The overall cost of investing for the California State Teachers’ Retirement System has fallen, but not because investment managers have decreased their fees.

This is according to CalSTRS’s annual investment cost report, which was released ahead of the retirement system’s monthly meeting on November 6. The report showed that the total cost of managing the retirement system’s portfolio decreased by six percent year-over-year.

The reason? Two words: carried interest. As the performance of investments that charge carried interest — a type of performance fee — fell year-over-year, so too did the cost of investing for CalSTRS.

According to the report, the overall costs of investing for CalSTRS were lower in 2018 because carried interest paid by the pension fell by 36 percent in absolute dollars from the previous year. CalSTRS paid nearly $1.72 billion in investment costs in 2018, the report said. This is compared with $1.83 billion the previous year.

“The reduction in carried interest indicates a slowdown in realized profits from private investments made over the last several years,” the report said.

But according to the report, which included details on fees charged between 2015 and 2018, CalSTRS’s total portfolio costs when excluding carried interest increased 14 percent from the previous year. The increase, the report said, is the result of net asset value growth, new investment strategies, and asset allocation changes.

The plan’s net assets increased three percent in 2018, which contributed to the increase, the report said. What’s more is that new investment strategies, including a shift within the global equity asset class from a home-country bias to a global structure, accounted for a five percent increase in costs because of higher fees charged by the new strategies, the report showed. The remaining increase of six percent resulted from a continued effort on the part of CalSTRS to increase its allocation to private assets, it said.

What’s more, the cost of investing for the retirement system was lower than its peers. According to an analysis of 48 U.S. public funds and 15 global peer funds with five or more consecutive years of data, CalSTRS paid, on average, at least five basis points fewer than its peers in total investment costs between 2015 and 2018.

As of September, the retirement system had an estimated $238.3 billion in assets under management, its chief investment officer report for November showed. It returned 6.8 percent for the fiscal year ending on June 30. A spokesperson for CalSTRS did not respond to an email seeking comment.

Investors would be better off adding leverage to their core real estate portfolios than paying billions of dollars in fees each year for alternative assets in the sector, a new study has found.

Underfunded public pensions have shifted to riskier assets in hopes of high returns, but their reach for yield in non-core real estate funds is not paying off, according to real estate professor Joseph Pagliari of the University of Chicago Booth School of Business and Mitchell Bollinger, an industry advisor, investor, and analyst.

Investors could have collectively saved an average $7.5 billion a year in “unnecessary investment-management fees” from 2000 through 2017 by adding more leverage to less risky, core assets rather than investing in non-core funds, the researchers found. Bollinger and Pagliari published their findings in the Journal of Portfolio Management last month.

Many chief investment officers at public pensions are “swinging for the fences,” seeking to repair their funding shortfalls with outsized returns from alternative investments such as non-core real estate, Pagliari said Friday in a phone interview. “If you adjust for fees and risk, then on average, investors have overpaid by approximately 300 basis points per year for their non-core real estate funds.”

Core real estate funds typically hold fully-leased buildings that are considered investment-grade, according to Pagliari. Non-core funds in private real estate, including value-added and opportunistic, are riskier and involve more leverage.

He and Bollinger found that value-added funds underperformed levered core funds by 3.26 percentage points annually, while the opportunistic funds lagged by 2.85 percentage points.

“Consider the implications,” Pagliari and Bollinger wrote in their paper. “Investors could have increased the leverage on their core portfolios from approximately 22 percent to somewhere between 55 percent and 65 percent, and they would have outperformed the net returns of the value-added and opportunistic funds by approximately 300 bps per year while incurring the same level of volatility.”

Value-added funds charge investors about three times more in fees than core real estate funds, according to their research. Opportunistic funds are even more expensive, raking in about four times more in fees than core real-estate funds.

Joseph Azelby, head of real estate and private markets at UBS Group’s asset management unit, noted at a media briefing in June that pensions have been shifting a portion of their core real estate holdings to properties under development or renovation. He flagged these riskier bets as a potential concern because pension managers had similarly stretched for yield in the runup to the 2008 financial crisis.

During the phone interview, Bollinger said it’s not easy to change the behavior of pensions despite “overwhelming” data showing it would make “economic sense” to add leverage to core funds instead of paying for riskier, private real estate. Having approached risk-taking in the sector in the same way for years, pension fund managers may be reluctant to venture outside their “comfort zone,” he suggested.

Pagliari also finds it puzzling that investors wouldn’t want more leverage on core assets and less on riskier properties that aren’t fully leased or require development.

“That’s a bit of a mystery,” he said by phone. “It’s backwards.”

The Alberta government proposed in its recent budget that management of the C$18 billion ($13.8 billion) Alberta Teachers' Retirement Fund, Edmonton, be shifted to Alberta Investment Management Corp.

AIMCo is an institutional investment manager with more than C$108.2 billion of assets from more than 30 pension, endowment and government funds in Alberta.

The move is intended to "lower costs and achieve significant and necessary economies of scale" that would "protect returns to pensioners," the budget plan, published Oct. 24, said.

A spokeswoman for the Alberta Treasury Board and Finance said in an email Wednesday that the transfer is a proposed change until the appropriate legislation is introduced and passed in the Legislative Assembly.

As part of the budget proposal, the Alberta government also recommended that assets from the C$10.3 billion Workers' Compensation Board and the C$2.3 billion Alberta Health Services, both in Edmonton, also be transferred to AIMCo for management. A spokeswoman for health agency declined to comment on the matter; and a spokesman for the compensation board did not immediately respond.

AIMCo already manages a small portion of the Workers' Compensation Board's assets, the treasury spokeswoman said.

The Alberta fund in a statement on its website said that fund personnel were only informed of the proposed change when the budget proposal was released. "The ATRF Board and Management have a number of questions and are in the process of seeking information and answers to those questions," the statement said.

"What we do know is that our commitment to plan members and employees is our utmost priority. To this end, we'll continue to provide the superior investment management and service delivery our members have come to expect from ATRF, and we will endeavor to share any and all updates as soon as they become available. Note that the change should not immediately affect pension benefits or contributions," the statement says.

Over the weekend, Jason Schilling, president of the Alberta Teachers' Association, Edmonton, said in a statement published on the association's website that the decision without the input of teachers made the move "feel like a hijacking."

"Why didn't they talk to us? Individual teachers contribute half of the money that funds the plan and now will have no say over the management of those funds," Mr. Schilling said in the statement.

ATRF has sent a follow-up letter to Minister Toews. The letter provides further information on return comparisons and ATRF pension management. The ATRF Chair asks for a third-party to consider the issue. Read it here: https://t.co/bPvJRMOdmF#AbEd#Handsoffmypensionpic.twitter.com/OCs7Leyn5R

— Alberta Teachers Association (@albertateachers) November 7, 2019

Finance Minister lied about AIMCo outperforming our ATRF. Again, hands off my pension! https://t.co/NbZpIR0s04

— A Grace Martin (@AGraceMartin) November 6, 2019

Print this letter. Take to your MLA. More fire from the ATRF Board. This is where the conversation started: risk adjusted returns to a common end date. Happy there will be a further meeting. Letter to Minister Toews November, https://t.co/eBKpdAs7wa via @yumpu_com

— Greg Meeker (@yomeeks) November 7, 2019

Historically ATRF's net investment returns after all costs have been superior to AIMCo's. Over the past 5 years, ATRF's fund returns have exceeded the returns of AIMCo's primary pension clients (PSPP and LAPP) by between 0.3% and 1.5% annually, depending on the plan. Notably, ATRF's returns have significantly exceeded those of AIMCo in all major private market categories (private equity, infrastructure and real estate), which is a clear indication that larger scale is not necessarily an advantage, and may in fact be a disadvantage.

Why were the assets of these funds, like Alberta Teachers, not managed by AIMCo since 2008 when AIMCo was founded? What has changed since then? I haven't seen that mentioned in the media articles that I have read about this issue in the last week.

“The world has gone mad and the system is broken.”

So says Ray Dalio, the billionaire financier and founder of Bridgewater Associates, the largest hedge fund in the world with $160 billion in assets.

There are several problems, including an overzealous lending market, a growing mountain of government debt and a widening divide between the rich and poor that’s becoming more tense, he says.

“This set of circumstances is unsustainable and certainly can no longer be pushed as it has been pushed since 2008. That is why I believe that the world is approaching a big paradigm shift,” Dalio wrote in a LinkedIn post published Tuesday.

Dalio, 70 and worth almost $19 billion, does not elucidate what that paradigm shift will be in his post, but he has been outspoken in his criticism of the very capitalist system that made him successful. In an interview with CBS’ “60 Minutes” in July, Dalio said the U.S. economy must change or there will be a “conflict” between the rich and the poor. And in January, he said“capitalism basically is not working for the majority of people.”

My below piece “The World Has Gone Mad and the System is Broken” explains some of the crazy things that are happening, why they are happening and why I believe that they are unsustainable. I’d be interested in knowing what you think about them. https://t.co/daUdsw0XLy

— Ray Dalio (@RayDalio) November 5, 2019

In his recent LinkedIn post, Dalio zeroed in on the way money is flowing through the economy.

First, says Dalio, we are in a situation known as “pushing on a string.” That is a scenario where central banks (like the Federal Reserve in the United States) are struggling to get their monetary policies to actually stimulate increased spending, according to Dalio’s book, “Principles for Navigating Big Debt Crises,” which he references in the LinkedIn post. That in turn leads to “low growth and low returns on assets,” he says in the book and echoes in the post. ”[T]he prices of financial assets have gone way up and the future expected returns have gone way down, while economic growth and inflation remain sluggish,” Dalio writes on LinkedIn. “Those big price rises and the resulting low expected returns are not just true for bonds; they are equally true for equities, private equity, and venture capital....”

In the venture capital and start-up space, this means “more companies than at any time since the dot-com bubble don’t have to make profits or even have clear paths to making profits to sell their stock because they can instead sell their dreams to those investors who are flush with money and borrowing power,” Dalio says.

At the same time, the U.S. government is out of money — and still spending, as deficits continue to grow. Governments need to fund obligations like pensions and healthcare, Dalio points out.

“Since there isn’t enough money ... there will likely be an ugly battle to determine how much of the gap will be bridged by 1) cutting benefits, 2) raising taxes, and 3) printing money...” Dalio writes.

“They are promises that have to be paid — they will either be paid by higher taxes or they’ll be not paid and defaulted on,” Dalio told CNBC at the Greenwich Economic Forum on Tuesday. “I don’t think they will be defaulted on. I think by and large, they’re going to be paid, but if they raise taxes too much, then it changes the nature of that economics.”

Dalio says higher taxes and less benefits will continue to create tension between the rich and the poor.

“The rich/poor battle over how much expenses should be cut and how much taxes should be raised will be much worse,” Dalio wrote on LinkedIn.

“Because the ‘trickle-down’ process of having money at the top trickle down to workers and others ... is not working, the system of making capitalism work well for most people is broken,” wrote Dalio.

I say these things because:

• Money is free for those who are creditworthy because the investors who are giving it to them are willing to get back less than they give. More specifically investors lending to those who are creditworthy will accept very low or negative interest rates and won’t require having their principal paid back for the foreseeable future. They are doing this because they have an enormous amount of money to invest that has been, and continues to be, pushed on them by central banks that are buying financial assets in their futile attempts to push economic activity and inflation up. The reason that this money that is being pushed on investors isn’t pushing growth and inflation much higher is that the investors who are getting it want to invest it rather than spend it. This dynamic is creating a “pushing on a string” dynamic that has happened many times before in history (though not in our lifetimes) and was thoroughly explained in my book Principles for Navigating Big Debt Crises. As a result of this dynamic, the prices of financial assets have gone way up and the future expected returns have gone way down while economic growth and inflation remain sluggish. Those big price rises and the resulting low expected returns are not just true for bonds; they are equally true for equities, private equity, and venture capital, though these assets’ low expected returns are not as apparent as they are for bond investments because these equity-like investments don’t have stated returns the way bonds do. As a result, their expected returns are left to investors’ imaginations. Because investors have so much money to invest and because of past success stories of stocks of revolutionary technology companies doing so well, more companies than at any time since the dot-com bubble don’t have to make profits or even have clear paths to making profits to sell their stock because they can instead sell their dreams to those investors who are flush with money and borrowing power. There is now so much money wanting to buy these dreams that in some cases venture capital investors are pushing money onto startups that don’t want more money because they already have more than enough; but the investors are threatening to harm these companies by providing enormous support to their startup competitors if they don’t take the money. This pushing of money onto investors is understandable because these investment managers, especially venture capital and private equity investment managers, now have large piles of committed and uninvested cash that they need to invest in order to meet their promises to their clients and collect their fees.
• At the same time, large government deficits exist and will almost certainly increase substantially, which will require huge amounts of more debt to be sold by governments—amounts that cannot naturally be absorbed without driving up interest rates at a time when an interest rate rise would be devastating for markets and economies because the world is so leveraged long. Where will the money come from to buy these bonds and fund these deficits? It will almost certainly come from central banks, which will buy the debt that is produced with freshly printed money. This whole dynamic in which sound finance is being thrown out the window will continue and probably accelerate, especially in the reserve currency countries and their currencies—i.e., in the US, Europe, and Japan, and in the dollar, euro, and yen.
• At the same time, pension and healthcare liability payments will increasingly be coming due while many of those who are obligated to pay them don’t have enough money to meet their obligations. Right now many pension funds that have investments that are intended to meet their pension obligations use assumed returns that are agreed to with their regulators. They are typically much higher (around 7%) than the market returns that are built into the pricing and that are likely to be produced. As a result, many of those who have the obligations to deliver the money to pay these pensions are unlikely to have enough money to meet their obligations. Those who are recipients of these benefits and expecting these commitments to be adhered to are typically teachers and other government employees who are also being squeezed by budget cuts. They are unlikely to quietly accept having their benefits cut. While pension obligations at least have some funding, most healthcare obligations are funded on a pay-as-you-go basis, and because of the shifting demographics in which fewer earners are having to support a larger population of baby boomers needing healthcare, there isn’t enough money to fund these obligations either. Since there isn’t enough money to fund these pension and healthcare obligations, there will likely be an ugly battle to determine how much of the gap will be bridged by 1) cutting benefits, 2) raising taxes, and 3) printing money (which would have to be done at the federal level and pass to those at the state level who need it). This will exacerbate the wealth gap battle. While none of these three paths are good, printing money is the easiest path because it is the most hidden way of creating a wealth transfer and it tends to make asset prices rise. After all, debt and other financial obligations that are denominated in the amount of money owed only require the debtors to deliver money; because there are no limitations made on the amounts of money that can be printed or the value of that money, it is the easiest path. The big risk of this path is that it threatens the viability of the three major world reserve currencies as viable storeholds of wealth. At the same time, if policy makers can’t monetize these obligations, then the rich/poor battle over how much expenses should be cut and how much taxes should be raised will be much worse. As a result rich capitalists will increasingly move to places in which the wealth gaps and conflicts are less severe and government officials in those losing these big tax payers will increasingly try to find ways to trap them.
• At the same time as money is essentially free for those who have money and creditworthiness, it is essentially unavailable to those who don’t have money and creditworthiness, which contributes to the rising wealth, opportunity, and political gaps. Also contributing to these gaps are the technological advances that investors and the entrepreneurs that I previously mentioned are excited by in the ways I described, and that also replace workers with machines. Because the “trickle-down” process of having money at the top trickle down to workers and others by improving their earnings and creditworthiness is not working, the system of making capitalism work well for most people is broken.

This set of circumstances is unsustainable and certainly can no longer be pushed as it has been pushed since 2008. That is why I believe that the world is approaching a big paradigm shift.

1. The global jobs crisis: High structural unemployment, especially youth unemployment, and less and less good paying jobs with benefits.
2. Demographic time bomb: A rapidly aging population means a lot more older people with little savings spending less.
3. The global pension crisis: As more and more people retire in poverty, they will spend less to stimulate economic activity. Moreover, the shift out of defined-benefit plans to defined-contribution plans is exacerbating pension poverty and is deflationary. Read more about this in my comments on the $400 trillion pension time bomb and the pension storm cometh. Any way you slice it, the global pension crisis is deflationary and bond friendly.
4. Excessive private and public debt: Rising government and consumer debt levels are constraining public finances and consumer spending.
5. Rising inequality: Hedge fund (and private equity) gurus cannot appreciate this because they live in an alternate universe, but widespread and rising inequality is deflationary as it constrains aggregate demand. The pension crisis will exacerbate inequality and keep a lid on inflationary pressures for a very long time.
6. Globalization: Capital is free to move around the world in search of better opportunities but labor isn't. Offshoring manufacturing and service sector jobs to countries with lower wages increases corporate profits but exacerbates inequality.
7. Technological shifts: Think about Amazon, Uber, Priceline, AI, robotics, and other technological shifts that lower prices and destroy more jobs than they create.

The companies said the new venture will acquire a mix of ground-up and standing assets located in the CB1 Estate in Cambridge, a master-planned development covering 26 acres.

The acquired assets include 50/60 Station Road, a fully-let 167,000sqft development completed in April 2019 and 30 Station Road, a pre-let 81,500sqft scheme.

Construction commenced in September, with completion scheduled for the third quarter of 2021.

Aviva Investors will act as development manager and asset management partner, working alongside Brookgate as the developer.

Aviva Investors and Canadian pension investment manager PSP Investments in 2015 invested in a portfolio of commercial properties in central London, currently worth over £400m.

Daniel McHugh, managing director, real estate, Aviva Investors Real Assets, said: “Station Road provides exposure to high-quality assets with a range of risk and return profiles, and we look forward to growing this strategy with PSP Investments.”

Stéphane Jalbert, managing director, Europe and Asia Pacific, real estate investments, PSP Investments, said: “Building on our existing partnership with Aviva, PSP is continuing its strategy of investing in key innovation markets.

”Cambridge is one of the UK’s leading knowledge clusters for artificial intelligence and life sciences, and we believe the regeneration of the Station Road area will outperform in the long term.”

Melanie Collett, head of real estate asset management, Aviva Investors Real Assets, said: “We continue to see high demand for space from many global firms, with cutting-edge technology and business services firms among the occupiers in our properties as we create leading locations that cater to businesses, communities and individuals.”

[..] PSP just formed a joint venture with Aviva Investors to invest in central London real estate:

Under the equal partnership, Aviva Investors’ in-house client Aviva Life & Pensions U.K. has agreed to sell 50% of its stake in a central London real estate portfolio to PSP Investments. Aviva previously owned 100% of the portfolio. The portfolio consists of 14 assets across London, made up of existing real estate or those with planning consent.

Aviva Investors will manage the assets and development for the joint venture.

The spokeswoman for PSP Investments said financial details of the transaction are confidential. The net asset value of PSP Investments’ real estate portfolio as of March 31, was C$14.4 billion ($11.4 billion,) she said.

“This investment is consistent with PSP Investments’ real estate strategy to invest in prime and dynamic city centers that we expect will outperform in the future, and is complementary to PSP Investments’ existing portfolio in London,” said Neil Cunningham, senior vice president, global head of real estate investments at PSP Investments, in a news release from Aviva Investors. Further details were not available by press time.

Aviva Investors has more than £31 billion ($47.8 billion) of real estate assets under management. PSP Investments manages C$112 billion of pension fund assets for Canadian federal public service workers, Canadian Forces, Reserve Force and the Royal Canadian Mounted Police.

I don't know enough details about this deal to state my opinion but I have to wonder why Aviva Investors is looking to unload half its stake and why PSP is buying prime real estate in London at the top of the market (trust me, I know how out of whack London's real estate prices have become).

But Neil isn't a dumb guy, far from it, and I have to take his word that he expects these assets to outperform in the future and that they are complementary to PSP's existing portfolio. I hope so because I'm sure PSP paid top dollar (more like pounds) to acquire these assets.

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

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

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

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

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

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

While the PSP already owns 19.1 per cent of Webster’s ordinary shares, its subsidiary PSP BidCo is acquiring the total remaining ordinary shares for A$2 per share, which is a 57 per cent premium on Webster’s most recent closing price. It will also buy all Webster preference shares on issue for A$2 in cash per share through a separate arrangement.

The company operates walnut and almond orchards in New South Wales and Tasmania, and also owns land for cotton and other annual crops, cattle and Dorper sheep production, a water entitlements portfolio and an apiary business.

Maurice Felizzi, managing director and chief executive officer at Webster, said the PSP was the logical owner of Webster’s portfolio given the fund’s focus on long-term growth. “We are encouraged by their understanding of our business and its ongoing importance to regional and rural communities in Australia,” he said in a press release. “PSP Investments has a proven track record in managing and investing in agricultural assets over the long term for sustainable value creation and therefore we believe this transaction represents a positive outcome for all stakeholders in our business.”

The purchase is part of the PSP’s natural resources group, which directly invests in agriculture, timber and related opportunities around the world.

If the deal is approved by shareholders, Webster will transfer certain assets to a newly created PSP group entity called KoobaCo for a value of A$267.7 million, plus the net working capital acquired with the business.

Existing investors Belfort Investment Advisors Ltd. and Verolot Ltd., which own 12.5 per cent and 10.7 per cent of Webster’s ordinary shares, respectively, will be offered the opportunity to acquire a 50.1 per cent ownership stake in the new company.

The first phase of the wharf, a waterfront neighbourhood that includes residential, hotel, office, retail real estate and public spaces like waterfront parks and piers, opened in 2017. This latest loan is for the second phase of its development.

The Goldman Sachs Group Inc. led the non-recourse transaction with syndicate members Starwood Capital Group, Mack Real Estate Group and Pentagon Federal Credit Union.

“With Goldman Sachs, we’re setting a new high bar for project financing in Washington,” said Kristopher Wojtecki, managing director of real estate investments at PSP Investments, in a press release. “We are now in an even stronger position to realize the full potential of Washington, D.C.’s waterfront.”

Since 2011, Apax and its consortium partners worked to reshape Acelity from a loose collection of businesses into a focused global leader. This was achieved through a strategic M&A program which included targeted acquisitions as well as the disposals of non-core businesses. In addition, a range of activities were undertaken to accelerate organic growth, including investments in R&D, medical education, clinical studies, and the expansion of its sales force. The result of these initiatives transformed Acelity into the world’s largest wound care company focused on advanced wound care, including negative pressure wound therapy.

Steven Dyson and Arthur Brothag, Partners at Apax Partners, said, “We are proud of our work with Acelity and our consortium partners. In many ways, this transaction represents what Apax seeks to achieve: namely, developing a high conviction thesis through sub-sector insights, forming a strong partnership with a talented management team, and working together to transform a business to become the global leader in its space. We wish Acelity well and look forward to watching the company continue to thrive under new ownership.”

R. Andrew Eckert, CEO of Acelity during the ownership of the Apax Funds and its consortium partners, said: “It has been a pleasure to work with Apax and its consortium partners. They have demonstrated a very strong understanding of our space and helped us reshape our business and invest to capture significant growth. It’s incredibly fulfilling to reflect on the rapid expansion in innovation and new products Acelity has delivered to the marketplace in this time. I especially want to recognize the Acelity workforce for their dedication to improving patients’ lives worldwide in bringing these new therapies forward.”

The Canadian company holds natural gas distribution utilities, as well as renewable power generation assets.

In the transaction, the cash offering of $33.50 per common share is an approximate 31 per cent premium on AltaGas’ closing price as of Oct. 18, 2019. The deal puts the company value at around $1.7 billion.

“We are very pleased to have entered into an agreement to acquire ACI in partnership with ATRF,” said Patrick Samson, managing director and head of infrastructure at PSP Investments, in a press release. “ACI’s business comprises a diversified portfolio of high-quality regulated natural gas utilities and long-dated contracted renewable power assets that are well aligned with our long-term investment strategy. We look forward to supporting the company, its management team and all of its stakeholders as ACI continues to grow and succeed.”

Currently, the deal is subject to shareholder approval, as well as certain regulatory approvals by the Alberta government.

Direct lenders and big banks are competing for the largest companies in the red-hot market for private credit, which is eroding underwriting standards, according to Canada’s second-biggest pension fund manager.

“The bigger, more solid companies are closer to having access to capital markets, so there’s a bit more erosion there because you have large direct lenders that are competing with each other,” along with the big banks to offer credit, said James McMullan, head of corporate credit for Caisse de Depot et Placement du Quebec, which has about $327 billion under management.

Like other asset managers, the pension fund is working to increase its exposure to higher-yielding private credit, but is doing so slowly as finding and screening companies is labour intensive, said McMullan. The Caisse currently holds around US$4 billion in the market, part of its US$41 billion credit portfolio.

“We definitely think there’s an opportunity in private,” said McMullan. He divides the private-credit middle market into three blocks: companies with less than US$30 million in earnings before interest, taxes, depreciation and amortization; those with between US$30 million and US$75 million; and those with US$80 million and up. It’s the upper end that’s seen the most erosion in credit quality, he said.

“I don’t know what too much is, but there’s a heck of a lot of capital, which leads to some perversions because everybody is looking for the right opportunity,” McMullan said. “So things are becoming more expensive, structures are getting eroded.”

Points of concerns when looking at covenants are often associated with definitions, McMullan said. He pays attention to subtle details such as how many pages are used to define the terms in the credit agreement, especially the Ebitda.

Workout Situations

“Some are a nice 10-line-paragraph, short and sweet, pretty simple to understand,” he said. “Others can be three pages, because there’s a whole bunch of add-back synergies, prospective treatment of future savings two years down the road, that we haven’t yet thought of, but we think we could get there. Those are areas that we look at.”

McMullan added there’s a “little bit of covenant-lite” deals creeping into the upper middle private-credit market.

The pension fund is looking into setting up a separate department that does work-out debt situations for companies, McMullan said. “When you have a large portfolio and you are playing in the private-debt or just high-yield world, there are accidents that happen,” he said.

But it’s steering clear from cyclical sectors such as oil, he said. This sector is also tricky as Caisse has adopted a climate policy and is trying to reduce its carbon footprint.

“We’ve tried to look at it thinking maybe we could take a bit more carbon risk as long as the return is significantly more, but even that comes into a bit of a clash with the longer-term view on what we should be doing,” he said.

It’s quite disturbing when I hear people dismissing Alberta’s economic woes as “nothing, just a bunch of whining Albertans.” Really? When the rest of the country benefited from Alberta’s resource extraction, nobody was complaining but now we have the most vile ecological fundamentalists hijacking our politics, misinforming people and spreading dangerous lies. This statement is so true, it needs to resonate with all Canadians or else Canada as we know it is doomed: “Our citizens in Alberta are suffering economically despite having given the rest of the country billions of dollars in support. It is crazy that we turn our backs to them when we have received so much from them.”

Capturing the Strength and Momentum in Private Debt and Alternative Credit Growth: The Remarkable Achievements of a Small Asset Class

Wednesday, September 25, 2019, 9:15 AM - 10:15 AM

There are enormous opportunities to be found in private debt and alternative credit growth. In 2018, assets under management globally by private debt funds reached $638 billion, with aggregate capital raised surpassing the $110 billion mark. Hear about the latest developments in asset-back debt, direct lending, and alternative credit. Access the full spectrum of credit instruments to deliver absolute performance while limiting your duration risk and interest rate sensitivity.

Moderator: Vishnu Mohanan, Manager, Private Investments - Halifax Regional Municipality Pension Plan

Speakers:
Theresa Shutt, Chief Investment Officer - Fiera Private Debt
Ian Fowler, Co-Head North America Global Private Finance & President, Barings BDC - Barings
Larry Zimmerman, Managing Director, Corporate Credit, Benefit Street Partners

Synopsis: This morning, we all listened to an interesting panel on private debt, one of the hottest asset classes right now. I came a tad late when they were going over the pros and cons of sponsored versus non-sponsored deals.

In non-sponsored deals, you rely on third party data on quality of earnings and other data.

Theresa Shutt said they focus on corporate credit and companies with audited statements. "If there is trouble, we want to see how management behaves in a downturn, we have good covenants."

She said to ask private debt managers a simple question: "Tell me about your bad months." She added: "Our recovery has been quite high".

I like that, asked Theresa to write a guest comment for my blog on this hot asset class.

Ian Fowler focused a lot of alignment of interests and said to look at two things:

1. Target return
2.  Fee structure

He warned "investors are overpaying for beta" and said you can expect 6-8% unlevered return but as the market gets hot, spreads are being compressed, managers are making higher risk loans to meet targeted return, and skimming is occurring where they are using investors' money to generate income on their platform."

Larry Zimmerman also warned investors to beware of private debt managers "building syndication deals".

Theresa Shutt warned not to just talk to principals, "ask about compensation, focus on culture". She said they use ESG in all their underwriting criteria.

I asked the panel how to prepare for another 2008 crisis and they told me to "focus on first not second lien loans" and remain highly diversified, avoiding deep cyclical sectors.

Interestingly, in the US, non bank private debt funds have been very active in the middle market and act to stabilize the market in case of a downturn.

Ian Fowler told us to look at average debt spread, style drift, and leverage.

I need to cover private debt in a lot more detail but Ian told me after that average PE multiples are priced at 12x so there is no room for error. "It's the same thing in private debt, you need to see how deals are being priced and beware of alignment of interests as spreads get compressed and managers try to fulfill their target return".

The chief executive of the Caisse de depot et placement du Quebec is stepping down from the pension fund manager to become head of the Munk School of Global Affairs and Public Policy at the University of Toronto.

The Quebec fund manager says Michael Sabia, 66, is leaving at the beginning of February, a little more than a year earlier than expected.

"I know that I am leaving the Caisse and its people in a strong position to seize the many opportunities that lie ahead for them as I move on to my next challenge," Sabia said in a statement on Tuesday.

Sabia, who was not available for interviews, noted that leading the unique Quebec institution has been "the greatest privilege" of his career.

He has served as president and chief executive at the Caisse since March 2009. Before joining the investment fund, he was chief executive of BCE Inc.

In February 2017, his mandate was renewed until March 31, 2021, to allow Sabia to oversee the completion of the Montreal electric railway project.

Caisse chairman Robert Tessier said it has retained the services of an international firm to search for Sabia's replacement and planned to complete the process at the beginning of 2020, with the appointment of a successor approved by the government.

Potential candidates have probably already been identified, said Michel Nadeau, a former senior Caisse executive and director general of the Institute on Governance of Private and Public Organizations.

"If Mr. Sabia leaves in February, it's because they already have people in mind," he said in an interview. "They feel that the government would prefer to have another person."

Quebec Premier Francois Legault praised Sabia's work, calling him an "excellent manager,""hard working" and a "brilliant man."

Finance Minister Eric Girard denied that the government wanted to place its own candidate at the Caisse.

"My approach was to tell him that I would have liked him to stay longer," he said in Quebec City. "If he had wanted to stay longer, he could have stayed longer."

Girard, who said the Caisse could be headed by a woman, felt Sabia's replacement would have to ensure its portfolios are resilient through a period that will eventually include bear markets.

Sabia's appointment was criticized a decade ago because he was not from Quebec.

But he made a name for the Caisse with a focus on reducing the volatility of returns, said governance expert and Concordia University professor Michel Magnan.

"He was hired to restore confidence in the institution. On that, I think we cannot argue."

Sabia was appointed to head the Caisse after it was shaken by the financial crisis, which resulted in $40 billion of losses the previous year.

Under his guidance, the Caisse said it has produced "solid and sustainable returns" of 9.9 per cent over 10 years, while the size of its net assets has almost tripled to $326.7 billion at June 30.

Over the last decade, the institution has diversified, focusing particularly on sectors such as infrastructure and private equity, while continuing to invest in real estate and adjusting its strategy.

"He confounded skeptics, me being the first," said Nadeau, who believes Sabia's mandate can be viewed in two periods.

Nadeau said Sabia spent the first years reducing the portfolio's risk and then relaunching an international expansion with 10 offices abroad. He also put more emphasis on investments in Quebec.

Sabia's total compensation last year was $3.87 million, up 11.5 per cent from 2017. His salary has remained steady at $500,000. He will not receive severance.

The province’s political class was quick to praise Michael Sabia on Tuesday, saying his “remarkable work” over the last 11 years helped bring the Caisse de dépôt et placement du Québec to new heights.

Sabia, 66, announced Tuesday he will be stepping away as the Caisse’s CEO in early February. He will be joining the University of Toronto as the new director of its Munk School of Global Affairs and Public Policy.

In a statement released from his office, Premier François Legault said Sabia led the Caisse through major global investments and a steady increase of its assets since 2009.

“I salute Mr. Sabia’s exceptional career at the head of the Caisse,” Legault said. “He has made the Caisse an even more important player in our economy for the benefit of all Quebecers.”

Legault said he spoke with Sabia after the announcement to thank him for his work.

Economy Minister Pierre Fitzgibbon praised Sabia for his dedication to his role and contribution to Quebec’s economic development, noting he worked with him both as a minister and as a Caisse board member himself.

“His rigorous management as CEO has brought the Caisse to another level, thanks to more than competitive returns year after year,” Fitzgibbon said in a statement.

Finance minister Eric Girard, for his part, said Sabia’s “professionalism” benefited the entire Quebec economy.

“During his tenure, Mr. Sabia improved the Caisse’s management processes,” Girard said in a statement, “which enabled him to outperform his benchmarks while creating more resilient portfolios.”

When Sabia became the Caisse’s CEO in 2009, it was considered a surprise. Being born in Ontario, he was labelled an outsider, despite moving to Quebec in 1993.

The Caisse was also coming off a year where it lost $39.8 billion.

But Sabia said then his focus was on the work ahead. His goal was to stabilize and fortify the Caisse, he told reporters, beginning with a reassessment of its risk-management, investment and communication strategies.

“The past isn’t particularly interesting to me,” he said during his first public appearance as CEO. “What interests me is the future and the steps we’ll take to strengthen the Caisse.”

In a major changing of the guard in the Canadian pension management world, Michael Sabia has announced he will leave the Caisse de dépôt et placement du Québec next February, a year ahead of schedule.

Sabia, 66, has been at the helm of Canada’s second-largest pension for 11 years, following a career that included serving as a senior executive in the telecommunications and transportation industries.

As the first Anglophone to run the Caisse — which has a rare dual mandate to achieve optimal long-term investment returns and to contribute to Quebec’s economic development — his hiring in the aftermath of the 2008 financial crisis was controversial.

At the time, the Caisse was dealing with one of its costliest missteps: heavy investment in asset-backed commercial paper, a form of short-term debt that had exposure to the U.S. subprime credit market, that contributed to a loss of a quarter of its assets in 2008 alone.

“He has been able to deliver good returns and to please the various funds and their members,” Claude Lamoureux, former head of the Ontario Teachers’ Pension Plan Board, told the Financial Post. “Also, what is more important, he (kept) his political masters happy.”

When Sabia took over as CEO of the Caisse in 2009, 64 per cent of its assets were invested in Canada. But by the end of 2018, the balance had shifted, and the same proportion was invested globally.

At the same time, under Sabia’s guidance, the pension manager has maintained its status as a champion of Quebec industry, including retaining its longstanding investments in troubled engineering firms SNC Lavalin and Bombardier Inc.

Lamoureux said Sabia’s “signature” style — solid investments that will pay dividends for both the pension and the province — can be seen in the Caisse’s recent investment in a $6.3 billion light-rail system planned for Montreal, scheduled to open by the end of 2021.

Expanding the portfolio of global investments has been a trend for many Canadian pension funds, but Sabia deserves “a massive amount of credit” for the Caisse’s transformation and performance, said Mark Wiseman, former CEO of the Canada Pension Plan Investment Board.

“Michael has done an incredible job leading la Caisse,” Wiseman told the Post, praising Sabia’s “unrelenting” work ethic and attention to detail.

“Under his tenure, CDPQ has become one of the most sophisticated, risk-aware and well-managed institutional investors in the world,” Wiseman said.

In 2017, Sabia’s term as CEO of the Caisse was renewed through March of 2021. However, he will leave just over a year early to take a job leading the Munk School of Global Affairs and Public Policy at the University of Toronto, a post he was offered following a global search process.

“This appointment will allow me to continue working on issues that I think are particularly important in the current state of world affairs,” Sabia said in a statement, noting that he will spend time in both Montreal and Toronto after he starts the new job in February.

“I know that I am leaving CDPQ and its people in a strong position to seize the many opportunities that lie ahead for them as I move on to my next challenge,” he said.

The Caisse has retained an international recruitment firm and plans to name a successor by the beginning of next year.

Robert Tessier, chair of the Quebec pension’s board, said Sabia did an “outstanding” job.

“His leadership has been founded on a clear vision in a complex and changing world,” Tessier said, adding that the Caisse has been built into a global financial institution with a diversified portfolio that benefits both depositors and the Québec economy.

“Courageously stepping up to the challenge of leading CDPQ in 2009 following the financial crisis, Michael and his team step by step have rebuilt the organization and repositioned it with new ideas.”

Sabia’s smooth run was far from a foregone conclusion when he took the job in 2009, following the departure of Richard Guay only four months into his appointment.

Sabia’s background, which included time as a federal government bureaucrat who worked on the tax overhaul that would lead to the creation of GST, made him a natural target for the Parti Québécois, said Karl Moore, a professor at McGill University’s Desautels Faculty of Management.

“It was just something where as the PQ, you go, here’s a guy who’s not from Quebec, whose mother-tongue is not French and in fact worked for the federal government…. They’re not natural allies,” Moore said of Sabia, who also worked as Canadian National Railway’s chief financial officer and chief executive of BCE Inc.

While tilting the portfolio toward a global focus, Sabia stayed true to the Caisse’s other central mandate of investing in Quebec, Moore said, pointing to large investments in Quebec’s tech sector, notably in Element AI and Lightspeed POS Inc.

“Part of it is it’s Quebec-based,” Moore said, “but it’s also a good investment. I don’t think they blindly invested in Quebec. They did it with a lot of wisdom and insight.”

Sabia navigated these challenges while proving to the government that he was worth keeping in the role, Moore said, suggesting that one slip anywhere along the way would have been all the PQ needed to dismiss him.

Sabia’s exit marks the third recently announced departure of a long-time Canadian pension CEO.

Ron Mock, chief executive of the Ontario Teachers Pension Plan, will retire and hand the reins to Teachers’ Jo Taylor on Jan. 1.

Jim Keohane, CEO of the Healthcare of Ontario Pension Plan, announced this year that he would be retiring in March of 2020.

The Canada Pension Plan Investment Board (CPPIB) plans to launch an investment strategy to cash in on opportunities arising from consumer trends triggered by climate change, it has revealed.

The C$400bn (€274bn) public pension fund, which is accountable to Canada’s Parliament and federal ministers but governed independently, said in its annual sustainability report that it was “preparing to launch a new climate change investment strategy”. It didn’t provide any details on size, but Deborah Orida, Senior Managing Director & Global Head of Active Equities, confirmed to RI that the capital would come from “growth of our department” rather than reallocation from existing strategies.

“The portfolio will be fundamentally driven and contain a diverse set of companies with tangible exposures to climate change,” the report explained, with Orida adding that themes would include disruptive sectors such as producers of meat substitutes.
The strategy is still being developed and will need to be confirmed by CPPIB’s committee before investment can begin. An update will be provided in next year’s annual sustainability report.

This year’s report also revealed that one of CPPIB’s climate work streams is working “to develop energy scenarios and reference cases to guide portfolio allocation decisions”. In April, the fund introduced a “climate change security selection framework” which requires its investment teams to “include descriptions of relevant climate change-related risks and opportunities that impact investment decisions in their screening memos and final investment recommendations”.

Orida told RI that the move had prompted “a real change in behaviour” at investment level at CPPIB. “It’s not just a paragraph in a memo that says ‘we thought about climate change, and conceptually identified risks around sea levels or more severe storms’,” she said. “There is actually an incorporation of that thinking into our financial models – increasing the estimated capex for a company, for example, and looking at the impact that would have on returns in terms of basis points.”

Earlier this week, CPPIB announced it acquired Pattern Energy, the Nasdaq- and Toronto-listed renewable energy ‘yieldco’ with 4.4GW of capacity across North America and Japan. The all-cash deal values Pattern at $6.1bn, meaning Pattern Energy shareholders will receive a 14.8% premium on their shares.

The transaction is slated to close by the middle of next year, at which point CPPIB will partner with private equity house Riverstone Holdings to combine Pattern Energy with its sister company Pattern Development. Yieldcos like Pattern Energy only own operational assets – thus removing all construction and development risk – while Pattern Development sources and develops assets. Combining the two will create a traditional, integrated and unlisted renewables company.

Toronto, ON, Canada (November 6, 2019) Canada Pension Plan Investment Board (CPPIB) today released its 2019 Reporton Sustainable Investing, an annual document that outlines the organization’s approach to environmental, social and governance (ESG) factors. The report outlines how CPPIB is managing challenging topics such as climate change and board diversity.

• Climate Change – As part of its climate change program, CPPIB launched a bottom-up evaluation framework requiring investment teams to specifically analyze the climate change risks and opportunities of each major investment they are considering. This year’s report also includes details on CPPIB’s climate change scenario analysis and expanded carbon footprint reporting, which includes public and private holdings. CPPIB has also developed an initial framework for using key indicators, or signposts, to monitor climate change and the global transition to lower-carbon energy sources.
• Investments in Power and Renewables– CPPIB’s investments in global renewable energy companies more than doubled to $3 billion in the year to June 30, 2019. This is up from just $30 million in 2016. For CPPIB, climate change is not merely about addressing risks, its disruptive impact is also creating opportunities. Our partners in this space include Alberta’ Enbridge Inc., India’s ReNew Power and Brazil’s Votorantim Energia.
• Board Diversity– CPPIB expanded its efforts to improve board diversity among our portfolio companies. We have long believed companies with diverse boards, including in terms of gender diversity, are more likely to achieve superior financial performance. As of December 2018, we began voting against the chair of the board committee responsible for director nominations if that board has no female directors and where no exception is warranted. Our new Global Board Gender Diversity Voting Practiceresulted in CPPIB voting against the election of 626 directors globally during the 2019 proxy season.

“Over the past year, we advanced our goal to be a leader among asset owners in understanding the risks posed, and opportunities presented, by climate change,” says Mark Machin, President & CEO, CPPIB. “We’re mindful that fully understanding the implications of climate change – including physical, transition and adaptation risks – will be a continuous process.”

The Report on Sustainable Investing provides a comprehensive review of the actions CPPIB took over the previous year to manage ESG factors to enhance the long-term value of the CPP Fund. This year’s report also highlights CPPIB’s efforts to assess and engage with companies to seek improvements in business practices and disclosures, and collaboration with other investors.

“Our climate change work, investments in renewable energy, and actions to improve board diversity are just some of the activities we undertake to help encourage positive change and improve long-term investment returns for the Canadian workers and retirees we serve,” says Richard Manley, Managing Director, Head of Sustainable Investing, CPPIB.

To learn more about our approach to sustainable investing or read the 2019 Report on Sustainable Investing, click here and follow us at @CPPIB.

About Canada Pension Plan Investment Board


Canada Pension Plan Investment Board (CPPIB) is a professional investment management organization that invests the funds not needed by the Canada Pension Plan (CPP) to pay current benefits in the best interests of 20 million contributors and beneficiaries. In order to build 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 $400.6 billion. For more information about CPPIB, please visit www.cppib.com or follow us on LinkedIn, Facebook or Twitter.

These past 18 months saw major advances in our ongoing goal to be a leader among asset owners in understanding the risks posed, and opportunities presented, by climate change.

Foremost among these was an acceleration of our Climate Change Program. It elevated the ways our teams incorporate climate change considerations into our investment processes and evolved the organization from theoretical understanding to practical implementation. (See pages 14-16).

Our Climate Change Steering Committee oversees this program. We enhanced this Committee last year, adding more members of our Senior Management Team to facilitate agile, enterprise-level decision-making; so that challenges could be readily addressed.

Among its early achievements was the launch in April of an evaluation framework requiring investment teams to perform bottom-up analyses of climate change risks and opportunities on material investments. The goal is to better understand the risks we are taking on, and to make sure we are getting paid for them.

Such progress is encouraging. Yet we’re mindful that fully understanding the implications of climate change – including physical, transition and adaptation risks – will be a continuous process.

For CPPIB, climate change is not merely about addressing risks. Its disruptive impact is also creating opportunities. This includes investments in renewable energy, where our size, expertise and long-term investment horizon make us an ideal partner.

We were the first pension fund to issue a green bond in June 2018, and followed in January 2019 with the first euro-denominated green bond issued by a pension fund. Both issues met with robust demand. (See pages 31- 3 3).

While CPPIB’s renewable energy investments have been led by our Power & Renewables team (see pages 23-26), our pursuit of opportunities is not confined to a single investment program. Both our Energy & Resources and Thematic Investing teams seek climate change-related opportunities and collaborated on our investment in one of the world’s leading electric vehicle charging networks. (Details on pages 21-23).

Finally, some of our broadly based investment programs are exposed to hundreds of companies that are leading the charge to displace traditional energy with more sustainable technologies.

BOARD DIVERSITY

This year we expanded our efforts to improve board diversity among our portfolio companies.

Based on our research, we have long believed companies with diverse boards, including with respect to gender, are more likely to achieve superior financial performance. This is why we increasingly use our voting power to encourage companies to appoint more women to their boards.

We began this practice within Canada in 2017, by voting against the election of nominating committee chairs at companies where boards had no female directors and no extenuating circumstances warranting an exception. If no progress was made by the following year, we voted against all of the company’s nominating committee members.

We also engaged directly with company directors prior to casting proxy votes; letting them know our concerns about the lack of female representation on their boards and clarifying our intentions to vote against their nominations.

We witnessed firsthand how this encouraged companies to prioritize the issue and add women to their upcoming nomination slates.

That success led us to take the practice global. As of December 2018, we now vote against the chair of the board committee responsible for director nominations at any investee public company if that board has no women directors and no exception is warranted.

At the end of fiscal 2019, we held shares in more than 3,400 companies outside of Canada. So these efforts mark a significant undertaking to improve board gender diversity across our global public portfolio. We will continue to be active in advancing this important matter.

Board diversity is just one of many issues about which we engage with companies, and success to date reinforces our firm belief in the importance of engagement.

Whether urging managers to more fulsomely consider the impacts of climate change, or to structure their boards for long-term success, engagement creates a path through which asset owners can become powerful, positive influences.

CONCLUSION

Our climate change work, investments in renewable energy and actions to improve board diversity are just some of what we do to help spark positive change and improve long-term investment returns for the Canadian workers and retirees we serve.

This year’s report shows the many ways our approach has evolved over 20 years. I hope by its conclusion you will share my optimism about what can be accomplished in the decades to come.

The Climate Change Program is a cross-functional effort that involves people from Total Portfolio Management (TPM), Finance, Analytics & Risk (FAR), our investment departments, Human Resources, Technology & Data, and Public Affairs and Communications. It’s a cross-divisional, cross-departmental effort because our strategy on climate change affects all of CPPIB – and we need to work together to make sure we’re identifying all the risks and opportunities that could impact investment decisions.

The new Program has three design work streams. The first is a top-down effort led by TPM focusing on portfolio design; and how climate change and energy transition scenarios are going to impact our target exposures in different countries. Second, we have a portfolio risk assessment and scenario analysis work stream led by our folks in FAR.

Finally, a bottom-up security selection work stream led by two investment teams – Active Equities and Real Assets – focuses on incorporating the impacts of climate change in our material investment decisions.

All this work may sound a bit theoretical. You might ask, ‘How is it affecting our day-to-day investment decisions?’

One way this work is really starting to come through is in the climate change security selection framework we launched in April. Investment teams must now include descriptions of relevant climate change-related risks and opportunities that impact investment decisions in their screening memos and final investment recommendations.

The U.S., China and other leading economies confront a massive funding gap of $15.8 trillion in 2050 to ensure lifetime financial support for their aging populations.

That’s according to a report spearheaded by former U.K. Financial Services Authority Chairman Adair Turner for the prestigious Group of 30, comprised of current and former policy makers.

“If public policies and individual behaviors do not change, many countries’ pension systems will face a severe crisis, threatening either unaffordable public expenditure pressures or inadequate incomes for retirees,” Turner said in a statement.

The projected $15.8 trillion shortfall is adjusted for inflation so the actual nominal dollar amount in 2050 will be materially larger, equivalent to 23% of global gross domestic product that year, according to the 75-page report.

The G-30, which includes Bank of England Governor Mark Carney and former U.S. Treasury Secretaries Timothy Geithner and Lawrence Summers, mainly blamed antiquated pension and retirement systems for the yawning financing gap, which it pegged at $1.2 trillion in 2018. Smaller projected returns on savings -- in an era of low interest rates -- aggravate the problem.

The report – which covers 21 countries, including Japan, Germany, India and Mexico, accounting for 90% of global GDP – said the coming crisis is not just about pensions. Lifetime financial security also depends on the availability of public health, housing and transportation services, as well as on informal community and family support.

The G-30 advocated a mixture of policies to tackle the problem:

• Increasing the official retirement age by at least four-to-six years by 2050 while enabling people to work longer. A quarter of the funding gap could be closed if retirees on average worked 20% of the time of standard-aged workers.
• Promoting higher savings by individuals and increasing taxes to support public pensions. Such steps might include mandatory savings programs.
• Accepting that expected incomes in retirement may need to be lower. For middle and high-income retirees, that might mean living on 60% of average pre-retirement incomes, rather than 75%.

The report’s working group, which included UBS Group AG Chairman Axel Weber and BlackRock Vice Chairman Philipp Hildebrand, also called for action to reduce the administration and asset management costs borne by people saving for retirement. That might include establishing national utilities to provide bulk processing and purchasing of asset management services.

Reforms to minimize investment management costs must be a priority, according to the report.

The G-30 said that while the shift by corporations away from defined benefit to defined contribution retirement plans like 401(k)s for their workers had in some ways been inevitable, it has not worked out well for many individuals. The group suggested hybrid retirement programs as a possible solution, including guaranteeing minimum investment returns for defined contributions.

“Reforms to defined contribution should enable individuals to benefit from collective investment management, at low cost, and not have their retirement savings hostage to market cycles as much as they are today,” G-30 Chairman and Singapore senior minister Tharman Shanmugaratnam said in a statement.

The report acknowledges that confronting the coming crisis will be difficult because it will involve potentially politically unpopular decisions.

Making it “even more arduous is that it occurs at a time when governmental institutions are increasingly mistrusted, mainstream political parties are under strain," and voters are becoming more diverse as well as "susceptible to populist rhetoric and demagoguery,” the G-30 said.

Perhaps it takes teachers to give politicians a lesson. Any official who wants to understand the terrible state of American public-sector pensions should read the financial report of the Illinois Teachers Pension Fund. Its funding ratio of 40.7% is one of the worst in America, according to the Centre for Retirement Research (CRR) in Boston (see table).

Since it was established in 1939, Illinois officials have not once set aside enough money to fund the pension promises made. As a result, three-quarters of the money the state (or rather the taxpayer) now pays in each year merely covers shortfalls from previous years. The situation is getting worse. In 2009 the schemes’ actuaries requested $2.1bn, but only $1.6bn was paid. By 2018 the state paid in $4.2bn, still well short of the $7.1bn the actuaries asked for. The trustees have warned that the plan would be “unable to absorb any financial shocks created by a sustained downturn in the markets”.

Other schemes have attracted similarly stark warnings. Illinois is the class dunce, with six languishing schemes. Chicago Municipal is just 25% funded and the actuaries warn that “the risk of insolvency for the fund has increased”. The actuaries of the Chicago police scheme warn that “this is a severely underfunded plan” with a shortfall of $10bn; the funded ratio is not projected to reach 50% until 2043.

Offering workers a defined-benefit pension, where an income based on final salary is paid for the rest of their lives, is an expensive proposition, especially as life expectancies lengthen. Pension shortfalls are common across America, with the average public scheme monitored by the CRR just 72.4% funded. That adds up to a collective shortfall of more than $1.6trn.

When a scheme is underfunded, one of three things can happen. More contributions can be made, by employers or workers or both. Benefits can be cut. Or the scheme can earn a higher return on its investments to make up for the shortfall.

Cities and states are paying more, but still not enough. In 2001 public-sector employers contributed a further 5.3% of their payroll to meet pension promises; now that figure is around 16.5% on average (see chart). Even so, in no year since 2001 has the average employer contributed as much as demanded by actuaries. Last year’s shortfall was just under 1% of payroll.

This reluctance is understandable. Politicians dislike raising taxes—or cutting services to pay for higher contributions. Workers do not want to see their current pay reduced by higher deductions, or their future benefits cut. And in any case, in some states courts have ruled that pension benefits, once promised, cannot be taken away. Arizona attempted a reform in 2012 that would have increased contributions for anyone with less than 20 years’ service. Workers sued and the courts ruled in their favour in 2016, requiring the scheme to repay $220m. Since the failed reform plan was instituted, employers’ contributions as a share of payroll have almost doubled.

So states and cities have crossed their fingers and hoped that their investments will bail them out. America’s buoyant stock market has done its best to help. Returns on government bonds have also been good for much of the past three decades. Even so, the average public-sector scheme is less well funded now than it was in 2001.

And the markets are unlikely to keep being so helpful. In 1982 the government sold long-term Treasury bonds with a yield of 14.6%; now such bonds yield just 2.4%. Equity valuations are high by historic standards. That suggests future returns will be lower than normal.

Kentucky offers a sobering example of how states can spiral towards disaster. In 2001 its retirement system was 120% funded and employers were putting in just 1.9% of payroll. After the dotcom slump, the funding position deteriorated. By 2005 the scheme was less than 75% funded and the required contribution had gone up to 5.3%. But the state fell short of the target every year until 2015, by which point the contribution had leapt to nearly 33% of payroll. In 2018 the actuaries asked for 41%.

Kentucky’s scheme covering “non-hazardous” workers (those who are not employed by the emergency services) is just 12.8% funded. One of its beneficiaries is Larry Totten, who worked for Kentucky’s park service and retired in 2010 after a 36-year career. When he found out about the scheme’s parlous state, he joined Kentucky Public Retirees, a group that lobbies for pensioners. “There’s enough blame to go around,” he says. Though it was state governors (of various parties) who failed to pay the required amounts into the scheme, it was the state legislature that let them get away with it.

Such severely underfunded schemes risk entering two vicious circles. The first involves costs. Kentucky’s public pension scheme covers a wide range of state employers and some have to pay 85% of payroll to cover their pension obligations. Employing someone on $50,000 a year requires an extra $42,500 of contributions. They naturally seek to lay off workers to reduce this cost. But that leaves fewer people paying in without changing the number currently receiving retirement benefits. That increases the short-term squeeze.

The second concerns the accounting treatment of public-sector funds. Many assume nominal returns on their portfolios of 7% or more after fees. This optimism has a big impact. Calculating the cost of a pension promise requires many assumptions—how long people will live, how much wages will rise and so on. Future payouts must be discounted to calculate a cost in current terms, and thus contributions. The higher the discount rate, the lower the current cost and the less employers have to pay in. Public-sector schemes use the assumed rate of investment return as their discount rate—so a high rate lowers the apparent cost.

But if a scheme becomes severely underfunded, a plunge in the stock market could leave it unable to cover current payouts. So it must invest in safer, lower-yielding securities, such as government bonds. That reduces the discount rate and makes the pension hole even bigger. Kentucky’s non-hazardous scheme uses an expected return of 5.25%, much lower than most public-sector schemes.

These calculations look surreal by comparison with private-sector pension funds. Their accounting rules regard a pension promise as a debt like any other. After all, courts insist pensions have to be paid, whatever the investment returns. The discount rate must therefore be based on the cost of debt—for companies, the yield on AA-rated corporate bonds. Since that yield, now around 3%, is far lower than the return assumed by public-sector funds, private-sector pension liabilities are very expensive. Faced with a $22.4bn shortfall, General Electric recently froze pension benefits for 20,000 employees.

These different accounting approaches seem to imply that it is cheaper to fund a public-sector pension than a private-sector one. In reality, that cannot be the case. The public-sector pension deficit is therefore much larger than the $1.6trn estimated by the CRR. It is hard to be precise about how much larger, but the accounts of troubled schemes give some indication.

The Chicago Teachers scheme has a shortfall of $13.4bn, and a funding ratio of 47.9% on the basis of an assumed return of 6.8%. Its financial report reveals that a one-percentage-point fall in the discount rate would increase the deficit by $3bn. The private-sector accounting approach would lower the discount rate by around four percentage points.

This is a crisis no one wants to solve, at least not quickly. The Chicago Teachers scheme is aiming for 90% funding, but not until 2059—long after many retired members will have died. New Jersey’s teachers’ scheme is not scheduled to be fully funded until 2048. Such promises might as well be dated “the 12th of never”. The bill for taxpayers seems certain to rise substantially. For the states with the biggest pension holes, political conflict is in store.

[...] two years ago, I wrote about the Mother of all US pension bailouts and last year I discussed how Congress gave a multibillion Thanksgiving pension bailout to solve a retirement crisis that threatened more than 1 million Americans in “multiemployer” pensions.

Why is this important? Because it provides clues as to what will happen when many chronically underfunded state and local pensions hit the proverbial brick wall, they will be bailed out by Congress and the Fed and US Treasury will help them meet their obligations (by buying pension bonds or simply transferring money to them).

Of course, it won't be that simple. I suspect retired members of these underfunded US public pensions will take some haircut, either partial or full removal of indexation or a more pronounced cut in benefits.

This is where Dalio rightly warns there will be huge tensions because teachers and other public sector employees and retirees will fight tooth and nail against any cuts in benefits.

But mark my words, the Mother of all US public pension bailouts is coming and it will likely come after the next major financial crisis hits us, whenever that is.

This is why central banks are vigorously trying to reflate the bubble, they know the next crisis will lead to widespread pain and misery, mostly for the poor, working class and those a step away from pension poverty.

The executive upheaval at the Caisse de dépôt et placement du Québec continues.

Less than a week after chief executive officer Michael Sabia announced his imminent departure, the manager of the Quebec pension plan said Monday that Stéphane Etroy is stepping down as executive vice-president and head of international private equity “to spend more time with his young family.” Etroy is based in London.

His departure will allow Canada’s second-largest public pension manager to consolidate all of its private equity activities in Quebec and abroad under one roof.

Etroy will be replaced by Charles Émond, who already oversaw the Caisse’s investments in its home province and now inherits a global portfolio that was valued at about $43 billion as of December. More than three-quarters of the Caisse’s private equity holdings were outside Canada.

“This combination of the private equity teams under one leadership will allow CDPQ to fully benefit from the expertise its teams have acquired over the years, in addition to making it easier to share best practices,” the Caisse said in the statement.

Émond, whose new title is executive vice-president, Quebec, private equity and strategic planning, “possesses solid expertise in concluding complex transactions and managing relationships with partners,” the Caisse said.

Before joining the Caisse in February, the executive spent 18 years at Scotiabank, including a stint as global head of investment banking and capital markets. He was responsible for the bank’s international investment activities on four continents, and for establishing a foothold in South America.

Some analysts had speculated last week that Émond might be considered for the CEO job.

Etroy was one of the Caisse’s best-paid executives last year, with total compensation of about $3.7 million. Émond’s compensation details haven’t been disclosed yet.

Sabia, 66, will leave his post in early February after almost 11 years, the Caisse said last week. He will become the new director of the University of Toronto’s Munk School of Global Affairs & Public Policy.

I don't want to wander into the middle of a political minefield but you are jumping to conclusions supported by opinions, not by fact or analysis.

You are no doubt aware that Quebec decided in the early 1960s that it would rather have its own pension plan (the QPP) than participate in the CPP. Quebec has never changed its mind about this. To the best of my knowledge, you have never criticized Quebec for staying out of the CPP. This being the case, why would you criticize Alberta for evaluating what Quebec has already done? Why not criticize Quebec's "bonehead move"?

Viewed objectively, Quebec made a mistake by opting out of the CPP. The problem isn't poor governance or lack of scale - the QPP is well run. The problem is demography. The QPP costs more than the CPP largely because Quebec's population grew more slowly than the population in the rest of Canada. Since neither the CPP nor the QPP is well funded, good investment performance cannot compensate for poor demography. By opting out of the CPP, Quebecers forced themselves to bear the burden of their own demography. Had Quebecers participated in the CPP, all Canadians would have borne this burden.

There is no mystery here. Pay-as-you-go pension systems force workers to pay for pensioners. In a national pension plan, the "older provinces" (Quebec, BC and the Maritimes) will be supported by the "younger" ones (everyone else). The subsidies are never measured or disclosed. Sometimes it is best not to know what's going on. Still, the subsidies are there and there is little doubt that Alberta (the youngest province) collectively subsidizes the other provinces. I see no harm in acknowledging this. The harder question is whether to do something about it.

There are many subsidies in a national pension plan. Men may subsidize women, who live longer. The poor may subsidize the rich, for the same reason. The healthy subsidize the less healthy. In the CPP and QPP, past generations had a better deal than future generations. Alberta may have subsidized other provinces in the past but that does not mean that Alberta will subsidize other provinces in the future. Its population and economy may change.

DB pension plans never flourish where everyone seeks a subsidy and no one is prepared to subsidize. There needs to be some solidarity and some commitment to sharing. Otherwise the plans die... and few things are uglier than the death of a poorly funded DB plan.

Quebecers are paying more (about 11% vs. 9.99% for the CPP) to the QPP because Quebec is older than Canada as a whole (i.e. the % of seniors is about 15% higher than in Canada as a whole).

If Alberta were to exit the CPP, they would be compelled by the CPP Act to set own their own ‘APP’, which would have to be “similar” to the CPP.

Because Alberta is younger than Canada, the APP contribution rate would be smaller than 9.9%, which Is likely the main reason Alberta wants its own “APP”.

If that were to happen, the CPP 9.9% contribution rate would therefore most likely have to be increased.

A forensic accountant who analyzed SNC-Lavalin’s financial statements says the firm transferred more than $118 million to Swiss bank accounts tied to a shell company established by a former executive.

Of that money, Sophie Déry said on Monday, $14 million was transferred to former vice-president Sami Bebawi and another $11 million was sent to his uncle’s bank account.

Riadh Ben Aissa, the former executive behind the shell company, received $35 million.

“The amounts went in and out almost on the same day,” Déry told jurors. “It was an account used only as an extra layer when distributing money.”

Déry was hired by the Royal Canadian Mounted Police to investigate the firm’s dealings in Libya between 2001 and 2011. She testified Monday during Bebawi’s fraud and corruption trial at the Montreal courthouse.

Déry told the jury she spent 1,500 hours looking through the firm’s finances. The accountant looked into several bank accounts in play, including two belonging to Bebawi, converting the different currencies the firm used to make payments — Euros, U.S. dollars, Libyan dinars and Deutsche Mark.

The money all came from contracts the firm signed in Libya, Déry said.

“We wanted to know where the money went and what, specifically, was done with each amount,” she said. “There were a lot of bank accounts and a lot of transactions.”

The jury has heard how the company in question, Duvel Securities Inc., was established by Ben Aissa while he acted as SNC-Lavalin’s main executive in Libya.

The Crown argues the money paid to Duvel was used to pay bonuses and kickbacks, including to Saadi Gadhafi, son of Libyan dictator Moammar Gadhafi.

Déry told jurors Monday roughly $27 million of the money transferred to Duvel was used to buy Saadi Gadhafi a yacht.

Ben Aissa has testified it was Bebawi who was instructing him what to do in Libya, pressuring him to settle a claim the firm had filed over a money-losing contract.

He later pleaded guilty in Switzerland to charges of corrupting a foreign official and laundering money.

Bebawi, 73, faces charges of fraud and bribing a foreign public official.

His trial continues Tuesday.

Shares of SNC-Lavalin Inc. plummeted to the lowest level in nearly 15 years Tuesday (August 6) in reaction to its largest shareholder, the Caisse de depot et placement du Quebec, warning that the embattled engineering firm had to move to emergency mode to improve its project execution.

The Montreal-based company's shares fell to a low of $16.10 in early trading on the Toronto Stock Exchange and were down eight per cent at $16.38 around midday. The TSX was closed Monday because of the Civic Holiday in Ontario and several other provinces.

Caisse CEO Michael Sabia shone the spotlight on SNC-Lavalin Monday during a discussion about the Quebec pension fund manager's results for the first half of 2019. It posted a modest return of 6.1 per cent, well below that of 7.5 per cent of its reference portfolio. Nevertheless, its annualized return of 8.3 per cent over five years exceeds the 7.2 per cent return for the same reference.

The Caisse booked a $700-million loss from its SNC investment during the first six months of the year and Sabia's impatience was clearly evident.

Although Sabia has said a few times that the Caisse is and will remain "a long-term investor in SNC-Lavalin during this turbulent period," he said that the engineering giant "must move quickly and must focus on execution."

Unwilling to comment on the risk of a hostile takeover bid of SNC by foreign investors, Sabia acknowledged that the Caisse remains watchful and that SNC is important to Quebec and to Canada and "the engineering ecosystem in Canada."

Paraphrasing famed inventor Thomas Edison, Sabia said: "A plan without execution is a hallucination."

"That's why we insist so much on the execution, on the daily discipline (...) It is a change of culture, a higher level -- significantly higher -- of discipline."

• Audrey Forbes is promoted to Senior Vice President, Member Experience and will report to Peter, and will become a member of the executive team.
• Kelly Glass will join the OPTrust team and assume responsibility as Senior Vice President, People, Communications & Public Affairs. Kelly will report to me and will become a member of the executive team. 
• Rick Votano will continue as Vice President, Information Technology, Program Delivery and Business Support Services and will, on an interim basis, join the executive team and report directly to Peter. 
• Dani Goraichy is promoted to Chief Risk Officer and Senior Vice President Actuarial Services and Plan Policy (ASPP). Dani will report to Peter and will become a member of the executive team. Dani will continue to oversee the ASPP team and the Risk functions will also report to him. This includes Investment Risk, Compliance and Enterprise Risk.
• Julie Belair is promoted to Vice President, Actuarial Services and Plan Policy, directly overseeing the ASPP team.
• Tracy Hatanaka-Lejnieks to assume the role of Chief Financial Officer on an interim basis, reporting to Peter and she will become a member of the executive team. 
• Karen Danylak will become VP of Corporate Affairs. She will continue serving as a member of the executive team.
• Louise Greig will assume the role of Corporate Secretary
• John Walsh (General Counsel) has informed OPTrust of his intention to leave in February 29th of next year to pursue other opportunities. John has a long and successful history with OPTrust, not only building Legal Services, but playing a key role in building our highly successful Private Markets Group.
• Reg Swamy (former Chief Pension Officer) is leaving OPTrust.
• Doug Michael (former CFO) is leaving OPTrust.

For OPTrust, the purpose of responsible investing lies in the recognition that ESG factors can impact investment risk and return. We seek to identify, assess and manage ESG factors in a manner that supports both our mission to deliver sustainable pension security and our fiduciary duty to our members.

The context for OPTrust’s responsible investing program is set out in three policies approved by the Board of Trustees; the Statement of Investment Policies and Procedures (SIP&P), Statement of Responsible Investing Principles (SRIP), and Proxy Voting Guidelines.

Our #responsibleinvesting lies in the recognition that #ESG factors can present both challenges and opportunities that span across generations, and we are thrilled that our commitment to #sustainability has been recognized in this development. #pensionshttps://t.co/Z1JeiGB2Vf

— OPTrust (@OPTrust) October 11, 2019

There was a time when defined benefit (DB) pension plans were common in Canada. In 1977, one in three Canadians working in the private sector were members of an employer-sponsored defined benefit pension plan. Now, only one in ten workers have a DB pension. Before becoming the head actuary at OPTrust, one of Canada’s largest defined benefit pension plans, much of my career was spent helping companies wind-up their pension plans as a consulting actuary, so I’ve seen the impact firsthand.

The shift has been gradual, but the trend is clear; fewer and fewer Canadians will have access to the security and stability of a defined benefit pension, and that has left a significant void to fill. For the nearly one million workers in Ontario’s nonprofit sector, the numbers are even more stark. The Ontario Nonprofit Network (ONN), the independent network of the 58,000 nonprofit organizations in Ontario, has been working for years to support Ontario's nonprofits, including exploring pension plan options for the sector.

Through their research, the ONN found that while employers in the nonprofit sector want to provide their employees with retirement security, DB pensions are often out of reach due to their cost, administrative burden, and most importantly, the impact of uncertain contributions on their budgets. This is especially true for smaller employers. It was with this fact in mind that we created OPTrust Select, the new defined benefit pension offering for workers in Ontario’s charitable, nonprofit and broader public sectors. OPTrust Select was designed to address the specific needs of these sectors, providing the security and stability of a defined benefit pension, but at a moderate and stable cost.

Achieving this, however, was no easy task. In order to meet the needs of contribution stability for employers, while providing workers with the lifetime retirement income of a DB pension, a tailored plan design was imperative.

Focusing on the core benefit

Because of budgetary constraints for employers, and more modest incomes for employees, we knew that the cost of a typical defined benefit plan was too steep and unpredictable for most nonprofits. Our research found that a contribution rate of 3% per side from employers and employees struck the right balance of making a meaningful contribution for retirement, without significantly impacting their monthly cost of living.

With the goal of providing the greatest level of retirement income at a lower contribution level, we focused our attention on the core benefit, removing valuable, but costly, ancillary features like early-retirement benefits and subsidized joint and survivor benefits. Ultimately, we were able to build a plan that produces approximately half of the lifetime benefit of our primary plan design, but at only a third of the cost.

Minimizing contribution rate volatility

One of the primary concerns voiced by the nonprofit sector was the risk of rising contribution rates. In a typical DB arrangement, if a plan is underfunded, the only options are future benefit reductions, or contribution rate increases. For a sector dependent on precarious funding sources, this risk is prohibitive. With OPTrust Select, we added additional levers to minimize volatility of contributions.

Under our primary schedule of benefits, members receive automatic indexation upgrades annually. Under OPTrust Select however, cost of living upgrades both before and after retirement are dependent on the funded status of the plan. This means if we are ever not fully funded, a proportion of cost of living upgrades will be paid depending on the level of funding of the plan. While the intention is to pay the upgrade in full every year, this conditionality leads to a significant reduction in the risk of contribution rate increases for employers and employees alike, addressing one of the greatest concerns we heard from the sector.

Increasing portability of pension

In September 2018, following years of research, the ONN’s Pensions Task Force recommended OPTrust Select as the pension plan of choice for organizations in the nonprofit sector. Their goal in recommending one plan was to maximize pension portability across the sector, and the response has been incredible.

As of writing this, 21 nonprofit organizations from across the province have joined OPTrust Select, resulting in close to 800 new members and a nearly two per cent increase in OPTrust’s total plan membership. We’ve heard interest from hundreds of additional employers, and there are a further 60 organizations currently in our application process. It is our hope that one day, workers in the nonprofit sector will be able to move throughout their careers with the security and stability of a defined benefit pension.

Replicating the model

OPTrust Select didn’t happen overnight. In fact, it’s an idea that was nearly 25 years in the making, but the lessons we’ve learned can be applied elsewhere. By focusing on the needs of our target market and leveraging our existing size and scale, OPTrust Select is able to provide the stability and security of a defined benefit pension, but at a moderate and stable cost. This is a model that can be replicated by others across the country.

A recent study by the Canadian Public Pension Leadership Council found that DB pensions “are not just better for Canadian workers, but for the Canadian economy overall” and they resulted in “lowered job stress, improved worker health and lower use of government funded assistance programs.” We are advocates of the defined benefit pension plans as the most efficient method to achieve financial security at retirement, and we stand ready to help those looking to replicate, and indeed, improve on our model.

CDPQ just put out as press release stating it will invest in Sydney Metro, Australia’s first driverless metro system:

• Acquisition of a 24.9% equity stake in the extended Sydney Metro trains, systems, operations and maintenance public-private partnership (PPP) contract
• Total transaction value of AUD 167 million (CAD 150 million)
• Strategic partnership with local and international investors combining operational and financial expertise

Caisse de dépôt et placement du Québec (CDPQ), a global institutional investor, announces today the acquisition of a 24.9% stake in the public-private partnership (PPP) contract for the trains, systems, operations and maintenance of Sydney Metro, Australia’s biggest public transport project, which includes both the North West and City & Southwest lines. The total value of the transaction is AUD 167 million (CAD 150 million). Other investors include MTR Corporation Limited, Marubeni Corporation, Plenary Group and CIMIC Group Limited.

The Metro North West Line opened in May 2019 with 13 metro stations in Sydney’s North West. It is being extended into the Sydney city centre and beyond to Bankstown by 2024, when Sydney will have 31 metro stations and a stand-alone 66-km metro railway.

“The Sydney Metro is a transformative project for the city and for thousands of people who look to public transport for fast and efficient travel each day. This transit system will expand sustainable mobility in the region and contribute to the transition toward a low-carbon economy by compounding the benefits of mass transit, electrification and energy from renewable sources,” said Emmanuel Jaclot, Executive Vice-President and Head of Infrastructure, CDPQ. “This investment is perfectly aligned with our strategy to invest in high-quality infrastructure assets, alongside partners with a deep understanding of the market and vast operational expertise.”

CDPQ’s strong presence in Australia

In addition to its investment in Sydney Metro, CDPQ acquired earlier this year a minority stake in Healthscope, a private hospital operator. In 2016, CDPQ collaborated with the founders of Greenstone to acquire a 44% interest in this leading Australian insurance distributor. In infrastructure, CDPQ is also a shareholder and long-term partner of Plenary Group, having invested in several Plenary-originated Australian projects since 2012. CDPQ also holds a 22.5% interest in TransGrid, the electricity transmission network of the State of New South Wales and the Australian Capital Territory, and 26.7% of the Port of Brisbane.

A 25% stake in Sydney Metro is a great long-term investment. Emmanuel Jaclot, Executive Vice-President and Head of Infrastructure at CDPQ, and his team should be congratulated for this investment. Not only does it fit perfectly with their strategy to invest in high-quality infrastructure assets, they also have the right partners on this deal who have the required operational expertise.

Infrastructure investments in Australia are just as popular as the ones in Britain. Why? Rule of law. Australia has a similar legal system to Canada's and in terms of currencies, the Aussie is very similar to the Canadian loonie (moves along with commodity prices and global economic recovery).

Investing in Sydney Metro allows the Caisse to generate steady cash flows that benefit from Australia's economic growth and that are indexed to inflation as user rates are regulated and are increased to reflect inflation.

In another major infrastructure deal that was announced last week, CPPIB, OTPP and IDEAL expanded their Mexican infrastructure partnership:

Canada Pension Plan Investment Board (“CPPIB”) and Ontario Teachers’ Pension Plan (“Ontario Teachers’”) have entered into a definitive agreement to acquire a stake in Impulsora del Desarrollo y el Empleo en América Latina, S.A.B. de C.V. (BMV:IDEAL B-1, “IDEAL”) to further invest in key infrastructure projects throughout Mexico.

IDEAL’s portfolio includes 18 infrastructure concessions in Mexico (13 toll roads, three logistics terminals and two wastewater treatment plants), as well as an electronic toll collection service business and an operations business. IDEAL, Ontario Teachers’ and CPPIB are already partners in the Arco Norte and Pacifico Sur toll roads.

Under the terms of the agreement, CPPIB and Ontario Teachers’ have committed to launch a tender offer in the Mexican stock exchange for shares in IDEAL, subject to the fulfillment of certain conditions, at MXN$43.96 per share. If successful, CPPIB will acquire a 23.7% interest in IDEAL alongside a 16.3% stake by Ontario Teachers’. The current majority owners of IDEAL’s outstanding shares will maintain a majority shareholding in the company.

As part of the arrangement, an infrastructure investment trust, known locally in Mexico as a FIBRA-E (Fideicomiso de Inversión en Energía e Infraestructura), will be formed by a subsidiary of IDEAL, and subsequently funded by certain shareholders of IDEAL, CPPIB and Ontario Teachers’. The FIBRA-E structure was introduced in Mexico in 2015 to encourage private-sector investment in energy and infrastructure projects.

The FIBRA-E will be managed by a subsidiary of IDEAL and purchase partial stakes in four of IDEAL’s toll roads: Arco Norte, Chamapa - La Venta, Toluca Bypass and Tijuana - Tecate. After the FIBRA-E is formed, a secondary offering led by CPPIB and Ontario Teachers’ will occur, which will reduce their ownership to small minority positions while also introducing other investors.

“This investment in IDEAL provides CPPIB with the valued opportunity to access a diversified portfolio of assets with stable cash flows, while also providing the opportunity for future growth through development opportunities in Mexico’s infrastructure sector,” said Scott Lawrence, Managing Director, Head of Infrastructure, CPPIB. “Broadening our partnership with Ontario Teachers’ and IDEAL further strengthens our commitment to long-term ownership.”

“Following our investments in Arco Norte and Pacifico Sur, this investment in IDEAL represents an important addition to our infrastructure portfolio. IDEAL is a leading Mexican infrastructure platform and provides Ontario Teachers’ new capabilities to further invest in projects in the region,” said Dale Burgess, Senior Managing Director, Infrastructure and Natural Resources, Ontario Teachers’. “We are excited to deepen our partnership with IDEAL and CPPIB to continue to invest in core infrastructure in Mexico.”

The transaction is subject to customary closing conditions, including by certain competition and regulatory authorities.

ABOUT IDEAL

IDEAL is an independent publicly traded company listed on the Mexican Stock Exchange (Ticker: IDEALB1.MX). IDEAL engages in the development, promotion, operation and administration of infrastructure projects in Mexico and Latin America. IDEAL is one of the largest infrastructure companies in Latin America, with 18 infrastructure concessions in different sectors, including toll roads, water, energy, social infrastructure and logistics terminals.

Just like CDPQ's Emmanuel Jaclot, CPPIB's Scott Lawrence and OTPP's Dale Burgess are top-notch infrastructure investors. Dale is right, IDEAL is a leading Mexican infrastructure platform and provides Ontario Teachers’ new capabilities to further invest in projects in the region.

And Scott Lawrence explains it in the simplest terms: "IDEAL provides CPPIB with the valued opportunity to access a diversified portfolio of assets with stable cash flows, while also providing the opportunity for future growth through development opportunities in Mexico’s infrastructure sector."

A concessionaire owned by Mexican mogul Carlos Slim is joining forces with two Canadian pension plans to invest in infrastructure projects.

Mexican holding company IDEAL, the highway operator unit of Slim conglomerate Grupo Carso, signed a binding agreement with the Canada Pension Plan Investment Board (CPPIB) and the Ontario Teachers’ Pension Plan to sell stakes in four highway concessions.

The Canadian funds will also buy a minority share of the infrastructure firm.

IDEAL's shares on Mexico’s stock exchange (BMV) jumped almost 50% on Friday after the announcement to their highest since 2017.

What’s the deal?

The stakes in the four highways will be offered via an infrastructure and energy investment trust known in Mexico as Fibra E, which will be listed on the BMV.

The Fibra Es were introduced four years ago to promote private sector investment in energy and infrastructure projects.

If everything goes according to plan, the Canadian funds will initially acquire 18.7% of the four toll roads before they are offered to other investors via the Fibra E.

The highways are Arco Norte in Mexico City, Chapala-La Venta in Jalisco state, Libramiento Toluca in Mexico state and the Tijuana-Mexicali route in Baja California Norte state.

According to IDEAL, revenues from the four highways totaled 5.6bn pesos (US$290mn) last year, with Arco Norte bringing in the most at 3.6bn pesos.

However, CPPIB and Ontario Teachers’ must first launch a public tender offer on the BMV to acquire 40% of IDEAL's shares at 43.96 pesos each.

CPPIB and Ontario Teachers will then own 23.7% and 16.3%, respectively, of the Mexican firm.

CPPIB said in a press release it intends to use part of what is brought in from the concessions for other infrastructure projects.

“This investment in IDEAL provides CPPIB with the valued opportunity to access a diversified portfolio of assets with stable cash flows, while also providing the opportunity for future growth through development opportunities in Mexico’s infrastructure sector,” Scott Lawrence, managing director and head of infrastructure at CPPIB, said in a statement. “Broadening our partnership with Ontario Teachers’ and IDEAL further strengthens our commitment to long-term ownership.”

IDEAL’s portfolio includes 18 infrastructure concessions in Mexico – 13 toll roads, three logistics terminals and two wastewater treatment plants, as well as an electronic toll collection service business and an operations business.

The three entities are already partners in the Arco Norte and Pacífico Sur toll roads.

The latest round of 13F filings from institutional investors is out, revealing to the world the stocks that some of the richest and most successful investors have been buying and selling.

Takeaways From 13F Season

Investors who follow particular fund managers can easily look up what each was buying and selling in the quarter, but other investors may be more interested in overall themes from 13F filings. Overall, it appears buying and selling among fund managers was split relatively evenly in the third quarter.

• Surprisingly, despite a 27.1% drop in Netflix, Inc. (NASDAQ: NFLX) shares in the third quarter, no major fund manager mentioned below was buying or selling shares.
• The FANG group didn’t get much attention at all in the third quarter aside from David Tepper buying Facebook, Amazon and Google.
• Carl Icahn took a gamble on Caesars Entertainment, while George Soros dialed back his position.
• Several fund managers made major adjustments to their ETF positions, including Tepper selling the XOP ETF, Leon Cooperman buying the GLD ETF, and Soros selling both the QQQ and the IWB funds.
• As interest rates fell, dividend stocks were getting some love this quarter, with fund managers buying stocks like General Motors, BP and Carnival, each of which yield more than 4%.

Here’s a rundown of how the smart money was playing some of the most popular stocks last quarter.

David Einhorn’s Greenlight Capital

Notable Q3 Buys/Increases:

• Chemours Co (NYSE: CC)
• Brighthouse Financial Inc (NASDAQ: BHF)
• General Motors Company (NYSE: GM)
• Neubase Therapeutics Inc (NASDAQ: NBSE)
• Adient PLC (NYSE: ADNT)

David Tepper’s Appaloosa Management

• Hilton Grand Vacations Inc (NYSE: HGV)
• KAR Auction Services Inc (NYSE: KAR)
• Valaris PLC (NYSE: VAL)
• Dillard's, Inc. (NYSE: DDS)

Notable Q3 Buys/Increases:

• Alphabet Inc Class C (NASDAQ: GOOG)
• Micron Technology, Inc. (NASDAQ: MU)
• Alibaba Group Holding Ltd - ADR (NYSE: BABA)
• Facebook, Inc. (NASDAQ: FB)
• Amazon.com, Inc. (NASDAQ: AMZN)
• PG&E Corporation (NYSE: PCG)
• Boeing Co (NYSE: BA)

Notable Q3 Sells/Reductions:

• SPDR S&P Oil & Gas Explore & Prod. (NYSE: XOP)

Leon Cooperman’s Omega Advisors

Notable Q3 Buys/Increases:

• Fiserv Inc (NASDAQ: FISV)
• SPDR Gold Trust (NYSE: GLD)
• Nabors Industries Ltd. (NYSE: NBR)
• Carnival Corp (NYSE: CCL)
• Navient Corp (NASDAQ: NAVI)

Notable Q3 Sells/Decreases:

• Nielsen Holdings PLC (NYSE: NLSN)
• Thermo Fisher Scientific Inc. (NYSE: TMO)
• AMC NETWORKS INC (NASDAQ: AMCX)

Barry Rosenstein’s Jana Partners

Notable Q3 Buys/Increases:

• Instructure Inc (NYSE: INST)
• Bloomin' Brands Inc (NASDAQ: BLMN)

Notable Q3 Sells/Reductions:

• Axalta Coating Systems Ltd (NYSE: AXTA)
• Zimmer Biomet Holdings Inc (NYSE: ZBH)
• HD Supply Holdings Inc (NASDAQ: HDS)
• Jack in the Box Inc. (NASDAQ: JACK)
• Falcon Minerals Corp (NASDAQ: FLMN)

Jeff Smith’s Starboard Value

Notable Q3 Buys/Increases:

• Perrigo Company PLC (NYSE: PRGO)
• Natus Medical Inc (NASDAQ: NTUS)
• Marvell Technology Group Ltd. (NASDAQ: MRVL)
• Dollar Tree, Inc. (NASDAQ: DLTR)
• Cars.com Inc (NYSE: CARS)

Notable Q3 Sells/Reductions:

• Box Inc (NYSE: BOX)

Warren Buffett’s Berkshire Hathaway

Notable Q3 Buys/Increases:

• Occidental Petroleum Corporation (NYSE: OXY)
• Restoration Hardware Holdings, Inc (NYSE: RH)

Notable Q3 Sells/Reductions:

• Wells Fargo & Co (NYSE: WFC)
• Apple Inc. (NASDAQ: AAPL)
• Phillips 66 (NYSE: PSX)
• Sirius XM Holdings Inc (NASDAQ: SIRI)

George Soros’ Soros Fund Management

Notable Q3 Buys/Increases:

• Peloton Interactive Inc (NASDAQ: PTON)
• Ally Financial Inc (NYSE: ALLY)
• BP plc (NYSE: BP)
• Citigroup Inc (NYSE: C)
• Celgene Corporation (NASDAQ: CELG)

Notable Q3 Sells/Reductions:

• PowerShares QQQ Trust, Series 1 (NASDAQ: QQQ)
• Caesars Entertainment Corporation (NASDAQ: CZR)
• Walt Disney Co (NYSE: DIS)
• iShares Russell 1000 Index (NYSE: IWB)
• Morgan Stanley (NYSE: MS)
• Slack Technologies Inc (NYSE: WORK)
• LYFT Inc (NASDAQ: LYFT)

Carl Icahn’s Icahn Capital

Notable Q3 Buys/Increases:

• HP Inc (NYSE: HPQ)
• Cloudera Inc (NYSE: CLDR)
• Icahn Enterprises LP (NASDAQ: IEP)
• Hertz Global Holdings Inc (NYSE: HTZ)
• Conduent Inc (NYSE: CNDT)
• Caesars Entertainment

Notable Q3 Sells/Reductions:

• Cheniere Energy, Inc. (NYSE: LNG)
• Freeport-McMoRan Inc (NYSE: FCX)
• Occidental Petroleum

Bill Ackman’s Pershing Square Capital

Notable Q3 Buys/Increases:

• Berkshire Hathaway Inc. Class B (NYSE: BRK-B)

Notable Q3 Sells/Reductions:

• Automatic Data Processing (NASDAQ: ADP)
• Chipotle Mexican Grill, Inc. (NYSE: CMG)
• Hilton Hotels Corporation (NYSE: HLT)
• Restaurant Brands International Inc (NYSE: QSR)
• Lowe's Companies, Inc. (NYSE: LOW)
• United Technologies Corporation (NYSE: UTX)

Nelson Peltz’s Trian Partners

Notable Q3 Buys/Increases:

• Procter & Gamble Co (NYSE: PG)
• MONDELEZ INTERNATIONAL INC (NASDAQ: MDLZ)
• Legg Mason Inc (NYSE: LM)
• General Electric Company (NYSE: GE)

Notable Q3 Sells/Decreases:

• PPG Industries, Inc. (NYSE: PPG)
• Wendys Co (NASDAQ: WEN)
• Bank of New York Mellon Corp (NYSE: BK)

Lots of pension fund executives would like to be in the shoes of Ron Mock as he sits in the London offices of Ontario Teachers’ Pension Plan (OTPP), overlooking Portman Square. Ahead of his retirement as CEO at the end of the year, Mock oversees a fully funded pension plan with assets of over C$200bn (€137bn).

He has transitioned OTPP’s management to a new benchmark aligned to the funding of the scheme. OTPP is sought the world over for its advice on how to implement it. It is the embodiment of what has become known as the “Canadian model”.

“Pick 30 countries, the top 30 around the planet, and there isn’t a week or month that goes by where they’re not in our office asking us, ‘how can we do this?’.”

Yet Mock, modestly, describes himself as standing on the shoulders of giants. What is the Canadian pension fund model? Can it be emulated, and is it, indeed, a useful way of looking at the world?

It may be thought of as having a high exposure to real or private assets. It may also be seen in terms of the high levels of compensation broadly necessary to attract and retain the required investment talent.

Indeed, many European pension funds look enviously at the higher compensation budgets that allow OTPP and its Canadian peers to recruit private market specialists, on the basis that it is better to pay them to work for you directly. Some 80% of OTPP’s assets are managed in-house.

Yet for Keith Ambachtsheer, the renowned Canadian pension specialist and director emeritus of the Rotman International Centre for Pension Management, success drivers for OTPP have been “legal freedom for the organisation to succeed at its 1990 start, governance that is both representative and skilled, and entrepreneurial culture and management through 29 years”.

Ambachtsheer’s 1980s recommendation for autonomous-funded public pension institutions was taken up by the Ontario treasurer, Robert Nixon, in 1987 in his Task Force on the Investment of Public Sector Pension Funds. In Ambachtsheer’s words, Nixon’s report recommended that taxpayer-funded pension funds “should have a clear mission, have a strong independent governance function, and be able to attract and retain the requisite talent to be successful”.

The most tangible outcome of this recommendation was the transformation of the old Teachers’ Superannuation Fund – which invested entirely in non-marketable provincial bonds – into the OTPP of today.

Success was not predetermined: OTPP’s first private equity investment was a total write-off. Employer and union stakeholders have stayed true to the model recommended by Ambachtsheer and Nixon more than three decades ago.

Today, Mock is happy to emphasise the bond between members and OTPP through “vertical alignment” between members, stakeholders and management.

In his tenure as CEO, Mock has spearheaded the OneTeachers strategy, which recognises that total fund returns and risk reduction are as important for plan sustainability as value-add returns. Aimed at increasing this “vertical alignment” with stakeholders, it has effectively meant recalibrating the fund’s benchmark to orientate it to pension liabilities.

Effective from 2017, OneTeachers has also meant shifting pay structures “to better align compensation practices to this strategy’s key performance indicators”, according to the 2016 annual report. OneTeachers, which Mock describes as originating within management rather than from stakeholders, is currently in the final phase of implementation.

Mock describes the transition variously as difficult and time-consuming, but also exciting and important. “The new ideas, the new concepts, that started getting unleashed from this was one of the most rewarding things I got an opportunity to witness.”

Teachers’ in the news

OTPP regularly appears in financial news media globally as an acquirer of private market assets. Indeed, capturing long-term illiquidity premia is widely seen as a hallmark of the Canadian model; OTPP currently has 18% in non-publicly-traded equity, for instance, and 9% in infrastructure.

And as an investor in high-profile infrastructure assets globally – like Brussels or London City Airports, as an investor in projects such as Elon Musk’s SpaceX, or as owner of smaller private companies like Burtons Foods in the UK, the maker of the decidedly homely Jammie Dodgers and Maryland Cookies brands – OTPP has a wide economic footprint that encompasses a broader set of risks than the traditional financial risk-return set-up.

Direct ownership of real assets brings a level of tangibility and connection to the real economy - but potentially also heightened questions around social responsibility and reputational risk. By OTPP’s definition, stakeholder groups include both regional and national governments but also residents around airport holdings, for instance.

As Mock puts it: “You become very acutely aware that you are carrying a responsibility to interface with that group of stakeholders, because they have a voice. They have an interest. And if you’re not taking care of that group, the governments that are actually giving you the privilege of investing in such assets, are going to have something to say about that.”

OTPP’s investment in water and sanitation in Chile – it supplies 30% of the water in the capital Santiago, where civil unrest started in mid-October – is a case in point. A rise in metro fares was the widely reported cause for the ongoing rioting and Mock makes a direct link between underlying issues of income inequality and OTPP’s investments in emerging markets.

OTPP’s investment, the CEO claims, has fundamentally improved water supply in the Chilean capital since the investment was made in the summer of 2011. “One of the benefits is, infant mortality dropped from a level that was third world country-like, down to the equivalent of G7 levels, because we invested the capital to deal with this kind of issue properly, where the Chilean government was not in a position to do so.”

But 24-hour news media mean that such investments are under constant scrutiny. “Our teachers watch this very, very closely. And in one second, if they ever thought that we were putting returns over people’s wellbeing, my phone and my emails will light up in the middle of the night like nobody’s business.”

A large organisation like OTPP can bring economies of scale to bear, but also a network effect of what Mock calls “horizontal connectivity”, which broadly refers to alignment and value creation across the portfolio: “Probably 70% of the value we have as an organisation is our horizontal connectivity. Buying something, leveraging it up, and driving return on equity through excessive leverage, those days are long gone.”

Few, like OTPP, can afford to acquire a team focused on airports, for instance or, indeed, can claim, as Mock does, to have at least some degree of diversification within their portfolio of airports. And few rub shoulders with the likes of Temesek or Carlos Slim’s investment operations in international deals.

OTPP and its Canadian counterparts might even over-bid for key assets where other considerations are at play. London City Airport, acquired in early 2016 from Global Infrastructure Partners by a consortium that included OTPP, is often cited in this regard. Overbidding is a loaded term, of course. For OTPP, the ability to take a longer-term view to value creation than a traditional private-equity fund horizon is crucial to how it values prospective assets.

Capital is white paint

Mock says scale of capital is no great distinction for global investors today.

“I can identify 50, 60 massive pools of capital around the world. And so capital is no longer a differentiator. Quite frankly, if somebody’s looking for capital, $500m cheques can easily be found. It’s like selling white paint.

“You’d better start thinking about, how am I a little bit different? The quality of partnership, the integrity with which you are dealing with your partners, and going in knowing that as a long-term investor one of your goals is to grow and improve the business.”

A key challenge – and opportunity to add value – is to leverage sector knowledge and transmit it between portfolio companies. Mock is keen to talk about how OTPP has helped the UK childcare company Busy Bees to expand in Asia, for instance. There are numerous other examples.

An important part of this has been the creation of a global strategic relationships unit within OTPP, which Mock describes as connecting between regions, companies and investors. “Global Strategic Relationships have made it their business to know all of our partners, all of our bankers, in all of our countries around the planet, in all of the companies that we own, and connect the dots,” Mock explains.

“When we sit down with a company, we need to be able to bring not just a cheque. We need to be able to bring pretty leading-edge HR thinking.” Indeed, Mock estimates that “maybe 40 to 50% of what we acquire, is because we are selected, even in a bidding process.

“The management will often come and say ‘we want Teachers’; you’re long-term capital, patient capital’.”

OTPP has also partnered with BCG Digital Ventures, the technology arm of Boston Consulting, to create an AI incubator. Named Koru, its objective is to interface with companies, and create new product lines through the use of AI and digital technology, for instance by devising efficiencies to drive EBITDA growth.

As part of the effort to boost “connectivity”, conferences of senior management from OTPP portfolio companies take place regularly across the world, including one yearly three-day global conference with around 300 CEOs and other senior executives. “Whether it’s high speed trains, airports, childcare companies, Jammie Dodger companies or lottery companies, we bring it all together.

“This is what’s pretty unique about Teachers’. We have more of a direct investing model than almost anybody that I know in the pension industry. And that has worked very well for us, both in infrastructure, private equity and, frankly, in real estate.”

Teaching and learning is a key to understanding how OTPP sees itself. This applies to both the organisation itself and the portfolio companies, and Mock describes the “knowledge equity” built up over the 29 years of OTPP’s existence as a key resource.

“Think of a classroom, think of learning, think of teachers, and mostly about ongoing learning. When this plan was started, while there was brilliant governance and insight, defending the model and operationalising it, is something that has to be ongoing.

“You have to maintain the independence of governance around this. You have to run it like a business. You have to have the freedom to create compensation structures that will attract the type of talent that you will need to handle the complexity of a global platform, and the kinds of businesses we invest in and operate.”

Moats and models

Can others adopt OTPP’s model? Along with other proponents of the Canadian model, has OTPP effectively built up a ‘moat’ or sizeable barriers to entry, around its operation? After all, it has built investment scale in private markets that few can rival, and can bid more effectively through its network, gaining opportunities that many other institutions don’t see. “We are paid well to think in a very competitive context,” as Mock puts it.

Mock denies that OTPP has built a moat – “that would suggest a level of protection, or even arrogance” – and advocates others adopt the kind of pay structures that his fund offers, even if he understands that political pressures and public scrutiny may make this very hard.

But he also cautions against glib assumptions that effective private market operations can be established in a short amount of time. “Replication of the model takes time,” Mock explains. “And by that I mean, you can get a good part of the way there, but it’ll take you a decade.” Not for the first time in the conversation, he cites the need for the right governance structure and for management to have the freedom to execute investment decisions.

As an active pension plan with growing assets, OTPP will need to continue to build its international network of people to identify and maintain a cutting edge in identifying a continuing stream of investment opportunities. This is still a considerable challenge. “We have to continue to innovate our value proposition for the people with whom we’re investing and the companies we’re investing in and buying,” as Mock puts it.

Mock has no ambition to have seats on multiple boards in his retirement. Instead, he wants to teach business, in Italian, and spend more time at his home in the Swiss-Italian lakes. What of his legacy at OTPP?

“We’ve built an organisation that is a learning organisation, that’s intended to deliver value to our partnerships as we need to deliver value to our partnerships above and beyond cheque writing. That is critically important. So there’s a long list of that kind of stuff but to me it’s a point of differentiation. It has to be, going forward.”

• Ron told me he liked the article above but there was a mistake in that he started as President and CEO on January 1st, 2014. He spoke to this journalist a month ago and said he wanted to focus on more on talent and technology, two critical elements we discussed at length.
• Ron told me that assets will necessarily shift to Asia over the coming decade as "that's where growth will be" and to stay ahead, "we need to make sure we are attracting the talent and have the requisite technology to make sure we remain ahead of the curve." 
• He said they're opening some new offices and are doing a global push to hire the "right talent with the right culture and mindset." He added: "This is critical if we are to stay competitive over the next 5 to 10 years."
• Ron kept harping on two critical elements: technology and talent. "If you don't have the right technology, you won't attract the requisite talent. Our organization needs to be agile or else we risk becoming stale and will be left behind in a world which is changing fast." He added: "We need to invest in our business and IT is a critical part of that investment." In fact, he said IT is "very sizable" at Teachers' and "extremely critical" in all aspects of the operations.
• But he kept stating "technology is critical because tech will leverage talent." He said he has seen amazingly brilliant young people come work at Teachers' and it's critical they offer them the right development opportunities and mentoring. "This is critical if we are to continue delivering on our mission, making sure we are maintaining a fully funded pension plan over the long run."
• He said "they dropped the contribution rates" over the last few years but added "thank god we have conditional inflation protection which along with the surplus offers an additional relief valve if we ever run into trouble." He added: "This allows us to run with a level of risk we are comfortable with to attain our 4.5% real target-rate-of-return."
• In terms of investing in Asia, I asked Ron how important it is to have local partners and he said "it's critical", especially in Asia and Latin America. "We are comfortable investing in North America, Europe and the UK but still have trusted partners there. In Asia and Latin America, we need to know our limitations, you need partners that operate with the same integrity level and are aligned in terms of making businesses better over the long run (realizing n the value creation plan)."
• He gave me examples of the concessions on the Eurotrain going from London to Paris, Brussels airport "which is carbon neutral" and Bristol airport which is headed that way too. he also gave the example he gave in the article above, with how the infant mortality dropped in Chile once they invested in improving the water supply.
• In terms of having deep expertise, he gave me the example of how they own five airports in Europe run by a team of ten out of London who "if tomorrow, the main airport in Mexico City was up for sale, we can send them to do a deep dive." He said these platforms are crucial to Teachers' success and said that is what they did in infrastructure and private equity. He also added that is what Olivia Steedman is doing with TIP, "starting small and building it out."
• We talked about HR issues and I mentioned that from the outside it seemed as if Blarne Graven Larsen, the former CIO, had a tough time fitting in culturally. Ron told me for family reasons, "it became difficult for Bjarne" but he added that "Ziad Hindo is going to be a superb CIO and it proves that Teachers' has an excellent bench, just like Dale Burgess, Olivia Steedman and others have stepped up to the plate." He said this is why three years ago his focus was on developing talent "so they are prepared to step into key roles when needed." Ron said the "turnover rate at Teachers' is abnormally low" but conceded some key investment professionals have left and there will always be some talent that leaves to go work elsewhere. He gave the example of Erol Uzumeri at Searchlight Capital"who has built a great fund with his partners". Interestingly, Andrew Claerhout, OTPP's former head of infrastructure, just joined Searchlight to lead infrastructure investments at the firm (see details here). He mentioned how Teachers' had some great talent in the past and specifically mentioned Mark Wiseman who went on to lead CPPIB and Claude Lamoureux who was inducted into the Canadian Business Hall of Fame earlier this year.
• We then moved our chat by discussing his long tenure at Teachers' and his transition into the CEO role and what he learned. Ron said he was privileged to have worked with good and smart people, stating several times that "culture is everything". He said "if you have the right platform that fosters innovation, the right governance, you can attract the right people." He said he "got to see the world, meet great partners and groups, and work with the smartest people."
• But he emphasized the key to all this was "the clarity of mission" which allowed the executive team to delegate authority and let them innovate. "You need engaged, excited staff which delegate authority. You want to hire the right kind of people who truly want to test their limits and if you're investing a dollar to develop them, you want $1.50 or $2 payoff, not 50 cents back."
• I asked Ron if Teachers' is ready for the next crisis and he told me that following the 2008 crisis, they moved the focus on liquidity and managing counterparty risk.  "We borrow on 3 or 5 year terms and in different currencies. So, liquidity fundamentals, conditional inflation protection and bolstering our repo operations through central clearing making it less bilateral than is was are all critical." He added: "we conduct fire drills and recently did one a month ago where we scenario tested what happens if the S&P goes down and stays down for a few years."
• We then talked about hedge funds and private equity. Ron is an expert in hedge funds and he told me "the big, liquid shops which have invested enormous amounts into IT and talent will be fine and continue to gather assets but the smaller ($500-$700 million Long/Short Equity funds) will find it hard to survive."
• In private equity, he said they monitor leverage levels and pricing and thinks investors "need to be very selective" here.
• Lastly, I asked Ron what's next and he told me he doesn't want to take part in any board committees (seen his fair share of committees) and wants to lecture at a university because "education is the foundation of our democracy" and it gives him great pleasure to share knowledge with others. I told him I remember the first time I met him in 2002, he was extremely passionate about his subject matter and was a great teacher (he has it in him).
• Ron also told me Jo Taylor is ready to assume to the role of CEO. "Jo has an international focus, he is performance oriented, acts with integrity and is decisive. He will be a great CEO and the board made the right choice."
• He ended by saying I've done a great job with this blog, "a true testament of your perseverance and passion." I said it's because of people like him, Jim Keohane, and others that have stepped up to the plate to help me deliver great content.

The Caisse de dépôt et placement du Québec and the Public Sector Pension Investment Board (PSP) are among a group of at least 14 investors pumping $229 million into an international fintech fund run by Portag3 Ventures, an early-stage investor established by companies under the umbrella of the Desmarais family’s Power Corp.

The disclosed institutional and strategic investors committing the new funds also include insurance companies and financial institutions from Canada, France, Israel and the United States. Among them are Aviva France, Harel Insurance & Finance and Silicon Valley’s NSV Wolf Capital.

An earlier fundraising round in 2018 drummed up $198 million from other limited partners including National Bank of Canada, Intact Financial Corp. and Equitable Bank.

“To have a larger fund really allows us to compete in today’s market and ensures that we … have the capability and depth to follow on in those companies that prove to be top performers,” said Adam Felesky, chief executive of Portag3 Ventures.

Portag3’s first fund, which closed in 2016, was backed entirely by companies associated with Power Corp., including Power Financial, IGM Financial Inc. and Great-West Lifeco, which remain anchor investors in the second fund.

“We’ve leveraged their trust and their assistance in helping us develop our platform to bring really credible investors, not only domestically but from around the world,” Felesky said.

In an interview, he said he sees the pensions that came on board in the latest round as potential direct investors alongside the fund in fintechs that become more established down the road.

Portag3 Fund II targets 10 to 20 per cent ownership stakes in the companies it invests in, and more than $100 million has been invested so far in a number of companies, Felesky said. The largest holding is Toronto-based Koho, which is positioning itself as an alternative to traditional banks with no-fee mobile spending and tracking.

Most recently, the Portag3 fund led a Series A investment round for Toronto-based Integrate.ai, a cloud-based machine-learning platform that allows businesses to interact with customers and gather “consumer intelligence.”

Felesky said he hopes some of the companies the fund invests in can replicate the success for Portag3 that online low-cost investment manager Wealthsimple has had for early backer Power Financial. Wealthsimple had more than $3.4 billion in assets under administration as of Dec. 31, 2018.

The focus of Portag3 Fund II is global, but Felesky said Canadian investments are looked at with an eye to choosing those with potential to be “the winner in the market” for domestic fintech.

“It’s more likely a winner takes all,” he said, noting the relative size and development of the Canadian marketplace.

The investment in fintech via the Portag3 fund isn’t the first time Montreal’s Caisse de dépôt has shown in interest in the market segment. Last year, the Quebec pension firm was among a group of investors behind Luge Capital, a $75 million venture capital fund launched to develop early-stage fintech companies and artificial intelligence applications for financial services.

Paul Desmarais III is the Chairman of Diagram, Executive Chairman of Portag3 Ventures, and also serves as Senior Vice-President of Power Corporation and Power Financial. Prior to his current position, he worked in the Risk Management Group of Great-West Lifeco. Previously, he worked in project management and corporate strategy at Imerys in France.

Paul has served as director of Great-West Life, Investors Group, Mackenzie, Pargesa and Groupe Bruxelles Lambert. Paul also serves as Executive Chairman of Sagard Capital, Chairman of Wealthsimple and Vice-Chairman of Imerys. Paul is the recipient of a B.A. degree in Economics from Harvard College (graduating cum laude) and he holds a MBA from INSEAD in France.

Air Canada, the pension fund for Canada’s flagship carrier, is preparing to manage external assets in a bid to let other pension funds and institutions tap into its top decile performance and 65-strong expert internal team, currently managing 80 per cent of the C$21 billion portfolio. The pension fund’s investment staff have transferred to a new entity, Trans-Canada Capital (TCC), now readying its legal, compliance and best practice pillars for take-off.

It’s a new approach designed to boost assets and grow Air Canada’s internal expertise as the closed fund carries on its own de-risking journey.

“We have been in gradual de-risking phase for many years. Managing external client assets is a new business line for the company and will help maintain and grow the team which is interesting from Air Canada’s point of view,” says Vincent Morin president, pension investments at TCC.

The final phase of the process involves transferring assets held under Air Canada’s pension master trust to a limited partner fund structure from which Air Canada’s pension fund will buy units, also offered to third party clients. TCC hasn’t begun a marketing push yet, but six investors have already shown interest, one of whom has just committed to investing in the fund’s internally managed C$1 billion multi-strategy hedge fund.

“As well as continuing with great returns for the pension fund, if someone wants to chip in and invest alongside us in any of our portfolios, they can now access the exact same strategy that has put Air Canada pension plans in surplus,” says Morin who won’t put a figure on the size of external assets TCC hopes to manage until the structure is right, but hazards it could hit C$10 billion in 10 years.

Transformation

It’s a remarkable transformation from when Morin and his senior vice-president Nelson Lam, who heads up equity and alternatives, joined the fund 10 years ago. A time when tight budgetary constraints due to Air Canada’s rocky finances and $4.2 billion pension fund deficit (when the fund’s AUM was only C$10 billion – there is now a C$2 billion surplus) left them working off laptops with a skeleton, mostly part-time, staff.

They set about replacing the wholly outsourced 60:40 portfolio with an active liability-driven strategy that aims to hedge 100 per cent of the fund’s interest rate risk (in sight, but not completed yet) and uses leverage to enable an allocation of up to 140 per cent. The 40 per cent allocation to risk assets comes via a reduced public equity exposure, and a diversifying allocation to private markets, hedge funds and recently added liquid alternatives.

One of the biggest changes was the introduction of derivatives. Less liquid than the US market, finding bank counterparties in Canada’s derivatives market was tough – as was convincing the board to authorise trading swaps, says Morin. “We now have ISDA’s with 24 different counter parties.”

Liquid alternatives

Last year TCC reduced its public equity allocation from 20 per cent to 10 per cent in favour of a new allocation to liquid alternatives. Comprising emerging market debt, high yield bonds and listed infrastructure, the allocation diversifies away from equity but also allows TCC the liquidity to be fleet-of-foot in times of crisis. Although the fund has traded liquid alternatives on a tactical basis before, it has never been in the fund’s strategic allocation where it now accounts for 5 per cent.

TCC will use some leverage to obtain exposure in liquid alternatives, explains Morin.

“We can use derivatives in emerging market debt and bonds to access the market. Alternatives, including liquid alternatives, can be expensive and using derivatives is a cost-effect way to access them.”

TCC will also use active management to improve returns, but only in niche corners of the liquid alts space where Morin and Lam believe there is enough value to make it cost effective compared to the fees of accessing the beta of the asset class.

“The challenge here is that using derivatives involves mark-to-market. In this way liquid alternatives are like equity, but they have a less risky profile because these asset classes are mostly bonds,” says Morin.

Private markets

As for the 20 per cent allocation to private markets, the mantra is dynamic and opportunistic. The allocation focuses on real estate, private equity, private debt and infrastructure but has no sub asset class divisions, allowing capital to move freely between the four allocations. For example, TCC moved out of its chunky allocation to US real estate debt as the sub-prime crisis unravelled to later re-invest in US real estate funds, from which it then made capital commitments to European real estate following ECB chief Draghi’s assurances on the euro in 2012.

“We can move around the private market asset classes according to the environment and opportunities the market is giving us,” says Lam.

In another example, they point to how the recently boosted private debt allocation will allow the fund to get its capital back faster than it can in private equity – a good thing in today’s market.

“If the market goes down, we can have a return of capital, or coupon, that will allow us to reinvest in distressed assets in the next crisis. We try to be dynamic but it’s hard because selling an asset in this market leaves too much money on the table. It’s great to be able to invest tactically wherever possible,” says Morin.

TCC’s strategy in private markets is currently defined by small ticket sizes (typically around C$50 million compared to C$200 million in the past) in response to high valuations. In another sign of their wary eye on compressed spreads and low risk premiums, they haven’t deployed to core real estate or developed market infrastructure for a couple of years.

“We want to reserve our cash for an opportune time to invest,” says Lam. “We’ll wait until there are distressed sellers.”

In public equity the fund accesses the beta of the portfolio as cheaply as possible using futures or total return swaps. Alpha comes mostly via a portable alpha strategy in niche, long short equity strategies run externally to actively harvest additional value.

“In current markets it’s hard to outperform in large cap, but some sub-asset classes or sectors are proving less efficient so we move tactically where we believe we can add value,” says Lam. It’s part of a $2 billion fund of hedge funds portfolio with 11 managers diversified across strategies including credit, CTA, volatility, global macro, event-driven and emerging market debt.

Hedge funds

It’s no surprise that TCC’s first client, a Canadian fund in the retail space which Morin and Lam decline to name at this stage, has chosen to chip in to TCC’s internal hedge fund allocation. In an asset class where Morin says “size matters” the multi-strategy allocation stands at C$1 billion with a sharpe ratio of over one. It’s guiding pension fund culture is a particular source of attraction, whereby a longer-term view (with up to two, three or four-year positions) is combined with daily and weekly trades.

“When we say longer term there is a caveat,” says Lam. “We are still in the hedge fund industry and the multi-strategy that we manage does have very short-term exposures where we come in and out in a day. However, we differentiate ourselves by also having longer term positions. We think these positions can add tremendous value to the portfolio.”

Managers

The fund uses over 60 managers across public equity, private markets (it also runs a co-investment program within private markets) and hedge funds. Rules of engagement include insisting managers have skin in the game.

“In all the funds we invest in, we want the investment managers to personally invest to a significant degree,” says Lam. If it’s a theme they like they “aren’t shy” of putting in large commitments that can stretch to $200 million.

“If we put in a higher ticket size, we obtain a seat on the limited partner advisory committee. This ensures we get a lot of attention, co-investment rights, fee rebate and preferential terms.”

TCC’s bargaining power is also bolstered by the fund’s ability to swiftly make decisions on deploying capital. Any deal involves internal analysis and external consultants, but the decision rests with the investment committee, chaired by Morin, which meets twice a week, and more frequently if needed.

“We can give a quick yes or no. We’ve made deals within three days in the past and our external managers really appreciate this,” says Lam.

Trans-Canada Capital Inc. (TCC) is a registered investment management firm with over $20 billion of assets under management.

Our mission is to add value for our clients on a consistent basis by using sophisticated and innovative investment strategies in a risk conscious framework.

Who We Are

Since 2009, TCC’s investment team has been managing the assets of Air Canada’s Canadian pension plans, consisting of over $20 billion of assets in aggregate today. Air Canada is one of the largest corporate pension plan sponsors in Canada and administers eight Canadian defined benefit pension plans.

TCC is a newly-created subsidiary of Air Canada. Formerly operating as a division of Air Canada, the team is now composed of over 60 investment professionals based in Montréal, Canada.

TCC’s team of investment professionals has extensive expertise in managing and trading fixed income securities and derivatives, from front to middle to back office, with an emphasis on portfolio construction and risk management in a liability-driven context.

What We Do

TCC offers world-class investment strategies and innovative risk management solutions to meet the needs of the most demanding institutional investors.

Our successful track record over the past 10 years has placed Air Canada’s Canadian pensions plans in an enviable financial position. The top quartile returns delivered by TCC’s investment team have been a major factor in the financial turnaround of Air Canada’s Canadian pension plans, in which a $4.2 billion solvency deficit was eliminated and replaced by a surplus of over $2 billion as of today.

Over the years, TCC has developed unique skills in managing pension assets with a specific expertise covering the following investment categories:

• Canadian fixed income
• Hedge funds
• Alternative investments (real estate, infrastructure, private equity, private debt, etc.)

Building on this valuable experience, TCC is now proud to offer its unique expertise to third-party institutional investors, including pension plans, foundations and endowment funds.

National Investment and Infrastructure Fund (NIIF) of India and Canada Pension Plan Investment Board (CPPIB) today announced an agreement for CPPIB to invest up to US$600 million through the NIIF Master Fund. The agreement includes a commitment of US$150 million in the NIIF Master Fund and co-investment rights of up to US$450 million in future opportunities to invest alongside the NIIF Master Fund.

With CPPIB’s investment, NIIF Master Fund now has US$2.1 billion in commitments and has achieved its initially targeted fund size. In addition, NIIF Master Fund investors have co-investment rights of US$3 billion, which will enable the NIIF Master Fund to invest at the scale required for India’s large infrastructure requirements. The NIIF Master Fund invests equity capital in core infrastructure sectors in India, with a focus on transportation, energy and urban infrastructure.

CPPIB joins Abu Dhabi Investment Authority, AustralianSuper, Ontario Teachers’ Pension Plan, Temasek, Axis Bank, HDFC Group, ICICI Bank and Kotak Mahindra Life Insurance as investors in the NIIF Master Fund, alongside Government of India.

CPPIB will also become a shareholder in National Investment and Infrastructure Fund Limited, NIIF’s investment management company.

Sujoy Bose, Managing Director & Chief Executive Officer of NIIF, said: “We are delighted to welcome CPPIB as an investor in the NIIF Master Fund and as a shareholder in our investment management company. CPPIB is a prominent and established investor in India, and their investment demonstrates the alignment of the NIIF Master Fund’s investment strategy with what large international investors seek in the infrastructure sector in India. With this fourth close of the NIIF Master Fund, we are pleased that the fund has achieved its initial target size of US$2.1 billion with domestic and international investors of the highest reputation and quality. We thank all our investors, and the Government of India, particularly the Ministry of Finance and the Ministry of External Affairs, for their strong support.”

Scott Lawrence, Managing Director, Head of Infrastructure, CPPIB, said: “The opportunity to invest in, and alongside, NIIF complements our existing direct investment strategy in Indian infrastructure. Through this investment in the NIIF Master Fund, we are also able to deploy capital in additional projects and sectors across the country, providing further long-term opportunities for CPPIB to invest in Infrastructure in India.”

About NIIF

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

For more information on NIIF, please visit www.niifindia.in or follow us on LinkedIn.

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 CPP and at arm’s length from governments. At September 30, 2019, the CPP Fund totaled $409.5 billion.

For more information about CPPIB, please visit www.cppib.com or follow us on LinkedIn, Facebook or Twitter.

"In recent months, I engaged in a consensual relationship with a colleague without reporting it, as required by BlackRock’s workplace policies. This was a mistake and I take full responsibility.

I will be spending time with family and friends in the weeks ahead, as I consider next steps professionally."

Stocks surged on Friday on the back of U.S. jobs growth that easily topped analyst expectations as Wall Street wrapped up a choppy week of trading.

The Dow Jones Industrial Average was up 337.27 points, or 1.2% at 28,015.06. Friday’s performance was the Dow’s best since Oct. 4, when it rallied 1.4%. The S&P 500 closed 0.9% higher at 3,145.91 — its biggest one-day gain since Oct. 15 — while the Nasdaq Composite jumped 1% to 8,656.53.

Shares of 3M (MMM) led the Dow’s strong gains, rising more than 4%. The energy sector was the best performer in the S&P 500, jumping 2%. Industrials and financials rose more than 1% each. Google-parent Alphabet closed 0.9% higher and hit an all-time high. Apple shares also reached record levels, gaining 1.9%. Goldman Sachs shares jumped 3.4%.

“The market is very strong,” said Mike Katz, partner at Seven Points Capital. “Every time we pull back for a couple of days, we shake out some weak hands, we got right back up to all-time highs.”

“Going into year-end, I think we’re going to get a pretty good push higher,” Katz added.

The S&P 500 came into the session down 0.7% for the week, but Friday’s strong gains helped the index recover those losses. The Dow and Nasdaq each entered Friday trading down more than 1% week to date. They were only down 0.1% each for the week after Friday trading ended.

Stocks also closed just below their record highs reached Nov. 27. The S&P 500 was just 0.3% away from hitting an all-time high. The Dow and Nasdaq are both 0.6% off their records.

The U.S. economy added 266,000 jobs in November, according to figures released by the Labor Department. Economists polled by Dow Jones expected a gain of 187,000. The unemployment rate fell to 3.5%, matching its lowest level since 1969.

“After the sharp slowdown at the start of the year, the recent rebound in employment growth is clearly encouraging, and suggests that the loosening in financial conditions this year is starting to support the economy,” said Andrew Hunter, senior U.S. economist at Capital Economics, in a note.

Treasury yields climbed to their session highs after the data was released, pushing prices down. The benchmark 10-year yield traded at 1.84% while the 2-year rate was at 1.62%.

Gold futures shed 1.2% to settle at $1,465.10 per ounce.

“There is a lot to like in today’s read,” said Mike Loewengart, vice president of investment strategy at E-Trade, about the jobs report. It also “puts a lot of questions to rest. It essentially means the Fed’s easing cycle is complete and it puts the US in a stronger position for trade war negotiations.”

Friday’s report comes as investors grappled with mixed signals on the U.S.-China trade front this week. China started off the week saying it wants tariffs to be canceled as part of a “phase one” trade deal. President Donald Trump later said he could hold off on any deal until after the 2020 U.S. election.

That rhetoric sent stocks tumbling to start off the week. However, Trump said Thursday the two countries were inching closer to a trade deal. China also extended an olive branch to the U.S. on Friday by waving import tariffs on some American pork and soybeans shipments.

But Larry Kudlow, director of the National Economic Council, told CNBC’s “Squawk on the Street” that Trump is prepared to “walk away” from the negotiations if some conditions are not met. “The president has said that if we can not get the enforcement and the assurances, then we will not go forward,” Kudlow said.

Both sides have less than 10 days to go before Washington is poised to impose even more tariffs on Chinese goods. Tariffs on another $156 billion in Chinese goods are set to go into effect on Dec. 15.

Stocks jumped Friday after the Labor Department’s November jobs report handily topped expectations. Treasury yields rose and gold prices sharply declined, as the latest sign of strength in the U.S. economy spurred risk-on trades.

Here’s where markets settled at the end of regular equity trading:

• S&P 500 (^GSPC): +0.91%, or 28.48 points
• Dow (^DJI): +1.22%, or 337.27 points
• Nasdaq (^IXIC): +1.00%, or 85.83 points
• 10-year Treasury yield (^TNX): +4.5 bps to 1.84%
• Gold (GC=F): -1.27% to $1,464.20 per ounce

The financial sector was one of the leaders in the S&P 500, after the strong print on the labor market suggested the Federal Reserve would likely keep interest rates on hold. Shares of JPMorgan (JPM), which is also a member of the Dow, surged to an all-time high. Other Dow components including Apple (AAPL) and Nike (NKE) also hit record intraday highs.

The energy sector surged and crude oil prices spiked after OPEC and its allies agreed to reduce oil production by an additional 500,000 barrels per day (b/d) next year, bringing total output reduction to 1.7 million b/d.

The Labor Department’s “official” report on the health of the U.S. job market, released at 8:30 a.m. ET, reflected surging employment gains and a joblessness rate at a 50-year low.

Non-farm payrolls rose by a much better-than-expected 266,000 during the month. This was well above the 180,000 consensus, which had already been one of the strongest expectations of the year heading into a jobs report.

“This is a blowout number and the U.S. economy continues to be all about the jobs,” Tony Bedikian, head of global markets for Citizens Bank, said in an email. “Business owners may be getting more cautious due to trade and political uncertainty and growth may be slow, but consumers keep spending and the punch bowl still seems full.”

The results got a bump from the return of striking General Motors (GM) workers, which had created a net drag of 43,000 manufacturing jobs in October. Manufacturing payrolls rose by 54,000 in November, ahead of the 40,000 increase expected.

Meanwhile, the unemployment rate edged down to 3.5%, matching September’s rate to mark the lowest level since 1969. Average hourly earnings slipped slightly month on month to a 0.2% increase. And average hourly wages edged down to a 3.1% year on year, from 3.2% in October.

Heading into the November jobs report, other surveys capturing employment trends were mostly positive. The Institute for Supply Management’s November non-manufacturing employment index rose during the month, and weekly unemployment claims remained at relatively low levels. And economists had mostly shrugged off ADP/Moody’s most recent monthly print on private payrolls growth, which missed expectations.

Friday’s report serves as one of the last pieces of new data members of the Federal Reserve receive ahead of their December meeting. Market participants widely expect that central bankers will hold interest rates steady after three cuts earlier this year, as economic data firmed.

“Today’s jobs read puts a lot of questions to rest—it essentially means the Fed’s easing cycle is complete and it puts the US in a stronger position for trade war negotiations,” Mike Loewengart, vice president of investment strategy for E-Trade Financial, said Friday.

Later during Friday’s session, the University of Michigan released its closely monitored consumer sentiment survey for December, which also topped expectations.

The preliminary monthly headline consumer confidence index rose to 99.2 in December from 96.7 in November, coming in ahead of estimates for 97.0. The sentiment index has averaged 97.0 over the past three years, “the highest sustained level since the all-time record in the Clinton administration, Richard Curtin, surveys of consumers chief economist, said in a statement.

Curtin said the early December gain was mostly driven by more optimism among upper income households, which reported “near record gains in household wealth” due to increasing stock prices.

Dunatov, who joined British Columbia Investment Management two years ago, said the most successful portfolios over the last 40 years invested in equities, real estate and infrastructure which were all just various plays on growth. Under his guidance, the $170 billion fund has increased its allocation to private assets and focused on buying investments with predictable income flows.

“We have to be honest with ourselves and admit that being long growth beta is the answer to investing in the long term,” Dunatov told a roomful of asset owners and consultants at a recent Conexus Financial conference. “It exposes what I call the fallacy of composition when it comes to portfolio theory. Diversification works at a portfolio level. Diversification doesn’t go up, it doesn’t work at the strategic level and at the strategic level you want to own growth beta.”

The former chief investment officer of Coal Pension Trustees Services said that with interest rates near zero, institutional investors had to think differently about monetary policy, which could mean the markets will have to contend with negative interest rates for the next 20 years. He said it was time to “think outside the box and think a little more laterally and unconventionally.”

“When you are sitting down to current long term strategy that you have, you have to disconnect current zero rates from what valuations are telling you,” he said. “How do you reconcile a zero rate world with valuations and equity risk premiums still telling you that you are probably going to get 6 or 8 per cent in the equities space? How does that work?”

Dunatov said the challenge for asset owners right now was figuring out how to invest in a zero rate policy world that was still growing, albeit slowly. He said BCI, which manage assets for British Columbia’s public sector, spends a lot of time focused on liquidity in the portfolio to make sure the strategy of owning growth assets is robust enough in the event of a downturn.

“That is probably the most important thing,” he said. “How do I know that I’m not going to sell them in a drawdown? We spend a lot of time on the liquidity aspect of that. Just imagine that there are only two sorts of bad worlds – a hard stop world like 2008 or a slow stop world like 1991,1992, 1993. We need to know that we will have the liquidity to get through both of them. As we are in net outflow mode, crystallising losses destroys wealth.”

Even so, one of Dunatov’s three key changes at BCI has seen the fund increase its allocation to private assets, a repeat of his strategy at Coal Pension where private assets had doubled by the time he left to make up closer to 45 per cent of the portfolio. The other changes include investing down the capital structure, particularly in private credit, as yields have rallied and a focus on owning assets with predictable income streams.

“Whether that is in equities, private credit, infra, real estate (we are looking for) more predicable income flows,” said Dunatov. “When it comes to equities, I would point that even in the crisis, lots of companies kept paying their dividends. Nestle still sold lots of milk products around the world and still kept paying dividends. So there are really good companies around that world that still do that.”

As a result, the strategy has seen BCI switch money into real estate, sell public equities in favour of private credit and real estate and buy more private equity, where the fund is “looking at deals that maybe (it) would not have done beforehand,” said Dunatov. He added that the fund had also sped up the reduction in exposure to the Canadian market to make the portfolio more global.

As for emerging markets, the investment strategist said while he was less convinced on the debt side the fund had made a “general push” into more peripheral markets. “We are not far off what you would call a benchmark position,” he added.

“That is probably the most important thing,” he said. “How do I know that I’m not going to sell them in a drawdown? We spend a lot of time on the liquidity aspect of that. Just imagine that there are only two sorts of bad worlds – a hard stop world like 2008 or a slow stop world like 1991,1992, 1993. We need to know that we will have the liquidity to get through both of them. As we are in net outflow mode, crystallising losses destroys wealth.”

From his home in Sacramento, Ben Meng starts the day with yoga and Bloomberg TV.

“It’s frustrating because I’m watching TV and I can’t do meditation,” says the investment chief of Calpers, the Californian fund which is the largest state employee pension scheme in the US. “My mind is on the TV but physically I’m stretching.”

The 49-year-old China-born US citizen, who was educated in Xi’an and California, is used to switching hemispheres.

He returned to Calpers in January after three years as deputy chief investment officer at the State Administration of Foreign Exchange (Safe), the agency that manages China’s capital account and the “largest asset owner in the world”, according to Mr Meng.

“I thought we were big [at Calpers] with nearly $400bn, but seeing how $3tn works, that definitely helps my job here,” says the tall, smartly groomed and engaging executive on a recent visit to the Financial Times’ London headquarters.

He knows asset management, too. After stints at Morgan Stanley and Lehman, he spent four years as a portfolio manager at Barclays Global Investors in San Francisco but left after BlackRock bought the business. He moved to Sacramento about an hour and half away to join Calpers as its investment director for asset allocation in 2008.

When asked about how to best navigate the choppy waters stirred by US-China tensions, including the detention of executives from both countries and trade spats between Washington and Beijing, Mr Meng is deft.

“My approach is very simple. I was hired to do a purely technical job, be an investment professional. Before Safe hired me, they knew I was an American citizen. They knew everything about me, the background check, everything.”

Now back at Calpers, he reiterates his role is purely about investment. “I am apolitical. Of course, my loyalty belongs to the United States of America,” he says.

“My personal interest and professional career is in investment management. If you stay focused on that, most likely different political factions wouldn’t bother you. But occasionally real extremists try to make a case out of it.”

Closer to home, Mr Meng has specific challenges as one of the most powerful executives in the US investment industry. Calpers is also an industry bellwether.

“Once [your size is] beyond $100bn, the challenge is roughly the same. From an asset manager’s perspective, the sweet spot is about $100bn-$150bn. You are not too small to be ignored by the market but you are not too big to be your own enemy,” he says.

Calpers’ total assets represent just 71 per cent of what it needs to pay future benefits to the 1.9m police officers, firefighters and other public workers who are members of the scheme. It invests in more than 10,000 public companies.

The fund has been hacking back its discount rate, its assumed rate of return, which is down to 7 per cent compared with 7.75 per cent in 2011. Lowering the discount rate means that California’s government employers need to make larger contributions to the scheme.

But even hitting the reduced number is tough in a low-return era.

“Let’s call the 10-year yield at 1.5 per cent, and the long-run equity premium, depending on which market and which time period you look, at 4 per cent; that only gives me 5.5 per cent. I still need another 150 basis points of additional return on the $400bn portfolio.

“So, I need to look at all corners of the world where I can earn that additional 1-2 per cent.”

Mr Meng says investments in faster-growing economies such as India, and private markets, mostly private equity, are where Calpers can generate juicier returns.

Soon after returning to Calpers, Mr Meng demonstrated an almost messianic zeal for private equity where valuations are at nosebleed levels. Of Calpers’ $385bn of assets, nearly $28bn or 7.3 per cent is in private markets. But Mr Meng wants to grow that to 10 per cent or higher.

It seems odd that a giant investor such as Calpers should so publicly signal its ambitious private equity growth plans when that risks prices moving against it. The fund has also attracted criticism for the amount it has spent on fees to private equity managers.

After investing in a new reporting system, Calpers revealed in 2015 that it had paid $3.4bn in carried interest to private equity managers over 25 years. That estimate was incomplete because nine managers had refused to provide historical data and Calpers was also unable to recover details of carried interest paid to private equity funds that had already matured.

Even so, he says private equity is the best-performing asset class for Calpers. “Over 20 years, net of the fees, our private equity delivered 10.5 per cent per annum.”

But generating strong returns from private equity owes much to getting access to the best managers. Mr Meng agrees that some academic studies have found that private equity, on average, does not beat public equity. “Depending on which data source you use or what time period you use, you get all different kinds of results,” he says.

Calpers, which has cut back its partnerships with private equity to about 100, recently stumped up $750m to one of Blackstone’s latest funds. “We regard Blackstone as one of the best private equity investors,” Mr Meng says.

In his spare time, he enjoys reading. Mastering The Market Cycle: Getting the Odds on Your Side by Howard Marks is on his table, and he rues the day airlines allowed WiFi on flights. “Just give me that uninterrupted block of 12-hour time. I can finish a book,” he says.

“Sometimes, I go to a coffee shop, don’t bring my computer or phone, just a book or research report for half a day, a day. I call that a really good day.”

His message to the nearly 2m Californians who are members of Calpers?

“They can rest assured that their retirement security is with good stewards, even though what the market does is out of our control,” he says. “But if we can focus on the long term we have a meaningful chance of success, of achieving the 7 per cent return.”

At my previous firm we had a substantial allocation to private equity and it was my job to manage the cash flows into and out of those funds. Here’s how I explained this process in Organizational Alpha:

Cash Flow Magnitude Matters. Let’s say your pension fund makes a $10 million commitment to a private equity fund. It’s highly likely that just $6-$7 million of that capital will ever be invested by the private equity fund over the life of the investment period. This is because, on average, private equity funds only call roughly 60 to 70 percent of committed capital. This means that while investors may be receiving decent returns on their private investments, it’s being earned on a smaller capital base than they may realize, thus diminishing the impact of the returns on the overall portfolio.

So that $800 billion of dry powder isn’t sitting in a money market or checking account at all of these private equity firms. It’s sitting in the portfolios of the endowments, foundations, sovereign wealth funds and wealthy LPs of these PE funds.

Private equity funds don’t invest all of your money the first day you sign up for their fund. They slowly invest the capital over a number of years when opportunities arise. So investors are more or less dollar-cost averaging into the buyout deals the PE firms are executing on their behalf (granted, this is a much riskier style of DCA because it’s typically a concentrated portfolio of private companies).

That money has to come from somewhere in the portfolio.

Many funds equitize their capital commitments and keep some combination of stock ETFs and cash to be ready when those calls come in. That’s exactly what we did at my old fund, selling down the ETF stock holdings when a large capital call came in (they typically give you around a month of lead time to come up with the cash before they’re going to make an investment).

So this dry powder is really just money that’s either sitting in cash or other investments in the portfolios of the LPs who invest in the PE funds. And depending on the size of the deal, those capital calls can sometimes be funded partially or solely from the distributions from current fund holdings that have some sort of liquidity event or dividend payout.

That $800 billion stockpile of commitments isn’t going to rush into the market all at once. It’s going to take time. We often modeled anywhere from 3 to 10 years for a fund to become fully invested. And there were cases where the fund would actually come to the investors and ask for an extension in the investment window they originally promised.

All that money is never always invested at the same time because PE funds make investments at different times, thus making the contributions and distributions of cash flows irregular and impossible to precisely plan for.

The secondary PE market was actually more vibrant during the crisis from my perspective because investors in PE funds needed to dump them because their allocations to PE became too large relative to the rest of the portfolio. It wasn’t out of the ordinary to see 50% discounts on these fire sales.

In a major investment move, the California Public Employees’ Retirement System (CalPERS) has terminated most of its external equity managers, slashing their allocation to $5.5 billion from $33.6 billion. Only three of 17 external equity managers have been spared in the reduction, shows a memo by Chief Executive Officer Marcie Frost.

The Oct. 21 memo to CalPERS board members also reveals that CalPERS Chief Investment Officer Ben Meng has restructured the pension plan’s emerging manager program, reducing the allocation to $500 million from $3.6 billion and cutting the number of managers to one from five.

The memo, which has not been publicly discussed, says the moves are necessary because of long-term underperformance. The memo obtained by CIO says that Meng is putting a “renewed focus on performance and our ability to achieve our 7% assumed rate.”

Meng, who took over as CalPERS’s CIO in January, has repeatedly expressed concerns, not only about CalPERS achieving the 7% assumed rate of return, but of its underfunding. CalPERS is only around 70% funded.

The memo notes that the move terminating emerging managers, who are often minority-owned or women-owned enterprises, “could receive media or legislative attention.”

The $380 billion pension system, the largest in the US, has faced criticism going back more than a decade by some legislators for not having enough diverse money managers on its roster.

In response, CalPERS launched new initiatives to hire a more diverse base of managers, including hosting diversity conferences with the California State Teachers’ Retirement System (CalSTRS).

However, the Frost memo indicates that emerging managers, which also included some newer managers who were not women or minorities, underperformed their benchmark on an even greater basis than the traditional equity managers.

“Over the last five years, traditional managers have underperformed their benchmarks by 48 bps and emerging mangers by 126 [bps],” the memo says.

The traditional equity managers, generally larger firms, will have no sway with the legislature. But some emerging equity managers have given campaign contributions to legislators who, at least in the past, have put pressure on CalPERS to hire more diverse managers.

Meng and other CalPERS officials have their own dagger to rise this time in defense, since the white-male owned investment firms favored by CalPERS over the years to manage a large chunk of its equity portfolio have also been fired.

Over the last decade, CalPERS has moved to managing most of its $187 billion in equities in-house, the majority of the strategies index-based. Still, just a few months ago, almost $34 billion in equity exposure was still managed by external managers.

CalPERS officials had debated over the course of the last decade whether it should fire external equity managers since they had almost universally underperformed stock index benchmarks. Until recently, investment officials had only selectively terminated managers, and gave most of its external partners a pass, with the assumption that stocks pickers would rise once again.

CalPERS documents from the system’s Nov. 18 investment committee meeting show that $9 billion was transferred recently into various in-house equity strategies. It’s likely that more money will be transferred into those accounts over the next few months since the liquidation of CalPERS accounts with the external managers will occur over several months.

CalPERS spokeswoman Megan White did not offer any immediate comment. CalPERS has not disclosed which managers it terminated.

The memo advises board members who receive questions about the changes to notify CalPERS’s office of public affairs. It says the terminations of the traditional external equity managers began three months ago and the emerging managers the day of the memo, Oct. 21.

Back in 2016, CalPERS officials pledged spending $7 billion more to expand its emerging manager program, but it’s unclear if any new managers were hired in the equity arena.

In the memo, Frost said the review of the external active equity managers began 18 months ago, before Meng started in office. She noted that the new CIO fully supported the efforts.

“This is a key part of Ben’s focus on risk and on making investments that can hit [a] 7% assumed rate of return,” she said. Frost noted that returns by external equity managers “haven’t contributed enough to achieving [the] 7% target.”

The CEO also noted that the pension plan will see “very significant savings” in fees from the manager terminations: $80 million from traditional equity managers and $20 million from the emerging managers.

The emerging manager program was particularly expensive for the pension plan since almost all of CalPERS emerging managers were part of manager of manager programs. CalPERS hired an overall manager, who was paid fees. That manager then hired a group of money managers, who were also paid fees from the pension plan. CalPERS did not hire the money managers directly because most were too small to receive a CalPERS allocation on their own.

Frost in the memo said that CalPERS was “not stopping” its emerging manager program. Without offering specifics, Frost said the pension plan will continue to engage with emerging managers across all asset classes.

Meng said that 60 cents of every dollar to pay the retiree benefits comes from investment returns. “We need those investment returns now and in the future,” he said. “If the market fails us, or we miss our targets, the hard-working people of California and the employers take on the financial burden.”

Meng said that outside groups, referring to the environmental advocates, need to be mindful of CalPERS’s financial condition and challenges.

“For non-stakeholders, such as outside parties, who do not bear the financial risk of our fund, but advocate using our fund to take actions beyond the scope of our fiduciary duty, and advocate using our fund to advance their agenda, we ask that they respect our fiduciary duty,” he said.

Meng’s statement comes as CalPERS is expected to issue, as soon as today, a report on climate-related risks in its investments and how the pension plan’s engagement activities are altering those risks.

The new report is required to be released by CalPERS by Jan. 1 under legislation signed into law by former California Gov. Jerry Brown in 2018.

As a long-term investor, we work to address risks and opportunities that can impact our returns. We have banded together with other investors to urge action against global warming @UN’s #COP25 conference on #climatechange: https://t.co/NfND7pWMEv -via @naumanbilly@financialtimes

— CalPERS (@CalPERS) December 9, 2019