helpful comments throughout the project.

Third, Mercer consultants around the world have been invaluable in providing information in respect of their retirement income systems, checking our interpretation of the data, and providing insightful comments. In this respect, we also appreciate the support of the Finnish Centre for Pensions.

I hope that you enjoy reading this report and that it continues to encourage pension reform to improve the provision of financial security for all retirees.

Again, take the time to read the full report here.

Not surprisingly, The Netherlands and Denmark have the best pension systems in the world, but as I recently discussed, the world's best-run pensions are starting to worry as negative rates swamp Europe and overly restrictive regulations are exacerbating the problem by forcing pensions to de-risk, buying more negative bonds and artificially inflating liabilities.

Now, the Melbourne Mercer Global Pension Index uses three sub-indices – adequacy, sustainability and integrity – to measure each retirement income system against more than 40 indicators. The following diagram highlights some of the topics covered in each sub-index:

The overall index value for each system represents the weighted average of the three sub-indices. The weightings used are 40 per cent for the adequacy sub-index, 35 per cent for the sustainability sub-index and 25 per cent for the integrity sub-index which have remained unchanged since the first Index in 2009.

The different weightings are used to reflect the primary importance of the adequacy sub-index which represents the benefits that are currently being provided together with some important system design features. The sustainability sub-index has a focus on the future and measures various indicators which will influence the likelihood that the current system will be able to provide benefits into the future. The integrity sub-index includes several items that influence the overall governance and operations of the system which affects the level of confidence that the citizens of each country have in their system.

I honed in on Canada which scored 69.2 in the overall index -- 70 for Adequacy, 69.8 for Sustainability and 78.2 for Integrity.

By comparison, The Netherlands which I highlighted got top spot, scoring 81 in the overall index -- 78.5 for Adequacy, 75.3 for Sustainability and 78.2 for Integrity. This top score was given despite concerns within the country about reducing the pension.

Clearly Canada lacks in the Sustainability sub-index of this report, receiving an overall C+ grade for that sub-index and a B grade for Adequacy and Integrity.

As shown below, compared to last year, however, Canada improved its Sustainability score (from 56 to 61.8) but saw its Adequacy score decline from 72.1 to 70 while the score for Integrity stayed unchanged at 78.2. This helped push its overall index score up from 68 in 2018 to 69.2 in 2019.

In Chapter 4 of the report, the authors provide a brief review of each system. Here is the one for Canada:

It is worth going over this:

Canada’s retirement income system comprises a universal flat-rate pension, supported by a means-tested income supplement; an earnings-related pension based on revalued lifetime earnings; voluntary occupational pension schemes (many of which are defined benefit schemes); and voluntary individual retirement savings plans.

The overall index value for the Canadian system could be increased by:

• increasing the coverage of employees in occupational pension schemes through the development of an attractive product for those without an employer-sponsored scheme
• ƒincreasing the level of household savings and reducing the level of household debt ƒ
• reducing government debt as a percentage of GDP
• >increasing the labour force participation rate at older ages as life expectancies rise

The Canadian index value increased from 68.0 in 2018 to 69.2 in 2019 primarily due to an allowance for the Canada Pension Plan in calculating the coverage percentage, as discussed in Chapter 3.

Twenty years ago, Jim Keohane was brought into the Healthcare of Ontario Pension Plan to launch its derivatives program. Since then, he’s climbed his way to the role of president and chief investment officer, grown his reputation as a trailblazer in liability-driven investing and navigated the pension fund through the financial crisis with positive returns.

“Prior to me being here, HOOPP had never done a derivative transaction so I was brought in for that reason,” he says. And now, the HOOPP is known around the world for its LDI strategy, which has derivatives at its core.

The LDI strategy began as a result of the technology meltdown of 2000- 2002, when the HOOPP quickly moved from surplus to deficit, says Keohane. “Effectively, our assets and liabilities moved in a different direction, so the liabilities went up and the assets went down, which is kind of the perfect storm, if you will, and we tried to think about ways that we could reduce that mismatch.”

The HOOPP’s previous derivatives transactions had allowed it to separate alpha and beta, using the arrangements to break a portfolio down to its component return streams, he says. “If you wanted to break down a portfolio into its component returns streams, you could think of it along the lines of the capital asset pricing model: risk-free, plus beta, plus alpha. Risk-free for us is long-term bonds, essentially. Beta is your exposure to risky asset classes, so you can get that through derivatives. So rather than actually physically being invested in equities, you can actually get that using equity index futures or options or swaps. And then alpha is any active management strategy.”

Typically, alpha is security selection, notes Keohane. However, a plan can use any absolute return strategy to substitute stock selection. This allowed the HOOPP to build its portfolio based on the building blocks as opposed to asset classes.

Most of the pension fund’s physical assets are in a liability-matching portfolio, with interest-rate sensitive and inflation-sensitive assets, such as real-return bonds, long-term bonds and real estate.

Then, as part of its return-seeking, the HOOPP layers on equity and credit exposure using derivatives, as well as internally executed absolute return strategies. The strategy also includes private equity.

The LDI approach allowed the plan to beat the financial crisis and produce a positive return for 2008 and 2009 combined, highlights Keohane.

Also, after looking at risk and stress testing, the HOOPP made a shift in 2007, moving 30 per cent of its money out of equities into long-term bonds and real return bonds. “We actually didn’t get very badly hurt because of that,” says Keohane. “And that actually benefited us quite a bit because being in a defensive position enabled us to buy long-term assets in 2008 at very attractive prices that benefited the fund for several years after that.”

A key differentiator to the plan’s approach is thinking about itself more as a pension delivery organization than an asset management organization, he notes. “And that sounds subtle, but it’s actually pretty profound because it refocuses you in terms of what you should be doing. It’s not just about beating markets, it’s about delivering on the pension promise.”

Keohane is set to retire from the HOOPP in March 2020.

Retirement is one of life’s biggest expenses. Yet while there has been vigorous debate about whether Canadians are saving enough for retirement, there has been much less discussion of how they are saving. Given stagnating income and strained household budgets, now is an important time to examine how best to achieve value for money in retirement savings. This study compares the efficiency of a variety of approaches to retirement, from a typical individual approach to a large-scale “Canada model” pension plan, as well as a variety of models in between.

The value for money in a retirement arrangement can be measured by the efficiency with which today’s savings generates tomorrow’s retirement income. In other words, how much does a person need to save, over a lifetime, to meet their retirement goals? This is influenced by saving behaviour, investment returns, and the ability to manage the post-retirement or “decumulation” phase in an efficient manner.

A review of evidence from both academic and industry literature reveals that good pensions create value for money for Canadians through five key value drivers:

1. Saving
2. Fees and costs
3. Investment discipline
4. Fiduciary governance
5. Risk pooling

The lifetime financial effect of combining these five value drivers can be dramatic. By participating in a top-performing pension plan—a plan with Canada-model characteristics, including independent fiduciary governance as well as scale, internal investment management, and risk pooling—a representative worker could achieve the same level of retirement security for a lifetime cost of nearly four times less than if they took a typical individual approach. This amounts to a lifetime savings of roughly $890,000.

The largest savings comes from risk pooling ($397,000), fees and costs ($275,000), and investment discipline ($116,000). From a retirement “bang for buck” perspective, for each dollar contributed, the retirement income from a Canada-model pension is $5.32 versus $1.70 from a typical individual approach.

Although these numbers may seem high, they are arguably calculated on a conservative basis and are directionally consistent with findings from a recent study of the Australian superannuation system.

This efficiency advantage does not depend on where the contribution comes from, whether from the individual, their employer, or the government.

Pensions are often identified with cost. This research shows that a better way to characterize pensions, especially if they are well governed and managed, is as efficient vehicles to pay for something expensive: retirement. In an era of government fiscal restraint and tight household budgets, it is especially critical that policymakers continue to support existing high-quality pension plans, of which Canada has some of the best regarded and most efficient in the world.

To take the opposite tack and move towards more individualized approaches to retirement would be to compromise value for money and efficiency. This would ultimately cost Canadians as savers, retirees, and taxpayers, and it would undermine a critical social and economic asset.

Policymakers should also encourage existing workplace retirement plan providers to adopt more of the characteristics of a good pension for their plans, including mandatory or automatic saving, lower costs, fiduciary governance, and risk pooling, especially during the post-retirement phase.

Unfortunately, outside the public sector, the past several decades have seen a trend away from pensions, resulting in a quiet but steady shift from collective to individualized approaches to retirement. Defined benefit pensions now cover only 10% of private sector workers—about a third of the coverage of the late 1970s—and overall workplace pension plan coverage has also declined. There is a growing number of uncovered workers who are disproportionately likely to be financially vulnerable Canadians, including lower-income people, women outside the public sector, young people, and new Canadians.

Economic and labour market trends, including automation, the rise of “nonstandard” work, and decreasing company longevity, suggest that, barring some intervention, this shift from collective to individualized retirement saving is likely to continue, if not accelerate. This will make retirement less efficient and thereby costlier for individuals, employers, and government.

In addition to continued support for good pensions, expanding access to pensions and other more collective retirement arrangements is a worthy goal for policymakers and other stakeholders that are concerned with the financial security of Canadians and their ability to make ends meet efficiently. Policymakers and other retirement system stakeholders, including employers, unions, associations, and private providers, could help more Canadians access a pension or other collective retirement plan by extending the reach of existing plans or by creating new plans to serve uncovered workers,
including the growing portion of the workforce that is considered nonstandard.

A key focus of such efforts should be on the five value drivers identified in this report: saving, fees and costs, investment discipline, fiduciary governance, and risk pooling. Pursuing quality coverage expansion will be challenging, but unlike in other developed countries, Canada is in a strong position: we already have examples of well-regarded efficient pensions in the public sector, institutions whose principles and key features can be applied to build or improve collective retirement arrangements for other parts of the economy.

Constellation Insurance Holdings (“Constellation”), founded by Anurag Chandra, former CEO of Prosperity Life Insurance Group (“Prosperity”), announced today that it has partnered with Caisse de dépôt et placement du Québec (“CDPQ”) and Ontario Teachers’ Pension Plan (“Ontario Teachers’”) and raised US$500 million in initial capital from them as founding investors. CDPQ and Ontario Teachers’ are two of North America’s largest institutional investors and together manage over CA$500 billion in net assets as of June 30, 2019.

“Constellation plans to invest in stock and mutual insurers based in North America that are seeking growth capital, stronger ratings, scale efficiencies and equity incentives while maintaining their independent management structure, brand identity, operations and entrepreneurial culture,” said Anurag Chandra, Founder, Chairman & CEO of Constellation. “Constellation’s target market and value proposition are differentiated versus other insurance platforms that focus on either asset accumulation, legacy block reinsurance or have shorter term investment horizons, which incentivize substantial expense reductions and limit investments in organic new business growth.”

“We believe this new partnership, which allies a unique combination of expertise to a flexible investment horizon, will provide a source of competitive advantage for Constellation” said Stephane Etroy, Executive Vice-President and Head of Private Equity at CDPQ. “We look forward to working with insurers’ management teams to support their existing operations and to identify new avenues for growth.”

“We are delighted to partner alongside CDPQ with Anurag Chandra, who has a distinctive and successful track record in the insurance sector including acquisitions, demutualizations, turnarounds and rehabilitations. As CEO of Prosperity, he built an attractive, high growth insurance platform that generated exceptional investor returns and favorable outcomes for all key stakeholders,” said Jane Rowe, Executive Managing Director, Equities, at Ontario Teachers’. “We expect this partnership with Constellation and CDPQ to create significant value for our stakeholders.”

ABOUT CAISSE DE DÉPÔT ET PLACEMENT DU QUÉBEC

Caisse de dépôt et placement du Québec (CDPQ) is a long-term institutional investor that manages funds primarily for public and parapublic pension and insurance plans. As at June 30, 2019, it held CA$326.7 billion in net assets. As one of Canada’s leading institutional fund managers, CDPQ invests globally in major financial markets, private equity, infrastructure, real estate and private debt. For more information, visit cdpq.com, follow us on Twitter @LaCDPQ or consult our Facebook or LinkedIn pages.

ABOUT ONTARIO TEACHERS’ PENSION PLAN

The Ontario Teachers' Pension Plan (Ontario Teachers') is Canada's largest single-profession pension plan, with $201.4 billion in net assets at June 30, 2019. 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 (all figures as at Dec. 31, 2018 unless noted). Ontario Teachers' is an independent organization headquartered in Toronto. Its Asia-Pacific region office is located in Hong Kong and in 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.

Former Chief Executive of Prosperity Life, Anurag Chandra, has secured $500 million in funding from Caisse de dépôt et placement du Québec (CDPQ) and the Ontario Teachers’ Pension Plan (OTPP) to launch Constellation Insurance Holdings, a platform set to focus on P&C and life insurer acquisitions and demutualizations.

Chandra, who will serve as CEO and Chairman of Constellation, says the new platform will invest in stock and mutual insurers based in North America that are seeking growth capital, stronger ratings, scale efficiencies and equity incentives while maintaining their independent management structure, brand identity, operations and entrepreneurial culture.

Chandra stepped away from Prosperity earlier this year after a ten year stint at the firm.

This new partnership will see him join forces with two of the largest investors in North America, with CDPQ and Ontario Teachers currently managing over CA$500 billion in net assets.

“Constellation’s target market and value proposition are differentiated versus other insurance platforms that focus on either asset accumulation, legacy block reinsurance or have shorter term investment horizons, which incentivize substantial expense reductions and limit investments in organic new business growth,” Chandra added.

Stephane Etroy, executive vice-president and head of private equity at CDPQ, said this new partnership will provide a source of competitive advantage for Constellation.

“We look forward to working with insurers’ management teams to support their existing operations and to identify new avenues for growth,” he added.

Jane Rowe, Executive Managing Director, Equities, at Ontario Teachers’, added, “We are delighted to partner alongside CDPQ with Anurag Chandra, who has a distinctive and successful track record in the insurance sector including acquisitions, demutualizations, turnarounds and rehabilitations.

“As CEO of Prosperity, he built an attractive, high growth insurance platform that generated exceptional investor returns and favourable outcomes for all key stakeholders.”

“We expect this partnership with Constellation and CDPQ to create significant value for our stakeholders.”

Prosperity, through its member companies, Shenandoah Life Insurance Company, SBLI USA Life Insurance Company, Inc. and S.USA Life Insurance Company, Inc., is a leading provider of protection, supplemental and asset accumulation products distributed through banks, independent marketing organizations, managing general agencies, career and worksite channels.

Meeting financial promises to our customers through financial strength and stability is paramount to everything we do and is evidenced by an A­- (Excellent) A.M. Best financial strength rating. We proudly service more than 300,000 policies with over $15 billion of life insurance in force. Prosperity had $2.5 billion in assets as of 2017 YE and generated $34 million in after-tax statutory earnings in 2017.

†A.M. Best financial strength rating is current as of publication date. For latest rating, accesswww.ambest.com.

Canadian pension fund Caisse de dépôt et placement du Québec (CDPQ) has agreed to buy erstwhile IDFC Private Equity’s road portfolio Highway Concessions One (HC1) for Rs 2,400 crore, three people with direct knowledge of the development said.

CDPQ pipped its Canadian peer, Canada Pension Plan Investment Board (CPPIB), and Indian sovereign wealth fund National Investment and Infrastructure Fund (NIIF), among others. HC1 comprises seven road assets covering 472 kilometres and having consolidated revenues of Rs 620 crore a year.

“The ask (valuation expectation) was around Rs 3,000 crore,” said a person involved in the process.

Global infrastructure fund manager Global Infrastructure Partners (GIP) had taken over private equity and other non-core businesses of IDFC in 2018 after the latter’s merger with First Capital.

The five toll roads and two annuity 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.

A GIP spokesperson declined comment while a CDPQ spokesperson did not respond to emailed queries as of press time Tuesday.

Over the last five years, CDPQ has significantly increased its involvement in Québec venture capital funds, including seed funds such as Anges Québec Capital, InnovExport and Real Ventures. This approach gives CDPQ access to a roster of promising companies that often gives rise to potential targets for direct investments, as seen with Hopper, Breather, Dialogue, AlayaCare and many others.

“Without a rich and dynamic startup ecosystem, there is a risk of considerably fewer quality investment opportunities in the subsequent growth and maturity phases, especially in disruptive niches. It is therefore key to invest at the very start, when companies are created, and then monitor their progress over time,” said Charles Émond, CDPQ’s Executive Vice-President and Head of Québec Investments and Global Strategic Planning.

Seed funds are critical to providing not only financing, but ongoing support for new companies. To provide solid support to these funds’ teams, CDPQ has mandated Teralys, with its deep knowledge of the Québec venture capital ecosystem, to manage this envelope.

“This CDPQ initiative dedicated to local seed funds fits well with our desire to help expand entrepreneurship in Québec by providing support with high added value,” added Éric Legault, Managing Partner at Teralys Capital. “We are proud of CDPQ’s renewed confidence, which over the last ten years has allowed Teralys Capital to build the largest Canadian investor specialized in innovation right here in Montréal.”

With the creation of this mandate, CDPQ aims to support the professionalization of new Québec seed managers and ensure they adopt best practices within their firms.

It comes as a response to an article in La Presse which said the train could be delayed by almost two years because of work on the Mount Royal tunnel.

"The project is on schedule. Even in certain sections, it's ahead of schedule," said Harout Chitilian, executive director on CDPQ Infra, the subsidiary of Caisse de depot leading the project.

La Presse obtained an internal report produced for the builder about the Mount Royal tunnel. The report stated that the Montreal fire department will require the tunnel to have a firewall between the north and southbound tracks and a ventilation system to evacuate smoke in the case of a fire. It also suggests the tunnel may have to be widened for safety purposes.

"Everybody knows that this is a 100-year-old tunnel. Everybody knows that the tunnel needs to be reinforced, that we need new ventilation systems, new drainage systems, lighting telecommunications, plus exit shafts for users," said Chitilian. "If they're ever in the tunnel and God forbid something happens – so there's no compromise on our behalf, on the security of the citizens."

The report stated the builder, a consortium led by SNC-Lavalin, worries the tunnel fixes could add to the $6.3-billion price tag and lead to two years of delays. The Caisse de depot suggests the builder is trying to negotiate in public.

"In a normal construction project, you always have a situation -- here the builder is going to ask for more money, more time, and then you'll push back, and they'll push back again," said Chitilian.

Quebec Transport Minister Francois Bonnardel is reassuring the public the train will be delivered on time.

The Caisse de depot won't say yet what kind of penalty the builder would face if it does indeed face delays.

1. CalPERS's assumed rate of return is 7% and when the yield on the 10-year US Treasury note is 1.5%, "where do you earn the additional 5.5% on a $400 billion?". Last year, they fell short of that 7% bogey, earning 6.6%, but Meng was quick to state they are "long-term investors and not fixated on a one, two or three-year return."
2. CalPERS's funded status is 70% and this limits their options to earn 7% because as he states, if they were 100% funded, he'd have more options available to earn that return. "When you are 70% funded, you need to be mindful of drawdown risk, so that limits our options."
3. CalPERS's size is a double-edged word as it "can be an advantage and a disadvantage" and in the current environment, it's a "disadvantage" because "it makes it harder to be nimble and make a difference". He said there are "some smaller niche strategies" that are offering attractive returns but they require a lot of internal resources and "don't move the needle" because you can't scale into them. "Our size limits the strategies we can look at".

CalPERS Board President Henry Jones defeated former CalPERS board member and investment officer J.J. Jelincic (Joseph John Jelincic Jr.) in a race that was 66% to 34% for Jelincic, according to CalPERS data. About 116,000 of the roughly 600,000 CalPERS retirees in the state voted. Jelincic served on the CalPERS board for 8 years and spent 33 years working for the pension system. Henry Jones is a retired Los Angeles school system chief financial officer.

The election was conducted from August 30, 2019 to September 30, 2019 by phone, email, and mail.

Jones will start his new 4-year term, effective January 16, 2020.

According to California campaign finance records, Jones spent roughly US$ 442,000 to retain his seat with support from labor unions and another US$ 50,000 in other contributions, while Jelincic raised approximately US$ 45,000. Jones was backed by SEIU Local 1000, the California Correctional Peace Officers Association, California Professional Firefighters, and other SEIU branches. Jelincic had endorsements from the Retired Public Employees’ Association and California State Retirees.

The trial, which had been scheduled to start Oct. 30, has been moved to April 13 to make time for settlement talks, according to court filings.

The lawsuit, filed in 2013, alleges CalPERS violated contracts when it hiked premiums by 85 percent for about 100,000 public employees after promising stable prices in marketing materials.

CalPERS, the nation’s largest public pension fund, has said it had the authority to increase the rates and did so solely to keep the plans sustainable.

Judge William Highberger warned CalPERS in July it faces serious financial risk in the lawsuit — plaintiffs estimate $1.2 billion — if it goes to trial. The trial is known as Sanchez vs. CalPERS.

Read more here: https://www.sacbee.com/news/politics-government/the-state-worker/article236012978.html#storylink=cpy

Settlement talks were scheduled in September and early this month. Another round is scheduled for November, said plaintiffs’ attorney Michael Bidart. Bidart declined to discuss details.

While the sale pleased advocates who have called for the California Public Employees’ Retirement System to divest from the companies, the $380 pension billion fund isn’t calling it divestment.

“It was an investment decision based on what is best for the fund,” CalPERS spokesman Wayne Davis said.

The fund got rid of its $8.8 million worth of holdings in GEO Group and CoreCivic, the nation’s two largest private prison companies, over the last two months as part of broader changes to one of its index funds, Davis said.

When Nobel Laureate and "Irrational Exuberance" author Robert Shiller says he sees bubbles in the financial markets — you'd better listen up. He literally wrote the book on stock market crashes and bubbles after all.

"I see bubbles everywhere," Shiller, economics professor at Yale University and author of just-published "Narrative Economics" told investors gathered in Los Angeles Wednesday. "There's no place to go. You just have to ride it out. You invest even though you expect the price to decline." Shiller famously predicted the 2000 stock market crash and the 2007 

The timing of Shiller's ominous warning comes at a scary time. This is the month of the 90th anniversary of Black Monday. That day on Oct. 28, 1929, the Dow Jones Industrial Average fell 13%. That still stands as the second-worst drop in history and, combined with the pounding the stock market took in early days of the depression, took 25 years for investors to recover from.

Shiller sees bubbles in the stock market, bond market and the housing market. "You get ... in a situation where you know it's going to decline, but you still saved enough to hold you over; you have no choice."

Shiller Expects Lackluster Future U.S. Stock Returns

Shiller, who won the Nobel Prize in economics in 2013, told Investor's Business Daily he expects just 4.4% average annual returns in U.S. stocks over the next 30 years. That's a disappointing return expectation — less than half the market's long-term return and well short of what pensions are calling for. The S&P 500's long-term return is 9.84%, says Index Fund Advisors.

The problem? The stock market is richly valued as prices have run up so much the past few years. The stock market is up 348% since the March 9, 2009 low, putting nearly $29 trillion into investors' portfolios.

High valuations rob future gains, Shiller says. He says the so-called CAPE Ratio on U.S. stocks is at an elevated level of 29. The CAPE Ratio, or Cyclically Adjusted Price-To-Earnings Ratio, looks at how much investors are paying for inflation-adjusted earnings averaged over a 10-year period. This indicator shows how expensive the market is, factoring out short-term distortions.

What's a high CAPE ratio, mean? "With a CAPE Ratio of 29 (currently), it's only happened a few times in history," Shiller says. "We got to the mid 30s in 1929. So that was a record." Markets subsequently crashed in 1929 and set off the Great Depression.

He adds, though, the CAPE ratio can still go higher until an irrational exuberance bubble is deflated. "(The CAPE Ratio) went up to 45 in the year 2000 (prior to the 49% bear market decline from 2000 to 2002)," he said. But the CAPE Ratio is slightly higher now than it was in 1987, before the market's biggest one-day drop of 23% on Oct. 19, 1987.

What about more recently, ahead of the crushing 57% bear market from 2007 to 2009? "In 2007 (the CAPE Ratio) was around this level, just before the other crash," he said. So "history shows that (the market's valuation) could go up to 45, just what it did 20 years ago, or ... lose half its value."

That's comforting.

Shiller: The 'Bond Market Boom Is Unsustainable'

Shiller is as nervous about bonds as he is about U.S. stocks. Bonds continue to be one of the hottest asset classes going as investors seek the safety of income. The SPDR Portfolio Aggregate Bond ETF (SPAB) delivered a stock-like total return this year of 8.31%. That's more than twice its average annual return of 3.7% over the past 10 years. Investors are pouring money into bond ETFs, hoping to hide from stock-market volatility and get at least some return.

"It (the bond bubble) seems to be related to people not paying enough attention thinking through the simple logic ... this can't keep going and it's going to end badly," he said. "These things may sink at some point."

Investors outside the U.S. are buying bonds with negative interest rates, simply betting they can sell to someone else when interest rates go even more negative. Holding the bonds until they mature locks in a negative return.

Shiller On Housing Bubble: "It's Just Like 2005 Again"

Shiller says the housing market is in a bubble phase, not unlike 2005. That was the point the housing bubble was inflated, but yet to go parabolic. "It's like 2005 again," Shiller said. "San Francisco and L.A. are already slowing down." That's a "bad indicator," he said, as those markets have been going up for years.

Real-estate stocks are on fire, too. The Real Estate Select Sector ETF (XLRE) is up nearly 29% just this year, blowing away the S&P 500's 20% gain. And that doesn't even include the Real Estate Select Sector's market-beating yield of 2.8%. Real-estate stocks are just narrowly behind the Technology Select Sector SPDR ETF (XLK) as the top-performing sector of the year.

Yet, given the housing bubble isn't as "excited as it was" in the early 2000s, Shiller has been reluctant to publicly call it a bubble until now. And he thinks enough people remember the 2000's housing bubble so they recall "home prices really do fall." We're not "as exuberant now, so I'm not sure it's a repeat performance," he said.

One Bright Spot: International

Shiller says one spot in the world dodges such irrational exuberance: Europe. Developed-world international stocks are largely left out of the global boom. He sees European stocks being almost a third cheaper than U.S. stocks.

The Vanguard FTSE Developed Markets ETF (VEA) delivered just a 5.07% average annual return over the past 10 years. That's roughly half of international stocks' long-term expected return. But investors are already pouring in. The Vanguard FTSE Developed Markets ETF is up 14% this year.

"I have higher expectations for Europe than the U.S.," he said.

Escape The Bubble? Largest International ETFs

Sources: ETF.com, S&P Global Market Intelligence

Teachers' pensions are currently managed by the independent Alberta Teachers' Retirement Fund Board, or ATRF, which was established in 1939.

The corporation currently administers pensions for all teachers in school jurisdictions and charter schools in Alberta, with an option for private school teachers to join as well.

But text of the budget released Thursday disclosed the ATRF was "expected to transfer funds to Alberta Investment Management Corporation (AIMCo) for management … AIMCo is expected to provide maximum returns to its clients, and processes will be expanded to support broader agency involvement."

Pensions for Workers' Compensation Board and Alberta Health Services employees will also be transferred to AIMCo, according to the budget.

Lee Martin, who has taught at St. Teresa of Calcutta School for seven years, said a lack of consultation was what most bothered him.

"You know, there are close to 40,000 teachers in the province. This pension is pretty big," Martin said. "Every teacher is putting away something close to something like a second mortgage a month. So that's a big investment that teachers need to be consulted on. It just feels like something has been taken away from us.

"Of course, a lot of people are taking it in the negative, but will it be better? But it's hard to think it could be better."

The ATRF currently manages $18 billion in teachers' retirement funds and yielded 9.6 per cent in the 2017-18 fiscal year.

Rod Matheson, CEO of the ATRF, said he was informed of the government's plans when the budget was released on Thursday.

"Our reaction was very much one of surprise. At this point, we're still wanting to understand," he said. "We're trying to learn what it was that went into making this decision. What information and facts were used to come to the conclusion to drive this action?"

AIMCo already administers more than $100 billion in government pensions and other funds.

"My concern is, not that I don't want it to be an Alberta investment, but it was pretty diverse," Martin said. "There were things overseas — good, ethical investments. Will it still be that way?"

In a statement posted on Twitter Saturday, the Alberta Teachers' Association called the move a "hijacking."

"Making this decision without consulting the ATA is extremely disrespectful [to those] who are plan members and owners," ATA president Jason Schilling wrote.

Move was about efficiency, gov't says

In a statement provided to CBC News, a spokesperson for Alberta's Treasury Board and Finance, Jerrica Goodwin, wrote that details around the specific timing of the change would be available when legislation is tabled.

"It is not a requirement to notify the ATRF of this change, and it is proposed until the legislation is tabled and passed," Goodwin wrote.

Goodwin wrote the move of the funds to AIMCo was part of a commitment to make government more efficient.

"[ATRF] assets will be moved under AIMCo so ATRF will have reduced investment management costs and, therefore, higher expected investment returns," she wrote. "Making this change eliminates duplication and reduces the cost of investment services. The ATRF board will remain in place to oversee the pension."

Matheson said the ATRF had not yet received that information from the government.

"To be fair, I have not personally spoken with anyone at the Alberta government myself. I've reached out, and we're going to set up a call and have a discussion," he said. "The focus for us is not about duplication or costs, because we strive for low costs, but much more importantly what we strive for is the best possible net investment returns.

"What we earn on the investments, net of all costs, is really the most important thing. It's not just about costs, it's about the net returns that we earn."

It’s been one month since Peter Lindley, the OPSEU Pension Trust’s new president and chief executive officer, started the role.

With an engineering degree and a more than 30-year career in finance under his belt, Lindley’s most recent role was president and head of investments at State Street Global Advisors. “When I went to work at State Street I got to work with investors, mostly pension plans, and providing them with investment advice was something I found a lot of personal satisfaction in,” he says.

The work led Lindley to eventually move to the asset-owner side of the industry. “I felt the next step in my career would be to join an asset owner and, as luck would have it, at the right time this opportunity came up and I was just really excited about it.”

One of the reasons he was attracted to the OPTrust was its leadership in the responsible investment space, he says, noting this topic is very dear to his heart. “I’ve seen [it go] from something in the wilderness to being very mainstream today. So I was really pleased to see responsible investing being so important here as well.”

Lindley says he was also attracted to the plan because of its size and the fact it serves 95,000 members, yet it’s still small enough to be nimble and has a culture of innovation.

Speaking of priorities going forward, Lindley wants to maintain the stability and momentum at the OPTrust. “But there are a lot of challenges out there, whether it’s short-term volatility in the markets or longer-term challenges from the investment point of view.”

Among these challenges, Lindley cites the lack of clarity around policy, political issues and trade wars. “I think there’s a lot of short-term volatility. But our investment approach really, I think, can manage the short-term volatility.”

For a longer-term organization like the OPTrust, the longer-term return expectations and low long-term interest rates are the main challenges, he says, noting this means the present value of liabilities is higher and it’s more difficult to hit return targets. “You’re very much more reliant on other markets, so it’s important to be well-diversified.”

That said, the OPTrust is well-funded, he adds. And there can be opportunity in volatility, too.

As a leader, Lindley describes his values as respect, integrity and teamwork. “I don’t believe in the star system really, I think the team can be better than the sum of the parts.”

The best piece of advice he’s ever received, he adds, is that companies should be as loyal to their employees as they expect their employees be to them. “We are in a resource business and our No. 1 resource is our people.”

[...]  after a few months of waiting for the process to work its way through, Peter Lindley has been named president and CEO of OPTrust.

Mr. Lindley replaces Hugh O'Reilly who stepped down back in March under pressure. I don't want to speculate as to why Hugh resigned but I was told by a very senior pension fund manager that OPTrust has a history of replacing its CEOs and the problem all stems from the governance of the Private Markets Group which apparently doesn't report to the president and CEO but to OPTrust's Board directly (a strange legacy issue which if true, needs to be rectified ASAP).

All I know is before Peter Lindley, Hugh O'Reilly lasted the longest in that position as his predecessors, Bill Hatanaka and Stephen J. Griggs lasted three years and less than a year in that role respectively.

In fact, Griggs sued OPTrust for wrongful dismissal, alleging he was terminated after trying to rein in “lavish spending” at the fund’s autonomous and high-flying private equity investment group.”

“The former CEO of the Ontario government’s employee pension fund has filed a wrongful dismissal lawsuit, alleging he was terminated after trying to rein in “lavish spending” at the fund’s autonomous and high-flying private equity investment group”:

“Mr. Griggs’ lawsuit alleges he was fired after members of the fund’s private markets division lobbied for his dismissal because they were angered by his attempts to review their operations and curtail the division’s “lavish spending”. He alleges he was trying to bring the private markets team under more centralized control because it was operating with little oversight.”

“The lawsuit says the fund’s private management group or PMG had little oversight and could make any size investment without board approval. It has separate computer and data systems, and “in effect operated as an autonomous entity”.

Anyway, that's all in the past and has nothing to do with the current PMG or Peter Lindley who I'm sure was aware of these issues before signing with OPTrust (and in all likelihood, signed an iron clad contract with a great golden parachute in case he's dismissed prematurely or without cause).

Coming from State Street Global Advisors, Lindley has tremendous investment experience heading up investments there but I'm glad he's also a strong advocate for defined benefit plans and will continue the work Hugh O'Reilly did advocating for DB plans (a very important part of the job).

The biggest difference between State Street and OPTrust is that Mr. Lindley will be interacting more with his clients, OPTrust members, and there will be a direct purpose to the work he'll be doing making sure OPTrust maintains its fully funded status.

In regards to this funded status, it's worth noting that unlike Ontario Teachers', HOOPP and CAAT Pension Plan, OPTrust and OMERS still offer guaranteed indexation which is something I don't recommend (conditional inflation protection is fairer risk sharing across active and retired members and offers the former plans a lever to get back to fully funded status if they experience a deficit again).

At OPTrust, Peter Lindley is surrounded by a solid team which includes James Davis, its CIO. James isn't only knowledgeable on investments in general, he's particularly honed in on responsible investing and takes climate change risks very seriously. For example, go read my comment on OPTrust's climate-savvy project.

Robert Smith built Vista Equity Partners into a money machine.

The private equity firm has racked up more than $120 billion of deals since its 2000 inception, mostly in technology companies, and produced some of the highest returns in the industry.

That has made Smith one of the world’s richest people with a $6 billion fortune. But like many private equity tycoons his wealth is largely illiquid, with the bulk of it locked up in Vista’s investment funds.

Smith, 56, pioneered an increasingly popular way to free up some of that treasure. He sold about 30% of the company he co-founded, helping him to become one of the most prominent philanthropists in the U.S. and buy at least $100 million of real estate, while also adding $500 million to the firm’s balance sheet.

Since cutting his first deal with Dyal Capital Partners in 2015, Smith has stepped up his philanthropy, signing Warren Buffett’s Giving Pledge in 2017. In May, he went viral with a promise to wipe out the student debt of an entire college class. He also reportedly bought two homes in Malibu, California, for about $40 million and plunked down almost $60 million on a three-story Manhattan penthouse.

Vista’s 2015 deal helped popularize sales of minority stakes, upending the conventional wisdom that only weaker businesses would sell a piece of themselves and at a time when more money than ever was pouring into private equity.

“It’s ironic that the industry has been one of the last to take private equity money,” said Daniel Adamson, senior managing director of Wafra, which was among the first to buy minority stakes in buyout firms. “It’s like a shoemaker’s family going barefoot.”

They’re making up for lost time. At least 39 buyout shops sold minority stakes from 2014 through 2018, according to a February report by Bain & Co. That’s more than triple the number from the previous five years as bulk buyers including Dyal, Goldman Sachs Group Inc. and Blackstone Group Inc. jostle for deals for established firms like Tom Gores’s Platinum Equity, Barry Sternlicht’s Starwood Capital Group and Steven Klinsky’s New Mountain Capital.

Funds targeting equity stakes raised $17 billion from 2012 through 2018 and are currently raising $17 billion more, according to Bain. Dyal’s fourth fund had raised more than $8 billion by September and already allocated most of that capital.

Meanwhile, the industry’s biggest names have been tapping some of that newfound liquidity for a variety of uses.

In 2016, Vista co-founder Brian Sheth reportedly dropped $38 million on a Los Angeles mansion and two years later spent $16 million on a neighboring property. He also has become a leading wildlife conservationist with his foundation committing $60 million largely to environmental initiatives, according to its website. He pledged more than $13 million to a youth club in Austin, Texas. David Miller, co-founder of Houston-based EnCap Investments, donated $19 million to his foundation in 2016, months after Dyal acquired 20% of his firm.

Owners and buyers stress that such deals are more about providing capital to bolster investing lines, helping general partners meet their commitments in funds they’re raising and enabling succession planning -- and typically have little to do with rewarding founders.

Typically more than 75% of the money from these investments goes back into the firms, according to a person familiar with the transactions. Vista’s Dyal deal helped it scale and boost its fund offerings without going public while Platinum Equity is using proceeds from its 2017 sale to build out a credit platform and grow its operational capabilities.

Still, the practice can generate uneasiness.

“Investors are now bracing for this kind of news,” said Andrea Auerbach, head of private investments at Cambridge Associates, which manages portfolios for endowments, foundations, pensions and family offices. “The capital can be used for lots of different things -- monetizing wealth, opening new lines of business -- and the concern is that can also take focus away from existing funds.”

Lofty Valuations

A 2018 Dyal investor presentation obtained by Bloomberg shows that seven of the 10 deals featured as case studies included some proportion of secondary sales.

No matter where the proceeds of such deals flow, the lofty valuations they bestow upon buyout shops reveal a fresh cohort of billionaires in an industry where such riches have accrued most visibly to the founders of publicly traded firms like Blackstone, KKR & Co. and Carlyle Group LP. They include Vista’s Smith and Sheth, and Starwood’s Sternlicht, according to calculations by Bloomberg.

Some scoff at such paper valuations.

“I don’t care what our firm is theoretically worth -- if I’m not going to sell the rest of it, it isn’t worth anything,” Kimmelman said in an interview. “It was an effective way to give us a balance sheet and strengthen the financial aspects of our firm.”

Rich Returns

Those acquiring stakes have reaped rich returns thus far. Dyal’s $5.3 billion third fund has posted annualized returns of 26% as of June 30, according to a report by the Minnesota State Board of Investment, which committed $175 million in 2016. The deals offer prized access to the economics of buyout firms at a time when private equity is steadily infiltrating just about every corner of the economy. From 24 Hour Fitness to Cinnabon to Vivid Seats, more than 20 million people are employed by the 15,000 companies backed by private equity.

“I cannot replace this kind of cash flow, predictability and downside protection,” said Christopher Zook, chairman and chief investment officer of CAZ Investments who has invested in some of Dyal’s funds. “I’ve told my wife and son that if I get hit by a bus they’re never allowed to sell this investment.”

Such optimism is well-founded. Vista’s assets have grown by more than a third to $56 billion since the second Dyal investment, making it one of the world’s biggest buyout firms. Miami-based H.I.G. Capital has added about $10 billion of assets since Dyal first invested in 2016.

Still, the market may have peaked. There’s a finite supply of top-tier firms even as the money chasing stakes in these entities grows with recent entrants including Stonyrock Partners, backed by an arm of Jefferies Financial Group Inc., and Investcorp.

“The first generation of these funds have done nicely,” Bain’s Elton said. “They were bought well during a good period for private equity. At the time, value drivers were pointing in the right direction, but now they may no longer be doing so.”

For now, it’s giving the latest generation of private equity owners the resources that are traditionally the preserve of more liquid fortunes. That was on dramatic display earlier this year when Smith stunned students at Morehouse College’s graduation ceremony with his promise to pay off the student loans of every member of the Class of 2019, a $34 million act of largesse.

“On behalf of the eight generations of my family that have been in this country, we’re gonna put a little fuel in your bus,” he told the graduates.

The preliminary working paper, which analyzed the performance persistence of buyout firms and individual portfolio managers, found evidence that individuals were “about four times as important as the organization” in explaining buyout fund returns over time. The paper was authored by Reiner Braun and Nils Dorau of the Technical University of Munich alongside University of Oxford professor Tim Jenkinson and Daniel Urban from Erasmus University Rotterdam.

“In absence of alternatives, many buyout fund investors put an emphasis on individual manager’s track record when making investment calls,” the authors wrote. “Our research indicates they may be right in doing so.”

The four researchers looked at the performance of nearly 4,000 individual portfolio managers from about 800 different private equity firms between 1970 and 2017. They found that an individual manager who was previously responsible for a top-tercile deal was “substantially” more likely to land another top-tercile deal than to deliver performance in the middle or bottom third of buyouts. Managers whose previous deals were middle- or bottom-tercile were similarly likely to continue in the same performance bracket.

According to the study, these individual differences in skill were not tied to age or industry experience, whether managers attended an Ivy League university, or if they have obtained an MBA degree.

The individual managers also continued to display performance persistence after the authors controlled for where they worked. In fact, they found that performance persistence had declined at the firm-level over the last several years, while continuing to exist at the individual level.

“Even in the face of increased competition for deals and standardization of processes and terms, some individuals seem to exhibit repeatable investment skill,” the authors wrote.

In a bid to reduce the complexity and costs involved in agreements between private equity firms and their investors, the Institutional Limited Partners Association has released a new set of guidelines for limited partnership agreements.

The industry association that represents private equity investors, called limited partners or LPs, announced Wednesday that its model limited partnership agreement is now available for general partners (GPs) and LPs to use as a guide for their own contracts.

At present, most GP-LP agreements are bespoke — law firms draw up the contracts, which are then rarely shared between firms, according to Chris Hayes, the senior policy counsel at ILPA.

“It's hard to get a copy of a draft model LP agreement,” Hayes said. “They’re all secret. It’ll be the first-ever document that’s out there and public.”

ILPA worked with roughly 20 lawyers over about a year to create the model agreement, Hayes said by phone.

The model letter includes provisions for the LP advisory committee to be allowed to meet without the GP or its affiliates present and to approve all affiliate transactions.

It also gives the LPs the right to vote to terminate or suspend the commitment period and to communicate with one another about the fund, the letter shows. It would require GPs to give LPs a list of their fellow LPs on a quarterly basis so that they can know who their peers are and communicate with them about governance. 

“We think it’s important for the GP to make sure the LP understands the treatment they should expect,” Hayes said. “They should have a list of the other LPs in the fund. It can help LPs exercise governance rights.”

The model letter includes several provisions to protect both LPs and GPs against overpayment, including an optional escrow provision, a GP clawback (the return of past performance fees to investors if the fund’s investments later underperform), and an LP giveback (when investors have to return money to the fund, for example to pay a claim against the fund), among other provisions.

The letter also specifies how a co-investor with a private equity firm should handle fees, expenses, and liabilities of the portfolio in a way that is fair to other LPs in the fund. 

“By putting it out there, it adds value to the private equity industry itself,” Hayes said. “I think this hopefully democratizes access to what a typical limited and fair limited partnership agreement looks like.”

But not everyone is keen on implementing the new model contract just yet.

“I don’t expect the biggest GPs to just get rid of their contract and use ours,” Hayes said. “Some GP counsel said they didn’t believe in the standardization, but we’re hoping that they’ll take a look at this.”

He added that he hopes the document will be useful especially for emerging managers, as the use of an ILPA-approved model could add credence to their process.

Pattern Energy Group Inc. (Nasdaq and TSX: PEGI) (“Pattern Energy” or “the Company”) and Canada Pension Plan Investment Board (“CPPIB”) today announced they have entered into a definitive agreement, pursuant to which CPPIB will acquire Pattern Energy in an all-cash transaction for $26.75 per share, implying an enterprise value of approximately $6.1 billion, including net debt.

CPPIB and Riverstone Holdings LLC (“Riverstone”) have concurrently entered into an agreement pursuant to which, at or following the completion of the proposed acquisition of Pattern Energy by CPPIB, CPPIB and Riverstone will combine Pattern Energy and Pattern Energy Group Holdings 2 LP ("Pattern Development") under common ownership, bringing together the operating assets of Pattern Energy with the world class development projects and capabilities of Pattern Development.

Under the terms of the merger agreement, Pattern Energy shareholders will receive $26.75 in cash consideration for each share of Pattern Energy, representing a premium of approximately 14.8% to Pattern Energy’s closing share price on August 9, 2019, the last trading day prior to market rumors regarding a potential acquisition of the Company. The consideration also represents a 15.1% premium to the 30-day volume weighted average price prior to that date.

The Pattern Energy management team, led by Mike Garland, will lead the combined enterprise.

“This agreement with CPPIB and Riverstone provides certain and significant value for Pattern Energy shareholders with an all cash transaction at a very attractive stock price,” said Mike Garland, CEO of Pattern Energy. “Over the years, Pattern Energy has been able to provide shareholders with a consistent dividend and now our shareholders can realize the value embedded in the Company. We believe the proposed transaction reflects the strength of the platform we have built.”

“In reaching this transaction, the Pattern Energy Board of Directors undertook a robust process that we believe culminated in a transaction that delivers value to shareholders,” said Alan Batkin, Chairman of the Pattern Energy Board of Directors. “As part of this process, the Board formed a special committee, composed of independent directors that directed the process at all times, and retained independent legal and financial advisors to assist our review of the transaction and provide a fairness opinion. The special committee reviewed multiple bids as part of a thorough process that involved multiple parties and evaluated the transaction against the Company’s standalone prospects, performance and outlook relative to historic trading multiples and yields. Based on this review and in light of the transaction structure, the special committee unanimously determined that this transaction is in the best interest of the Company’s shareholders and recommended it to the full Pattern Energy Board, which also determined that this transaction is advisable and in the best interests of the Company’s shareholders. The transaction delivers significant, immediate and certain value to the Company’s shareholders.”

“Pattern Energy is one of the most experienced renewables developers in North America and Japan with a high-quality, diversified portfolio of contracted operating assets, aligning well with CPPIB’s renewable energy investment strategy and the increasing global demand for low-carbon energy,” said Bruce Hogg, Managing Director, Head of Power and Renewables, CPPIB. “The Pattern Energy management team has a proven track record of identifying and executing development strategies with differentiated competitive advantages. We look forward to working with Pattern Energy and Riverstone to grow the company.”

"We have long been believers in Pattern Energy and have had a successful partnership with the Company since we first invested in it more than 10 years ago,” said Chris Hunt and Alfredo Marti, Partners at Riverstone. “We have worked closely with Mike and the Pattern Energy team to grow the Company from a development startup into a multinational operator and supplier of low cost, renewably sourced energy. We are confident the team will continue to develop world-class wind and solar assets, which will be an important part of our transition to cleaner forms of power generation. We look forward to continuing to support them in driving the Company’s next phase of development.”

Transaction Details

The transaction is expected to close by the second quarter of 2020, subject to Pattern Energy shareholder approval, receipt of the required regulatory approvals, and other customary closing conditions. The Pattern Energy transaction is not contingent upon the completion of the Pattern Development transaction.

Upon the completion of the transaction, Pattern Energy will become a privately held company and shares of Pattern Energy’s common stock will no longer be listed on any public market. Pattern Energy will continue paying its quarterly dividend through the transaction close.

Advisors

Evercore and Goldman, Sachs & Co. LLC are acting as independent financial advisors to Pattern Energy’s special committee, and Paul, Weiss, Rifkind, Wharton & Garrison LLP is serving as independent legal counsel to the special committee.

About Pattern Energy

Pattern Energy Group Inc. (Pattern Energy) is an independent power company listed on the Nasdaq Global Select Market and Toronto Stock Exchange. Pattern Energy has a portfolio of 28 renewable energy projects with an operating capacity of 4.4 GW in the United States, Canada and Japan that use proven, best-in-class technology. Pattern Energy’s wind and solar power facilities generate stable long-term cash flows in attractive markets and provide a solid foundation for the continued growth of the business. For more information, visit www.patternenergy.com.

About Pattern Development

Pattern Development is a leader in developing renewable energy and transmission assets. With a long history in wind energy, Pattern Development has developed, financed and placed into operation more than 4,000 MW of wind and solar power projects. A strong commitment to promoting environmental stewardship drives the company's dedication in working closely with communities to create renewable energy projects. Pattern Development has offices in San Francisco, San Diego, Houston, New York, Toronto, Mexico City, and Tokyo. For more information, visit www.patterndev.com.

About CPPIB

Canada Pension Plan Investment Board (CPPIB) is a professional investment management organization that invests the funds not needed by the Canada Pension Plan (CPP) to pay current benefits in the best interests of 20 million contributors and beneficiaries. In order to build diversified portfolios of assets, CPPIB invests in public equities, private equities, real estate, infrastructure and fixed income instruments. Headquartered in Toronto, with offices in Hong Kong, London, Luxembourg, Mumbai, New York City, San Francisco, São Paulo and Sydney, CPPIB is governed and managed independently of the Canada Pension Plan and at arm’s length from governments. At June 30, 2019, the CPP Fund totalled C$400.6 billion. For more information about CPPIB, please visit www.cppib.com or follow us on LinkedIn, Facebook or Twitter.

About Riverstone Holdings

Riverstone is an energy and power-focused private investment firm founded in 2000 by David M. Leuschen and Pierre F. Lapeyre, Jr. with over $39 billion of equity capital raised to date. Riverstone conducts buyout and growth capital investments in the exploration & production, midstream, oilfield services, power and renewable sectors of the energy industry. With offices in New York, London, Houston and Mexico City, the firm has committed approximately $40 billion to more than 180 investments in North America, South America, Europe, Africa, Asia, and Australia.

Riverstone is an energy and power-focused private investment firm founded in 2000 by David M. Leuschen and Pierre F. Lapeyre, Jr. with approximately $39 billion of capital raised. We conduct buyout and growth capital investments in the exploration & production, midstream, oilfield services, power, and renewable sectors of the energy industry.

With offices in New York, London, Houston, Mexico City, and Amsterdam, we have committed nearly $39 billion to nearly 180 investments in North America, South America, Europe, Africa, Asia, and Australia.

Our organization is a flat, nimble structure that suits us and the management teams with which we partner. In fact, we have worked with many of our current CEOs multiple times before, and without continued mutual respect and repeat commitment from both sides we could not be as effective.

Riverstone reinforces this pledge by having plenty of ‘skin in the game,’ and over $1 billion of the firm’s commitment to funds and operations comes directly from our partners, employees, management teams, and other associates.

For the eighth edition of the Power 100, we laud the asset owners who have distinguished themselves in navigating a changing, and often perilous, market landscape. Come 2020, the ground surely will continue to shift beneath their feet, as they balance opportunity and prudence to deliver first-rate returns.

In 2019, these owners started out after the S&P 500 almost entered a bear market. Along the way this past year, they had to steer through headline-induced downdrafts that could come from anywhere, as the trade war and other exogenous events sent the stock market into turmoil. They also had to strategize how to deal with the return of falling interest rates, as the Federal Reserve reversed its policy of tightening amid signs of economic weakness. Up ahead, those headwinds will present tough challenges. Because they met the test of 2019 with such skill and grace, our Power 100 richly deserve to be honored.

For the list this year, along with their ability to innovate, some CIOs moved up the list when we added influence into our formula of factors. As the industry is often shaped by the power qualities of the CIO, their ability to collaborate also continues to play an important role, as CIOs tread carefully toward continued globalization, co-investment and team development to create investment offices that will last far into the future.

Mizuno, who will lead GPIF through March 31, has been chief investment officer of the fund since January 2015. His previous term ended on September 30. The fund owns about ten percent of the Japanese stock market and about one percent of global stock market.

Since his arrival at the world’s largest pension fund, the former private equity and banking executive introduced the culture of investment banking to the institution. He has made major changes to the investment strategy, initially moving the fund’s shift away from stocks to domestic debt. On Monday, the Nikkei announced that the fund continues to move away from domestic debt, given ultra-low rates in favor of holding more foreign bonds. He also pushed for assets that reflected environmental and social concerns.

The fund is a topic for a Harvard Business School case study. On a recent podcast, Harvard Business School professors Rebecca Henderson and George Serafeim noted that Mizuno has improved corporate governance, increased gender diversity and addressed climate change, radically re-thinking institutional investing. Mizuno’s approach to the fund, which has influenced other firms, was unusual because his strategy incorporated these factors into investment decisions simultaneously.

“The radical part was thinking about all three. Many Japanese asset managers and investors were worried about governance,” said Henderson. “It was the idea that you should focus on E and S as well when everyone was, like, ‘Whoa, why are you doing that?’ I mean, that was very countercultural…We have a protagonist who’s absolutely trying to change the world.”

Mizuno is aware that investors can’t diversify away from risks to the whole economy. “For Hiro, the risk of climate change is not some abstract thing that might happen to some other firm,” said Henderson. “He believes that the whole economy is at risk–and the Japanese economy is at risk from these issues.”

Mizuno has embraced change in other ways. He hired a consultant to help the fund adapt to alternative investments, as its regulatory framework was set up only for investments in public equities and fixed income rather than Japanese government bonds.

The co-chair of the Milken Institute’s Global Capital Markets Advisory Council even turned to technology. In November 2017, GPIF collaborated with Sony Computer Science Laboratories to study the impact of AI on asset management. Specifically, Mizuno sought to apply the technology for evaluating and monitoring fund managers. The effort culminated in a study that addresses how AI could be used to help each manager execute, depending on investment styles.

“We’re just trying to prove [that] even boring organizations like the GPIF can benefit from AI,” he said.

Our Chief Investment Officer Ziad Hindo has ranked #7 on @ChiefInvOfficer's 2019 Power 100 List. Congratulations! https://t.co/JpCRsISVpd

— OTPP (@OtppInfo) October 31, 2019

Ziad Hindo has had an intense six months.

The chief investment officer of the Ontario Teachers’ Pension Plan (OTPP) has overseen the launch of a new tech-investing division, surpassed $200 billion in assets under management and inked partnerships with Google’s sister company Sidewalk Labs and Boston Consulting Group (BCG) Digital Ventures. He also launched the Teachers’ Innovation Platform (TIP), which invested in SpaceX in June.

Teachers’ is going all in on tech: the fund is overhauling its operations and those of its portfolio companies as it gears itself up for an economic downturn and a global trade war.

But it isn’t the only pension fund with a new tech focus. The Caisse de dépôt et placement du Québec and the Canada Pension Plan Investment Board (CPPIB) have new billion-dollar tech funds and plans to overhaul their investing strategies. CPPIB and the Ontario Municipal Employees Retirement System (OMERS) announced new tech-focused divisions coupled with San Francisco offices this year.

In an interview shortly after The Logic reported that the fund was planning a new incubator, Koru, he discussed why he wants to expand in India, why OTPP is focusing on private equity and infrastructure investments and his plan for diversifying Teachers’ $200-billion portfolio.

This interview has been edited for length and clarity.

How does Koru fit into Teachers’ overall strategy of increasing exposure in the tech space?

In private equity, infrastructure and natural resources, we have more than 90 private holdings across three diverse sets of sectors and geographies. The idea behind Koru is to help them do venture and to help them think about new businesses and new possibilities that heavily leverage technology to drive exceptional growth in revenue.

It will tackle early-stage venture in traditional economic sectors, which, frankly, will sooner or later be disrupted one way or the other through external forces. We’re trying to inculcate that entrepreneurial mindset, so we get to disrupt our own businesses before external forces disrupt us.

CPPIB and the Caisse recently launched internal reviews to look at the potential for disruption among their own companies. Teachers’ is partnering with an outside group to do the same. What’s the benefit of having BCG involved?

BCG Digital Ventures has entrepreneurs, software engineers, startup guys, a lot of data analysts. BCG Digital Ventures, we’ve gotten to know very well over the last couple of years. They’ve already stood up 90 startups or ventures by working with companies, and are doing it very successfully.

We always say one of our core values is partnering, and I believe we picked the right horse here. They’re a perfect partner for us, to help us inculcate that venture, that startup mentality, that entrepreneurial spirit inside our portfolio companies. I can’t really comment on what the other pension plans are doing.

Koru is early-stage venture, focusing on our holdings or private investments. TIP is late-stage venture and growth equity, but for new external investments.

When we put both of them together, they really cover the entire venture-risk spectrum. We have early-stage venture, but focusing on our own businesses — that’s where our edge is.

We really don’t have that much of an edge going in Silicon Valley, targeting Series A early-stage venture types. A, they’re not scalable. B, I’m not sure we’ve got the network to actually find out who are the entrepreneurs in their basement that are about to launch Series A. That’s not where we believe we can compete.

Both OMERS and CPPIB have opened San Francisco offices in the past year. Is Teachers’ interested?

We haven’t really landed on whether we need an office or not. I’m not sure the winning formula is only going to be in Silicon Valley. We see thriving technologies coming out of Asia and Europe, too, which is probably a market that is not as competed-out as you have in the States.

In September, Ontario Teachers’ said it would switch its focus from investing via limited partners in India to making direct investments in both infrastructure and private equity. Private equity and infrastructure seem to be focuses for a lot of your new initiatives: Sidewalk Infrastructure Partners, Koru, the Teachers’ Innovation Platform. Why?

They’ve always been areas of focus for us. We were one of the early adopters of going direct and internal in private assets: first in private equity, then we started infrastructure almost 17, 18 years ago.

I think the emphasis on India is that it is a vibrant emerging market with huge potential. We are going to invest significantly in our employees in Asia. I will be going with a senior investment team to India later this fall. We’re going to spend the whole week meeting with businesspeople, fund investors, our partners on the GP (general partner) side there and government officials.

Are there other parts of the world you’re planning trips to?

We have pretty excellent capabilities in Europe, based out of the London office, with, again, a great emphasis on both private equity and infrastructure, as well as high-conviction equities. We’re going to grow our capabilities in Europe, as well.

When we look 10 years out, we want to make sure we’re as global as we could be, so that we can scour the earth for the best opportunities from a risk-adjusted-return perspective and deploy capital accordingly. Canada is unfortunately too small a market for us.

In August, Teachers’ announced it had crossed $200 billion in net assets, and you said, “Over the last few years, we have been transitioning the asset mix to a more balanced approach from a risk perspective and … we increased our allocation to the fixed-income asset class.” Is that in response to the trade war and global volatility?

When we looked at the portfolio a few years ago, we realized that it doesn’t have enough fixed-income exposure. Why do we need fixed-income exposure? Two reasons.

First: income, because you clip coupons on government bonds. Second: from a diversification perspective, because fixed income typically does well in recessions or economic downturns.

We are in the 10th or 11th year of the economic expansion. It is getting a little long in the tooth in that cycle. You need fixed income. You need it because of a recession. You need it because of the trade war and tensions. By themselves, they’re having pressure on the manufacturing sector of the economy.

Big picture, what does success in tech look like for you five years from now?

First, we want to generate returns. And we want to make sure that from a capability perspective, we participate in the new trends that define the new economy.

They both serve that purpose, Koru and TIP. But for Koru specifically, we want to have about 15 to 20 portfolio ventures established that are hopefully commercially profitable.

On TIP, really, it’s about making sure that we understand technological disruption. That we’re participating in those new sectors — be it health or telecommunications or cleantech — that really define tomorrow’s economy.

It’s also about inculcating that digital, technological mindset, internally but also within portfolio companies.

Finally, tech is extremely important when it comes to attracting and retaining talent. Young talent want to come work for organizations that are vibrant, dynamic, thinking about technology, thinking about the future — whether it’s cleantech or sustainable investing.

We are pleased to announce that Dr. David Long, the former Chief Investment Officer of Healthcare of Ontario Pension Plan (HOOPP) has joined AIM as Co-Managing Partner with Kerry Stirton, and with AIM Partners Cheryl Davidson and Athas Kouvaras. Simultaneously, AIM Managing Partner Donald Raymond transitions to Chair of the AIM Investment Committee.

At the time of David’s departure in 2017, HOOPP was the best performing large pension plan in the world over the previous ten year period (2016 CEM World Bank Group Study). Dr. Long was instrumental in the success of HOOPP and we consider it a major achievement for David to join AIM in this leadership capacity. David will join AIM with the goal to deliver even more value from the internally managed portion of the fund; something Dr. Long did exceptionally well at HOOPP. Moreover, David will be working with Alignvest with regards to a large new client, Sagicor Financial Corporation.

AIM Managing Partner Don Raymond will be transitioning out of his day-to-day Co-Managing Partner role while continuing his responsibilities as Chair of the AIM Investment Committee. Notably, AIM will continue to implement the Canada Model approach that Dr. Raymond designed for Alignvest Strategic Partners Fund. Dr. Long is very familiar with the Canada Model approach from his many years at HOOPP and will bring to bear additional capabilities for optimizing the value of client investments within the fund.

• David told me a good CIO needs to be "pretty sharp mentally" and has to have a "broad background in finance, trading, and risk management." He added : "You need to be more well rounded than just investments to deal with tech, people, the Board and to manage change in a very fast pace environment. You need to be good at planning, in terms of hiring, see the future and plan ahead."
• We talked at length about markets, the role of central banks and the role that olitics play into the equation. David told me the "massively increased role of central banks has made investing difficult." On deflation vs inflation, he said inflation has "shown up in securities markets and the service economy" but said the "capacity of central banks to continue doing what they’re doing is limited and the end point is politics." He expanded on this stating: "The Fed’s modest sized balance sheet is because of US politics where too much government intervention is frowned upon. Central banks are doing whatever it takes to sustain some level of economic growth but politics is a key issue."
• He told me "MMT isn’t radical, it’s become more mainstream" and "as long as people believe the currency is worth as much as yesterday, that's fine" but if there is a crisis of confidence, it could degenerate quickly. He certainly doesn't believe moving consumption ahead will create real wealth.
• He is concerned that whatever level of prosperity is driven by "low rates and central bank intervention' and told me the big risk is if there is any change of that policy direction. "Policy is based on humans and they’re capricious."
• He wasn't bearish or bullish on markets and told me he doesn't see the bubbles of the past as there is a healthy amount of skepticism in the markets." But he did say record low unemployment isn't a good indicator of things to come because in this economy, a financial crisis will lead to higher unemployment (economy is more depended on financial markets).
• In terms of private markets, he said it depends on a lot of different factors. "Some transactions are well thought through, others are based on financial engineering."
• He said that all pensions are struggling with same issue, "interest rates are not high enough to meet your future obligations"forcing pensions out on the risk curve.
• He said many traditional activities of banks are pushed out in the private sector. HOOPP undertook balance sheet activities. Lending activities and some balance sheet activities are migrating elsewhere now because of the post-crisis regulations on banks which is good and bad.
• We had an interesting exchange on the role of a CIO or co-CIO. He said staffing decisions are more complex, which is why some organizations offer two candidates "half a baby." He said "two individuals can manage all the priorities but ultimately you need direct accountability."
• Interestingly, he said the job of a CIO can be "quite isolating when going up against the heads of five asset classes so you need a team, strong lieutenants or a strong co-CIO."
• In terms of peers, he spoke highly of Ontario Teachers and said they helped him a lot when he first started but said the "golden age of pensions is over" and that right now, organizations are so big you need to rely on "third-party PowerPoint presentations to know what is going on in different units."