The legal retirement age in France will remain 62 with the new French retirement plan, but workers will need to work until 64 to get a full pension, French Prime Minister Édouard Philippe announced on Wednesday.

“We’ll maintain the legal retirement age of 62,” Philippe said, adding, “but we’ll encourage [the French] to work longer. The government intends to adopt the proposal of the high commissioner Jean-Paul Delevoye to introduce, above the legal age, an ‘age of equilibrium’ with a system of discounts and bonuses.”

In a speech at the Economic, Social and Environmental Council in Paris, on the seventh day of crippling countrywide strikes and protests, Philippe declared “the time has come to build a universal retirement system”.

He emphasised some of the concessions agreed to by the government, including that the overhaul would not apply to those born before 1975 (as opposed to 1963, as had been previously stated).

“We’ve decided to change nothing for those who have already contributed toward their retirement for at least 17 years, which means for those under the general retirement regime – those born before 1975 and who will be over 50 in 2025,” Philippe said.

The plan is part of Macron’s campaign promise to produce a simplified, universal system to replace the current 42 different pension schemes for various labour categories with a single, points-based system, while pushing the French to work longer before retirement.

Philippe sought to reassure workers in sectors that enjoy earlier retirement or more generous pensions that the changes would be gradual. The government's new universal pension system will cancel out special pension regimes, he said.

"The implementation of the new universal system will mean the end of specific regimes," Philippe continued, claiming that women would be the big winners of the new system.

Women's organisations disagree, however, saying many stand to lose out under the new regime.

Public workers have been on strike for seven days against the reforms and unions have called for more protests on December 12 and December 17 following two mass demonstrations on Tuesday and last Thursday.

A speedy resolution of the stand-off appears unlikely, with Philippe warning Tuesday of a lengthy battle ahead as unions vowed not to yield.

The rail workers’ largest union, the CGT, called for “stepping up the strikes” after the speech on Wednesday.

“The government is taking everybody for fools,” the head of the CGT, Philippe Martinez, said in reaction to the prime minister’s remarks. “Everyone will work longer – it’s unacceptable.”

The industrial action has paralysed public transport in Paris and disrupted national rail services and grounded many planes.

It is the biggest show of union force since Macron came to power in 2017 vowing to cut public spending and make the economy more competitive.

On Tuesday, 339,000 people took part in a second day of demonstrations over government plans to merge the country's 42 pension schemes into one, according to interior ministry estimates.

The numbers, which unions claimed were far greater, were markedly down from the first day of the strike on December 5, when more than 800,000 people took to the streets.

The government has angered unions by promising to scrap the more advantageous pension provisions enjoyed by some professions – including public transport and utilities workers, sailors, notaries, and Paris Opéra performers.

Those opposing the reform accuse former investment banker Macron of trying to roll back France's costly but highly cherished welfare state.

France's official retirement age of 62 is one of the lowest among developed countries and fiercely defended by the labour force.

Petrol refineries blocked

France's most militant unions have sounded an uncompromising note, insisting they will not call off the strike unless the reform is scrapped outright, while others are demanding sweeping concessions.

The action has revived memories of three-week-long strikes over pension reform that crippled France in 1995, forcing the centre-right government of the day to reverse course.

Teachers joined the industrial action Tuesday for the second time in a week, closing many schools.

Julien Sergere, a 38-year-old teacher who marched in Paris, told AFP he was worried that a proposal to standardise the way pensions are calculated would leave teachers poorer.

"Our wages are low and until now the advantage we had was that our pensions were calculated on the basis of the last six months of our career, which compensated a bit.

"But today, they're talking about the last 25 years, which could make our pensions fall by between €500 and €900 ($550-1,100) a month on average," he said.

Disgruntled hospital workers, firefighters, students and Yellow Vest anti-government protesters also took part in protests, reflecting the broad level of dissatisfaction with Macron's policies halfway through his mandate.

Striking workers blocked seven of France's eight petrol refineries Tuesday.

Public transport in the capital remained at a near standstill, causing much frustration for working commuters and tourists alike.

On Wednesday, 10 out of Paris's 16 métro lines will be offline, four will run reduced services, and the only two driverless lines (lines 1 and 14) will function as usual though with a high risk of overcrowding, according to operator RATP.

The head of commuter trains at SNCF, Alain Krakovitch, warned he expected the chaos to continue "until the end of the week", but some labour leaders have vowed to fight on until Christmas.

International trains will also be disrupted, the SNCF said.

Hoping to tamp down the transport strikes that are choking France, Prime Minister Edouard Philippe promised in a much-anticipated speech on Wednesday that the government’s planned pension overhaul would not affect older workers and would have a limited effect on those now in midcareer.

But he again angered the unions on a crucial point — pushing the French to work longer — raising doubts about an early end to the strikes, which have also hit schools and government services, and setting up a possible prolonged battle between workers and the government of President Emmanuel Macron.

Mr. Philippe, the president’s stoic frontman for the pension plan, said that through incentives and penalties, the French would be encouraged to work until 64, past the legal retirement age, 62, one of the lowest in Europe. He also made concessions on the start date of the changes, which would go into effect in 2022, but only progressively, and at an even slower pace for those, like railway workers, who are currently in “special” retirement schemes.

But the new age target was too much for a critical moderate union, the French Democratic Confederation of Labor, or C.F.D.T., whose support the government needs and which had held back from the strikes.

“The red line has been crossed,” said Laurent Berger, secretary general of the C.F.D.T. Union.

The militant leftist General Confederation of Labor, or C.G.T. Union, which has spearheaded the strikes, struck an even harsher tone, an ill omen for government hopes of easing tensions.

“We’re obviously not at all satisfied by the government’s announcements,” Philippe Martinez, leader of the C.G.T., said after the prime minister’s speech. “They’re not taking us seriously, and they’re not taking seriously those who are in the fight today.”

The most hard-line unions like the C.G.T. want the government to withdraw the whole project. Others, like the C.F.D.T., are not opposed to an overhaul in principle, but are suspicious of the government’s plans and want guarantees that nobody will lose out.

France’s pension system, one of the most protective in the world, has been a traditional third rail in national politics, responsible for the downfall or weakening of successive governments. The current administration may not prove an exception.

Mr. Philippe warned his parliamentary representatives on Tuesday that he would not be waving any “magic wand” to end the strikes. And the disruption for commuters continued on Wednesday, with most subway lines in Paris still shut, and most medium- and long-distance trains canceled. Already, the effects on shopping, tourism and trucking are being felt.

In his speech, the prime minister notably excluded older workers from the pension overhaul. He also offered guarantees to those in a host of professions — including teachers, nurses, soldiers and police officers — that their pension benefits would remain intact.

But it quickly became clear that he had not backed down far enough to quell the social unrest plaguing Mr. Macron’s government less than a year after he brought tenuous calm to the “Yellow Vest” uprising that began over a gasoline tax and expanded into wider discontent over his policies.

Some unions quickly called for a redoubling of resistance to the government. The head of a major rail union, Laurent Brun, said a “toughening of the strike” was now needed in response to Mr. Philippe.

And Jean-Luc Mélenchon, head of the leftist France Unbowed party, said: “Those who are now 15 are condemned to this points system. The others are thrown into an incoherent and treacherous labyrinth.”

Mr. Philippe said that the full effect of the pension changes would be felt only by people born after 2004, and those born before 1975 would not be affected at all, he promised. For people born between those years, only the period they work after 2025 would be affected, he said. The prime minister also fixed the minimum pension at about $1,100 a month.

“We’re proposing a new pact between the generations, one faithful in spirit to that which the National Resistance Council put in place after the war,” he said, referring to the 1940s body that coordinated the actions of the French Resistance and outlined postwar social and economic policies that became the foundation of France’s social security model. “It’s a profound reform of the rules, to correct injustices and to take into account the new realities.”

But Mr. Philippe was firm on crucial points that brought tens of thousands into the streets and halted public transport: The “special systems” governing pensions for millions will be scrapped, replacing 42 plans with one points-based system for all workers. The new law would ensure that the value of the points would not diminish over time, he said.

The overhaul has been a central goal of Mr. Macron and Mr. Philippe, who have argued that getting the French to retire later and streamlining the pension system are necessary steps to put the system on a sounder financial footing.

Mr. Macron wants to unify the system and do away with the special pensions systems that date back decades, or even centuries in a few cases. He would give all workers points correlated to the number of years they work, and people would cash them in upon retirement.

Mr. Philippe argued that the government’s new universal plan was far more adapted to the contemporary realities of work: careers that are interrupted, that take place over several jobs and that start or finish at varying ages.

The government, he said, wanted to “guarantee the French a stronger and more durable social protection, because it won’t depend on the demography of professions, so that one’s professional choice won’t weigh on retirees. Our children will have less linear careers than ours. We’ve got to give them confidence that our system no longer seems to privilege some over others.”

Après ⁦@TV5MONDE⁩ c’est au tour de ⁦@CNN⁩ de s’intéresser à la réforme des retraites. My take on the demonstrations yesterday in France and the pension reform ⁦@CyrilCNN⁩ pic.twitter.com/LsXyEyWT2a

— Roland Lescure (@RolandLescure) December 6, 2019

I feel that it is very important to personally address the questions and accusations that have been raised in the media — both the traditional and social varieties — around the roles and relationships that exist between the Alberta Investment Management Corporation, AIMCo, and the provincial government. Specifically, there has been a lot written and said recently about the Alberta government’s influence or control over AIMCo’s investing decisions.

As AIMCo’s CEO, let me be absolutely clear on this issue: the Alberta government has no say whatsoever regarding where or how we invest. AIMCo’s operational and investment independence from government is such an important consideration of our business that it was explicitly written into our founding legislation, The Alberta Investment Management Corporation Act. Maintaining investment independence is essential to our ability to fulfill our mandate, which is to maximize investment returns by acting in the best interest of, and solely for the benefit of, all our clients.

As it stands today, AIMCo is responsible for the investment management of a strong majority of Alberta’s public-sector pension plans. We also manage the assets of the Heritage Savings Trust Fund and many provincial government accounts. Our team at AIMCo takes tremendous pride in this responsibility — a responsibility that should and does put our clients’ investment needs as the one and only objective.

Accusations that AIMCo does not exercise absolute investment independence are wrong. To suggest that recent moves by the Alberta government to broaden and solidify AIMCo’s scope of clients is motivated by a desire by government to control those investments is also wrong. I speak on behalf of all AIMCo’s leadership and board in saying that we would never allow our investment independence to be put in jeopardy.

I can also testify that at no time have I had anyone from this government attempt to challenge our investment independence, either directly or indirectly.

Rather than a bid for influence, the Alberta government has introduced the recent changes to AIMCo because they understand that in the very competitive world of institutional investing, scale and long-term stability are extremely important advantages: advantages than can and ought to be brought to bear here in Alberta.

However, this is hardly a unique or Alberta-only observation. Elsewhere in Canada and around the world there are active moves to build larger, more sophisticated institutional pools of capital, with the end objective of being able to invest more successfully and by more efficient means for the collective end-stakeholders. This is exactly what AIMCo is dedicated to doing for Albertans.

I believe that AIMCo is an institution that all Albertans should take pride in, and so it worries and disappoints me when untrue and undermining accusations about us are made and spread.

Over our 11-year history, AIMCo has grown to be a successful, world-class investment organization. It’s been built right here in Western Canada, away from the traditional institutional investment hubs, but without sacrificing one iota of investment savvy, sophistication or global scope and reach. I am grateful for the vote of confidence that the Alberta government has made in AIMCo. We will make every effort to deliver on our expanding responsibility to Alberta, but never at the cost of diminishing our absolute operational and investment independence.

1) ironically that's also what the ARTF fund believed too. Will AIMCo support the ARTFs independence by refusing to manage their, until recently, independantly managed funds?

2) the majority UCP government have already demonstrated that they are willing, in fact eager, to tear up any and all existing provincial legislation if it interferes with their political agenda.

1. We got the discount rate right. Our large DB pensions use much lower discount rates that the assumed investment returns that US public pensions use (7% to 8%).
2. We got the governance right. In Canada, our large public pensions operate totally independently from government. This means, independent qualified board members are sought to oversee these large pensions and they hire a CEO who hires senior managers to run the day-to-day affairs of these pensions. They are compensated appropriately and run these pensions much like large businesses, investing across public and private markets all over the world.
3. We got the risk sharing right. In Canada, large and some smaller public pensions (like CAAT) are jointly governed and the risk of the plan is shared equally among all stakeholders, including retired members. Typically, this means adopting conditional inflation protection where indexation is partially or fully lifted if a pension is experiencing a deficit and restored retroactively once it reaches fully funded status again.

OMERS is pleased to announce the appointment of Blake Hutcheson as its new CEO effective June 1, 2020. Mr. Hutcheson is currently President and Chief Pension Officer, and will succeed Michael Latimer, who is retiring after two decades with OMERS, the last six years as CEO, on May 31, 2020. The transition will commence in early January, consistent with OMERS succession plan, and will remain seamless over the period.

“Michael has done an outstanding job as OMERS CEO,” said George Cooke, Chair of the OMERS Administration Corporation Board of Directors. “He led OMERS in the development and successful execution of our 2020 strategy, which provided clear direction for our members, sponsors, stakeholders and employees and saw significant growth in assets with steady improvements in the Plan’s liabilities and financial position. At the same time, he focused on building a strong culture and establishing a workplace where employees are fully engaged.

“The Board is very confident in Blake’s leadership given his track record in building strong relationships, successful global organizations, showing great investment judgement and understanding all aspects of OMERS and its vast stakeholder group,” continued Mr. Cooke. “His proven motivational style and distinguished career is exemplary, as is his commitment to the future of OMERS.”

“It has been a privilege and an honour to lead the talented group of people at OMERS,” said Michael Latimer. “When I first took the role of CEO, I established three priorities for our organization: to focus on our people, our results and our culture so that we ensure the OMERS plan would be secure, sustainable and meaningful to our 500,000 members. I believe with the quality of our people and the balance sheet we have built, OMERS is well-positioned to weather the challenges and seize the opportunities that lie ahead.”

Under Mr. Latimer’s leadership as CEO, OMERS assets have grown from $65 billion to well over $100 billion, growth of more than 50%. OMERS achieved a solid annual net return of 8% over this period, well above the Plan’s discount rate, improving the Plan’s financial position to near full funding. Over the same period, the organization successfully deployed $33 billion of capital as a result of its asset mix shift into private investment asset classes while expanding its global footprint and opening offices in Singapore, Sydney, Paris, Berlin, Boston and San Francisco.

“The Board has made an excellent choice in appointing Blake and I am confident that under his leadership the organization and our members are in good hands,” said Mr. Latimer. “Blake is committed to OMERS members, employers, unions, stakeholders and employees and to the execution of our mission and vision. He is a leader who will make a difference for OMERS and I am excited for him and for the team. I know that Blake will lead the organization to a new level of success.”

Mr. Hutcheson assumes his new role, having been with OMERS for ten years. The first eight and a half years he served as the CEO of Oxford Properties (an OMERS company) where he grew this business from being primarily a domestic operation to becoming a $50 billion, truly global leader in the real estate industry that returned an average of 12.5% during his tenure. Since April 2018, he has been the President and Chief Pension Officer at OMERS and has helped transform the Pension Services area within the organization, while carrying out responsibility for Strategy, Operations, Communications, Government Relations, Legal, and Data & Technology. Early this year, under his team’s leadership, OMERS approved a 2025 and 2030 Strategy, which will provide clear direction for the next five- and ten-year period. Blake has been a highly successful CEO for over 20 years and has served on more than 25 Boards and Committees of both public and private entities. He is a graduate of the University of Western Ontario, London School of Economics and Columbia University.

“It is an honour to be asked to take on this leadership role at this important time in the history of OMERS,” said Mr. Hutcheson. “I accept it with equanimity and tremendous enthusiasm. The leadership team we have at OMERS is terrific and I look forward to working with them. I have worked extremely closely with Michael for the last ten years, hold him in the highest regard, and believe that together we will model the CEO transition in a way that will make OMERS proud.”

Mr. Latimer concluded, “As the outgoing CEO, I would like to thank each and every employee of OMERS, past and present, for their contributions to our significant growth over these years. I would also like to thank our Board of Directors for their support. Without both, achieving our goals would not have been possible. Across geographies, offices and businesses, We are All OMERS, and proud of it. Everything we do at OMERS is in service to our members. They are our motivation and inspiration, and the reason we show up for work each and every day and do our best on their behalf”.

It’s no secret that Americans are falling short when it comes to saving enough for retirement. But as a new report shows, many are disastrously unprepared — and that may point to flaws in the system.

Progressive think tank the Economic Policy Institute found that Americans 56 to 61 had a median balance of $21,000 in their 401(k) accounts in 2016, which is the most up-to-date data on file. That total reflects almost 30 years of savings.

Younger generations do not fare much better. Older millennials (ages 32 to 37) have about $1,000 saved in their 401(k)s.

The problem is that while 401(k) plans are meant to supplement Social Security, the benefits distributed by the government agency are modest. Currently, the average Social Security retirement benefit is about $1,470 a month, or about $17,640 a year, according to the Center on Budget and Policy Priorities.

Meanwhile, the typical American spent about $3,900 a month last year on basics such as food, housing, utilities, transportation and health care, according to the latest consumer spending data from the Bureau of Labor Statistics. Retirement accounts, ranging from pensions to 401(k)s to individual retirement accounts, are expected to fill the gap.

But when it comes to 401(k)s, that’s not happening.

At least one economist says that the problem lies primarily with the plans, not with Americans’ savings habits.“The system is designed to make people feel bad about themselves — everyone privately thinks that they’re screwing up. And yet if everyone is screwing up, then it’s clearly a system flaw,” Monique Morrissey, economist at the Economic Policy Institute and author of the report, tells CNBC Make It.

Problems with the current system

As more and more American employers move away from offering pensions, 401(k)s and similarly structured retirement plans have risen in popularity. But the biggest problem with relying on 401(k) plans to supplement Social Security benefits is that many people simply don’t have access to employer-based retirement plans.

“The No. 1 problem is a coverage problem,” Morrissey says. Nearly 40 million private-sector employees do not have access to a retirement plan through their employer, according to a 2018 study by the U.S. Bureau of Labor Statistics.

Most people without any 401(k) savings are in that position because they don’t have access to a plan at work, often because their employer doesn’t have a plan at all, they’re part-time or they haven’t been at the company long enough to qualify.

Even if people are covered and participating in their retirement plan, Morrissey says “401(k) plans were not well designed to serve in lieu of a real pension.”

First, 401(k) plans can be difficult for employees to navigate, even with changes lawmakers have put in place to make it easier for consumers to get started. Last year, 65% of companies with more than 5,000 employees automatically enrolled workers in 401(k) plans at a small set deferral rate, according to data from Vanguard. Many times, these programs will start employees off at a 3% contribution rate and gradually increase it to 6%.

Yet even though these auto-enroll programs get consumers started, the projections and assumptions that they need to make can be difficult to navigate. To determine how much you should invest to retire comfortably, you need to broadly estimate your lifetime earnings, as well as make some assumptions on what market returns will look like.

As Morrissey points out, small variations in those assumptions can make a huge difference. If you slightly tweak your expectations to be more pessimistic or more conservative, you could get results that specify you need to be saving close to half of your income.

If millennials want to retire at 65 and have enough to live off even half of their final salary in retirement, for example, they would need to save 40% of their income over the next 30 years if investments return less than 3%, according to recent academic research from Olivia S. Mitchell, a professor and executive director of Wharton’s Pension Research Council at the University of Pennsylvania.

That type of savings goal becomes “overwhelmingly impossible to do and people give up,” Morrissey says.

Additionally, 401(k) contributions are voluntary and you can tap your funds for a variety of purposes before retirement, a situation that makes these types of retirement savings accounts more “vulnerable” than traditional pension benefits to economic downturns.

How to boost your savings

For millennials, the good news is that it’s not too late to jump-start retirement savings. Juggling saving for retirement with covering rising day-to-day housing, health care and living expenses and working to wipe out existing debt can feel overwhelming, but it’s possible.

First, take some time to prioritize your financial goals. “Millennials will need to have a clear idea of what is most important to them in the long-term. Kids? House? Life experiences?” says Bart Brewer, a certified financial planner with California-based Global Financial Advisory Services. Trade-offs may need to happen, he adds.

It can also help to create a written monthly budget and carefully manage your credit. Young people need to be very careful about dramatically raising their standard of living, Brewer says. “It’s much harder to ratchet down after you’ve ratcheted up.”

And while they’re not perfect, it’s worth enrolling in your employer’s retirement plan if you’re eligible. Once you have your 401(k) account set up and your contributions flowing in, it’s important that you select how to invest your funds— otherwise your retirement money will essentially act like a savings account.

Also, make sure to contribute enough to take advantage of any match your company may offer. Some companies offer to match the amount of money you put your 401(k), up to a certain point: If you put 5% of your salary into your 401(k), your employer may also contribute 5%, depending on the type of program. The median matching level is 4% among Vanguard 401(k) plans.

Last, you may need to consider working longer and waiting to claim Social Security until later. “Benefits from Social Security are 76% higher if you claim at age 70 versus 62, which can substitute for a lot of extra savings,” Mitchell says.

If you’re able, don’t retire, Mitchell says. “If you can keep working, do so. If you can’t work full-time, work part-time. Every little bit helps.”

#Debt is still a 4 letter word. @DiMartinoBooth@paranoidbull

"Americans are projected to fall seriously behind on their credit card bills at the highest rate in a decade as banks push a record number of people to get plastic."https://t.co/zsdnZJ8J6r

— FreeMarkets-TQN-👑 (@TechQn) December 12, 2019

Kentucky, New Jersey, and Illinois have the worst-funded retirement systems in the nation in part because policymakers did not consistently set aside the amount their own actuaries said was necessary to cover the cost of promised benefits to retirees. As a result, the pension funds in those three states had less than half of the assets needed to cover liabilities in 2017. Underfunding pensions also increases pension costs significantly over time. Pension contributions went up 424 percent in Illinois, 267 percent in Kentucky, and more than 100 percent in New Jersey from 2007 to 2017, reducing resources available for other important public priorities. Despite these increases in contributions, the three states collectively fell $11.5 billion short of the amount needed to keep pension debt from growing.

1. We got the discount rate right. Our large DB pensions use much lower discount rates that the assumed investment returns that US public pensions use to discount their future liabilities (anywhere between 7% to 8%; in Canada, they are discounted at 6% or lower).
2. We got the governance right. In Canada, our large public pensions operate totally independently from government. This means, independent qualified board members are sought to oversee these large pensions and they hire a CEO who hires senior managers to run the day-to-day affairs of these pensions. They are compensated appropriately and run these pensions much like large businesses, investing across public and private markets all over the world.
3. We got the risk sharing right. In Canada, large and some smaller public pensions (like CAAT Pension) are jointly governed and the risk of the plan is shared equally among all stakeholders, including retired members. Typically, this means adopting conditional inflation protection where indexation is partially or fully lifted if a pension is experiencing a deficit and restored retroactively once it reaches fully funded status again.

In a deal announced Monday, iPort Properties (owned by the Healthcare of Ontario Pension Plan, or HOOPP), purchased 300 acres just west of the Loblaws distribution centre on Maple Grove Road. The property, currently farm fields and woodlots, stretches from Middle Block Road to Allendale Road.

The parcel is the largest of three pieces of property assembled in the area over the last 12 years by Intermarket Properties, totalling 425 acres and five farms. Intermarket still owns the other two parcels and plans to develop them into employment lands.

"We're not a big group and we're focused on small and mid-sized developments," Mark Kindrachuk, president of Intermarket Properties, said in explaining why it sold the largest parcel.

"HOOPP is a big group, a big pension fund that is across the country, and they do bigger things so it just made sense."

Terms of the deal were not disclosed. HOOPP owns more than $79 billion in assets. Its real estate portfolio spans across Canada, the United States, five countries in Europe and the United Kingdom.

Intermarket is well-known in this region. It recently developed the 40-acre Waterloo Corporate Campus at Northfield Drive and Weber Street North in Waterloo, and Sportsworld Crossing in south Kitchener.

Known as IP Park, the original vision was a 425-acre master-planned business campus with more than five million square feet of commercial development, including large-scale industrial, advanced manufacturing, and office and data centre space.

Kindrachuk said Intermarket still plans to develop Phases 1 and 2 into industrial and office lands, while iPort Properties will develop Phase 3 into large-scale industrial. They'll work together to market the new properties once the buildings are ready for occupancy.

"We're collaborating, we're co-operating," he said. "We know their marketing people and we're working on a cohesive marketing program for the entire area, along with the region."

All of the transportation, planning, servicing and stormwater studies are finished, and the areas are now zoned for industrial use. The City of Cambridge will also build a new road to improve access to the IP Park.

It's expected the total development will support the creation of more than 3,000 jobs, Kindrachuk said.

In a news release, Tony LaMantia, president of the Waterloo Region Economic Development Corp., said that "Waterloo's emergence as a global technology hub has positioned us to play a leading role in advanced manufacturing and we look forward to marketing IP Park and iPort for high quality, strategic investment."

Intermarket Properties is pleased to announce that iPort Properties (“iPort”), has acquired Phase 3 of IP Park in Cambridge, Ontario to develop iPort Cambridge. iPort is owned by the Healthcare of Ontario Pension Plan (HOOPP) and is one of the largest owners of large scale industrial business parks in Canada. The sale of the 300 acres in Phase 3 will allow large scale industrial users to locate in Cambridge and benefit from the close proximity to the recently widened Highway 401 and the Waterloo International Airport.

Intermarket Properties is pleased to announce that iPort Properties (“iPort”), has acquired Phase 3 of IP Park in Cambridge, Ontario to develop iPort Cambridge. iPort is owned by the Healthcare of Ontario Pension Plan (HOOPP) and is one of the largest owners of large scale industrial business parks in Canada. The sale of the 300 acres in Phase 3 will allow large scale industrial users to locate in Cambridge and benefit from the close proximity to the recently widened Highway 401 and the Waterloo International Airport.

The original vision for IP Park, a 425 acre master-planned business campus, was conceived by Intermarket and provides for over 5 million square feet of commercial development including large scale industrial uses, advanced manufacturing, office and data center space. The project extends from Highway 8 to Middle Block Road and is the largest industrial development in Waterloo Region. iPort will now develop the lands south of Middle Block Road to Allendale Road; and Intermarket will continue to develop the Phase I and Phase II lands south of Allendale Road. IP Park, formerly named Creekside, also integrates over 200 acres of additional green space that provides a network of parks, woodlots and wetlands. A trail system is also proposed that will create an environment where employees can walk or bike through the entire area.

Mark Kindrachuk, President of Intermarket Properties states “IP Park and iPort Cambridge will provide much needed industrial space in Waterloo Region and there will be over 3,000 jobs created with this overall development. We have been working to ensure that the required infrastructure is available for new development in this area, and now that the construction of the roads and sanitary pumping station has started; we are seeing substantial new investment in this region”.

With the capacity to accommodate a wide range of industrial and commercial uses, IP Park was developed in collaboration with community and government stake holders and establishes Cambridge as a key driver of economic growth and competitiveness for Waterloo Region.

“HOOPP is very pleased to be acquiring the lands south of Middle Block Road to develop iPort Cambridge” said Chris Holtved, Senior Portfolio Manager HOOPP Real Estate. “HOOPP has previously developed industrial and flex office buildings in Cambridge, but this acquisition allows us to develop at a bigger scale, in keeping with our other first class business parks across Canada. It also gives us the ability to attract a wide variety of larger scale uses to the area”.

Tony LaMantia, President of the Waterloo Region Economic Development Corporation (Waterloo EDC) is excited about the opportunities for IP Park and iPort Cambridge: “Our industrial roots in Waterloo Region have laid a foundation for innovation and manufacturing excellence. We have more than a century of manufacturing experience driven by some great anchor companies and the expertise to disrupt and innovate in robotics, aerospace and automotive. Waterloo’s emergence as a global technology hub has positioned us to play a leading role in advanced manufacturing and we look forward to marketing IP Park and iPort for high quality, strategic investment.”

The project is being developed by GWL Realty Advisors on behalf of project owner, the Healthcare of Ontario Pension Plan (HOOPP).

Amazon has already announced, and is currently having built fulfillment centres in Ottawa and Caledon, just north of Toronto. It also announced a facility outside of Calgary late in 2017.

The new B.C. facility will create more than 700 full-time jobs, Amazon says, and join its network of existing British Columbia fulfillment centres in Delta and New Westminster.

Amazon currently employs more than 2,300 British Columbians, including about 1,500 at its tech hub in Vancouver.

“Since first opening in British Columbia in 2012, we credit our exciting growth to the incredible customers and outstanding workforce of the Lower Mainland community,” said Glenn Sommerville, director of Amazon operations in Canada, in a prepared statement.

“Our ability to create over 700 good-paying jobs with great benefits is thanks to the network of support we’ve received from the Tsawwassen First Nation Executive Council, provincial and community leaders, and strong project partners dedicated to innovation.”

“We are pleased that Amazon has chosen Delta iPort as its newest Metro Vancouver distribution facility,” said Paul Finkbeiner, president of GWL Realty Advisors. “In an industrial real estate market as constrained as Vancouver, meeting the needs of Amazon for facility size and location requires creative thinking.

“By working in partnership with the Tsawwassen First Nation, we were able to create an innovative solution for both Amazon and for our client, HOOPP.”

Delta iPort built for distribution, logistics

The agreement with Amazon is for the first phase of the 57-acre Delta iPort industrial park. When complete, the campus will offer nearly one million square feet of modern distribution space across two separate buildings. Delta iPort has been tailored to the rapidly evolving and increasingly complex logistics and e-commerce markets.

“HOOPP is pleased to welcome Amazon to Delta iPort,” said Chris Holtved, senior portfolio manager, HOOPP real estate. “Amazon is one the largest clients in HOOPP’s global logistics portfolio.

“Securing them as the anchor tenant for Delta iPort fulfills the original shared vision that HOOPP, GWL Realty Advisors and TFN create a best-in-class distribution hub that would attract leading edge global logistics clients.”

Delta iPort is located at 41B Street and Salish Sea Way, adjacent to Port of Vancouver’s Deltaport, within 30 kilometres of both downtown Vancouver and the U.S. border. It’s adjacent to several key transportation routes, including the South Fraser Perimeter Road.

The facility will open in 2019, and will be managed by GWL Realty Advisors.

It will be Amazon’s 10th fulfillment facility in Canada and join Amazon’s current fulfillment centres in Alberta, British Columbia and Ontario. The facility will be used to store and distribute items such as books, toys, small electronics and home goods.

Amazon employs more than 7,000 working at fulfillment centres, corporate offices, development centres and other facilities throughout Canada in Ontario, British Columbia, Alberta, and Quebec.

“Tsawwassen First Nation welcomes Amazon to our Lands,” said Chief Bryce Williams in the release. “This is a promising advancement that will continue to unlock the potential of TFN as a leading development partner and key economic driver in Metro Vancouver, and we thank our partners GWL Realty Advisors and HOOPP for their roles in bringing this exciting agreement to fruition.”

Other Amazon projects in Canada

Amazon’s distribution centre in Caledon will be a million-square-foot facility located near the community of Bolton. It will join Amazon’s network of existing Ontario buildings in Brampton, Mississauga and Milton in servicing the GTA and other areas. It will also handle the packing and shipping of small items.

In Ottawa, Amazon is building a million-square-foot centre in the east end of the city, in a rural area at 5371 Boundary Rd. That facility is owned and being constructed by Montreal-based Broccolini.

The two projects will bring more than 1,400 new jobs to Ontario by the end of 2019.

Amazon is near completion of its other new Canadian fulfillment centre, in the Nose Creek Business Park in Balzac, Alta., just outside Calgary. This building is more than 600,000 square feet and is expected to employ up to 1,000 people.

Construction at Nose Creek facility began in 2017 and Amazon hopes to be shipping from it by late 2018.

America's growth has been increasingly concentrated in large cities and by the coasts, spurring angst about whether more rural areas will keep getting left behind. https://t.co/DviYZkTI8I

— Lisa Abramowicz (@lisaabramowicz1) December 16, 2019

I’ve been writing about bitcoin as a new asset class and viable investment option since 2013 when I began a series of articles documenting my journey to find a bitcoin based investment for my retirement account (you can access the series of articles here). As a former financial advisor and corporate executive with a major U.S. wirehouse, I recognize the value of asset allocation and prudent portfolio analysis.

Recognizing bitcoin as an alternative asset for portfolio allocation is not a stretch for me. The lack of correlation with equities and bonds, along with a compelling risk/reward profile makes it an alternative asset class to consider for investors’ portfolio. This approach provided much of the foundation for my book, “Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond” (co-authored with Chris Burniske). In fact, during the writing of the book, I met with Harry Markowitz, father of Modern Portfolio Theory and Nobel Prize winner to discuss my thoughts and evaluate the use of traditional financial analysis tools such as MPT and Sharpe Ratio for bitcoin and cryptoassets.

Since 2013, I’ve heard bitcoin dismissed by knowledgeable investors and financial industry leaders as a “ponzi scheme” and “rat poison squared”. With apologies to Jamie Dimon and Warren Buffett, it’s neither of those things and it seems that each year they seem to reconcile themselves to the reality of bitcoin as a viable investment option. Over the last year, we’ve seen financial firms such as Goldman Sachs provide detailed analysis reports on bitcoin and crypto based trading desks have begun to appear at major financial firms to trade directly in the asset and on its futures markets.

Institutions are using the bitcoin futures markets and regulator-friendly crypto trading firms such as Gemini to trade these markets for the benefit of their firms’ bottom line. Additionally, major endowments for Harvard, MIT and Stanford have recently invested into bitcoin. This year, Harvard’s endowment fund made a cryptocurrency investment worth about $11.5 million (this will make up less than 0.05 percent of Harvard’s endowment, valued at nearly $40 billion). In fact, a recent survey found that 94% of endowments had invested in bitcoin and crypto based investments over the last year.

However, for the individual investor, getting involved in bitcoin and cryptoasset trading has been limited and oftentimes restricted to accredited investors or savvy individual investors who have to understand the intricacies of working directly with exchanges such as Coinbase. The SEC has regularly dismissed all potential bitcoin ETFs proposed to them and although there’s an investment called GBTC, which looks like a bitcoin based ETF but has not been approved by regulators and trades at a high premium (with high fees as well), it’s an option that is not available to all investors as it trades on the OTCQX.

As I’ve spoken around the world over the last 5 years describing how investors can achieve increased returns with an alternative asset allocation of 5-10% in their portfolio, it’s been a message that most take back to their financial advisor or 401k provider and all they hear is that they can’t partake in it as an investment option. So, as bitcoin continues to provide astronomical returns including being the top performing asset of 2019 and over the last ten years, an easy to invest bitcoin option has eluded the individual investor.

For the past 3 years, Fred Pye, CEO of 3iQ and his team have worked within the regulatory framework to gain approval for a bitcoin exchange traded product that can be accessed by all levels of investors. In February of this year the Ontario Securities Commission (OSC) denied the company’s filing for a non-offering preliminary prospectus for their Bitcoin Fund. Pye and his team decided to challenge the ruling by putting the onus on Canadian regulators to prove why the product is not in the “public interest” and that their denial impedes financial innovation in the country.

In October of this year, the OSC provided a favorable ruling regarding 3iQ’s Bitcoin Fund (the Fund) and announced that they would issue a receipt for a final prospectus of the Fund, paving the way for a closed-end bitcoin fund to be listed for trading on a major Canadian stock exchange. This is the first time that a securities regulator has directly approved such a regulated exchange traded product for all levels of investors and stands in stark contrast to the US’s Securities and Exchange Commission which has denied all bitcoin ETFs.

In a press release, Fred Pye said, “Over the past three years, we have worked actively with the OSC’s Investment Funds and Structured Products Branch to create an investment fund that we hope will allow retail investors the benefits of investing in bitcoin through a regulated, listed fund. We have addressed the questions of pricing, custody, audit, and public interest issues in a regulated investment fund. We intend to refile the prospectus as soon as possible as the next step in bringing this ground-breaking fund to investors.”

Pye expects the fund to list on the Toronto Stock Exchange (TSX) by year end, providing investors of all levels access to gaining bitcoin exposure easily in their investment portfolios. “We look forward to offering retail investors exposure to this exciting new asset class within registered and traditional investment accounts” said Howard Atkinson, Chairman of 3iQ.

Over a three-year period of seeking this approval, 3iQ not only took the arduous path of directly working through the regulatory framework but created the fund with the partnership of leading firms in the crypto and investment space. Jan van Eck, CEO of VanEck, which is a leading ETF provider and partner with 3iQ, said “We were pleased to work closely with 3iQ in both the development of the index and in working with the regulators to address their concerns. We are obviously impressed with the determination and persistence of our Canadian partners.”

The 3iQ fund also works with Gemini Trust LLC, which is run by, Cameron Winklevoss as its custodian of the fund. Winklevoss said, “3iQ has carefully selected a team of professional partners with expertise in the digital asset industry to construct a safe and secure fund product for the Canadian market, and we are excited to be selected as its custodian.”

Although it will take time for this investment to make its way into the hands of individual investors, this is a huge plus for not only investors but for the institutional business as well. This decision will help pension plans feel comfortable placing the 3iQ product appropriately within the alternative asset sleeve of their portfolio, potentially closing the gaps on current shortfalls. Forward thinking 401k providers can provide 3iQ’s regulated bitcoin investment product as an option for investors, potentially helping them to gain returns that can help them achieve their retirement goals. Current research also shows that millennial investors, which is a demographic that current wealth management firms are struggling to reach, are very interested in bitcoin investing and providing them this option in their personal and retirement accounts will provide competitive advantages and new clients to those firms who step up and offer it.

The boldness of the OSC to recognize that the new asset class of bitcoin requires an easy to use investment product shows a level of innovation that is missing from US regulators. Thanks to trailblazers like Fred Pye and his team at 3iQ, their persistence will allow investors to gain easy access to a compelling and rewarding asset class. It will also provide those financial institutions willing to innovate and look to the future with a competitive advantage over those who won’t, as well as potentially new revenue and clients.

State and local public employee retirement systems in the United States manage over $4.3 trillion in public pension fund investments, with returns on these assets accounting for more than 60 cents of every dollar available to pay promised benefits. About three-quarters of these assets are held in what are often called risky assets—stocks and alternative investments, including private equities, hedge funds, real estate, and commodities. These investments offer potentially higher long-term returns, but their values fluctuate with ups and downs in financial markets in the short term and the broader economy over the long run.

Financial analysts now expect public pension fund returns over the next two decades to be more than a full percentage point lower than those of the past, based on forecasts for lower-than-historical interest rates and economic growth. Research by The Pew Charitable Trusts shows that since the Great Recession—which started in late 2007 and officially ended in mid-2009—public pension plans have lowered return targets in response to changes in the long-term outlook for financial markets. (See Figure 1.)

Pew’s database includes the 73 largest state-sponsored pension funds, which collectively manage 95 percent of all investments for state retirement systems. The average assumed return for these funds was 7.3 percent in 2017, down from over 7.5 percent in 2016 and 8 percent in 2007 just before the downturn began.

More than half of the funds in Pew’s database lowered their assumed rates of return in 2017. Following the steep swings during the recession and in the years immediately afterward, these changes reflect a new normal in which forward-looking projections of expected economic growth and yields on bonds are lower than those that state pension funds have historically enjoyed. Reducing the assumed rate of return leads to increases in reported plan liabilities on fund balance sheets, which in turn increases the actuarially required employer contributions. Still, making such changes can ultimately strengthen plans’ financial sustainability by reducing the risk of earnings shortfalls, and thus limiting unexpected costs.

Recently, many plans have worked to mitigate the higher required contributions that have been prompted by increased liabilities linked to more conservative investment assumptions. The present value of future liabilities is typically calculated using the assumed rate of return as the discount rate, which is used to express future liabilities in today’s dollars; lower return assumptions yield higher calculated liabilities. Some state pension funds have phased in discount rate reductions—effectively altering how they compute future liabilities. That allows them to spread out increases in contributions over time.

For example, in 2016, the California Public Employees Retirement System (CalPERS)—the nation’s largest public pension plan—announced it would decrease its assumed rate of return incrementally from 7.5 percent in 2017 to 7 percent by 2021. Even such an incremental change can have a significant impact over time: a 1 percentage point drop in the discount rate would increase reported liabilities across U.S. plans by over $500 billion, a 12 percent rise.

As assumed returns have gone down, asset mixes have remained largely unchanged. For example, average allocations to stocks and alternative investments—which can provide higher yields but with greater risk, complexity, and cost—have remained relatively stable in recent years at around 50 percent and 25 percent of assets, respectively. This indicates that most fund managers and policymakers are adjusting their assumed rates of return in response to external economic and market forecasts, not based on shifts in internal investment policies.

This brief updates research published by Pew in 2017 and 2018 that provided data on asset allocation, performance, and reporting practices for funds in all 50 states. It explores the impact of continued slow economic growth on investment performance, as well as potential management and policy responses to lower returns. Finally, the brief highlights policies and solutions employed by well-funded plans, including the adoption of lower return assumptions, that have helped insulate the plans from economic volatility.

Slow economic growth projected for the next decade

Forecasts of lower-than-historical economic growth and bond yields over the next 10 to 20 years drive the growing consensus among government and industry economists that pension funds will see lower long-term investment returns and suggest a new normal for public fund investments. For example, the U.S. experienced annual gross domestic product (GDP) growth of more than 5.5 percent from 1988 through 2007, while the Congressional Budget Office (CBO) now projects only 4 percent annual growth for the next decade. (See Figure 2.) And as economic growth is expected to perform more modestly, the long-term outlook for stocks and other investments that pension funds hold will be similar.

Returns on bonds, which make up about 25 percent of pension fund assets, are also projected to be lower than historical averages. Investment-grade bond yields between 1988 and 2007 averaged about 6.5 percent a year, but the CBO projects an average of just 3.7 percent annually through the next decade.

Given these trends, market experts generally agree that lower investment returns will persist going forward. Pew forecasts a long-term median return of only 6.4 percent a year for a typical pension fund portfolio, considering expected GDP growth and interest rates. Other analysts with similar projections include Voya Financial Advisors (6.4 percent), J.P. Morgan and Wilshire (both 6.5 percent), and Aon Hewitt (6.6 percent).

Key trend: Lower assumed returns

Investment returns make up more than 60 percent of public pension plan revenues—employer and employee contributions make up the rest—so funds need accurate return assumptions to ensure fiscal sustainability. A decade into the recovery, states have an opportunity to recalibrate policies to the economy’s “new normal” by adopting return assumptions in line with current projections.

Many plans have lowered their assumed rates of return—which also affects discount rates—to reflect these economic realities, despite the near-term budget challenges they may face as contribution requirements rise with lower discount rates. For example, while only nine of the 73 funds in this study had an assumed rate below 7.5 percent in 2014, by the end of fiscal year 2017, about half had adopted assumed rates below that percentage. Forty-two of the funds reduced their assumed rate in 2017 to better account for lower expected investment returns. Several states—including Georgia, Louisiana, Michigan, and New Jersey—have followed the example of California’s CalPERS fund by adopting multiyear strategies to ramp down assumed rates over the next several years.

Policymakers may raise concerns about the rise in the present value of pension fund liabilities caused by lowering discount rates, the resulting reduction in funded ratios (the share of a plan’s liabilities matched by assets), and the impact of these changes on required contributions for employers and workers. However, the impact on liabilities reflects accounting, not economics. Ultimately policymakers need to structure retirement systems to ensure fiscal sustainability throughout the economic cycle so members receive promised benefits. Although pension funds enjoyed robust investment returns in 2017 (the median one-year return across the 73 funds was 12.8 percent), funds continue to underperform relative to their long-term return targets. For example, in 2017 the median return over the prior 10 years was less than 5.5 percent, and none of the funds in our data met their investment target over that period.

States acting to adopt more conservative assumptions

States are addressing these concerns. Recent reforms in Connecticut provide an example of how a reduction in discount rates can help mitigate long-term risks and avoid short-term spikes in contribution requirements. The state reduced the discount rates for the Connecticut State Employees’ Retirement System (SERS) and Teachers’ Retirement System (TRS) from 8 percent to 6.9 percent in 2017 and 2019 respectively. Concurrently, policymakers adopted a funding policy that would bring down the unfunded liability and stabilize long-term contribution rates. Finally, they extended the time period for the state to pay down the more than $30 billion in pension debt to 30 years and added a five-year phase-in of the new funding policies. Collectively, these policies helped ensure that the impact of increased employer contributions would only gradually affect the state budget.

As expected, Connecticut’s changes resulted in an increase in the state’s reported pension debt—the recent reduction in the discount rate for the TRS raised the reported unfunded liability for that system alone from $13 billion to nearly $17 billion. But the changes ultimately set the state on a path to pay down that debt in a sustainable manner that increases the state’s cost predictability and insulates the pension funds from market volatility. Indeed, rating agency analyses of Connecticut’s credit have taken a forward-looking approach that considers future market risk and long-term financial sustainability side by side with the reported funding ratio.

For example, Fitch Ratings, in its analysis of Connecticut’s 2019 TRS reform proposal, noted that the fund’s previous assumed annual return of 8 percent was an “unrealistic target for future investment returns ... resulting in actuarial contributions that are inadequate to support long-term funding improvement, thus exposing the state to severe fiscal risk.” The rating agency noted the change to an expected return of 6.9 percent as a factor that would lower fiscal risks.

Other states have adopted alternative approaches to increase cost predictability and create a margin of safety against inevitable market downturns. In California, CalPERS put in place a risk policy in 2015 that incrementally reduces the plan’s assumed rate of return and shifts its investment mix to less risky assets each year that funded levels increase because of better-than-expected returns. Such policies help gradually reduce risk and increase cost predictability over the long term in a way that doesn’t put short-term pressure on the state budget.

The Wisconsin Retirement System (WRS) takes an innovative approach to managing risk through return assumptions. The WRS’ long-term return assumption for 2017 was 7.2 percent; however, the plan uses a lower discount rate of 5 percent to calculate the cost of benefits for workers once they retire. Even if investments fall short of the long-term return assumption, the amount set aside for each retiree should be enough to pay for the base benefit without additional contributions from taxpayers or current employees. And, if the returns exceed 5 percent, as they now are expected to do, the excess will be used to fund an annuity increase (similar to a cost of living adjustment). The system would not provide such a boost when returns fall below 5 percent.

Finally, North Carolina effectively uses two discount rates to set contribution policy. The state determines a contribution floor based on the plan’s investment return assumption of 7 percent, as well as a ceiling using yields on U.S. Treasury bonds as a proxy for what a risk-free investment could return. That risk-free rate reflects what a guaranteed investment could deliver; state pension plans, like most other investors, take on risk to earn yields above that rate. If the plan is fully funded under the risk-free rate, then employer contributions would drop to simply pay for the cost of new benefits. Any year in which the contribution rate is between the floor and the ceiling, employers will put in an additional .35 percent of pay above the prior year’s rate.

The policies put in place by CalPERS, Wisconsin, and North Carolina are designed to better ensure that adequate assets are set aside to pay for promised benefits, given the fundamental uncertainty of relying on risky investments over a decades-long time horizon. In addition, by lowering their assumed rates of return, more than half of state pension funds made it more likely that they’ll be able to hit their investment targets in future years.

As well as adjusting return targets to reflect changing economic conditions, funds are looking more closely at the fees they pay investment managers. According to the Institutional Limited Partners Association (ILPA), over 140 institutions—including many state and local pension funds—have moved to increase disclosure and transparency for private equity performance fees (also known as carried interest). These fees account for approximately $6 billion, or 30 percent of all fees U.S. state and local funds reported paying to investment managers in 2017 (management fees make up the rest). For state pension funds to accurately report their performance fees, private equity managers need to disclose the total price tag to their clients; an expectation that these fees would be disclosed only recently emerged across state pension funds.

Although fee levels in aggregate have remained relatively constant as a percentage of assets over the last decade or more, some funds have managed significant reductions. For example, in Pennsylvania, reported investment expenses as a percentage of assets have declined from 0.81 percent in 2015 to 0.74 percent in 2017, a shift that saves state pension plans more than $57 million annually in reduced fees. The state continues to focus on the issue, following the recommendations of its public pension management and asset investment review commission. Lawmakers put the panel in place as part of the 2017 state pension reforms, and it has recommended actions projected to offer actuarial savings between $8 billion and $10 billion over 30 years.

Conclusion

The economy is expected to grow at a modest rate over the next decade, and pension fund investment returns are unlikely to return to historic levels for the foreseeable future. In recognition of these trends, public plans are increasingly adjusting their return assumptions to rates more in keeping with economic forecasts.

Although reported liabilities will rise because plans are calculating the cost of pension promises using more conservative assumptions, the lower assumed rates of return ultimately decrease pension funds’ investment risk, increase pension cost predictability for taxpayers, and factor positively in state credit analyses. By pairing the reductions in the discount rate with policies to smooth out the cost impact or by adopting such changes as part of broader reform efforts, policymakers can moderate the impact on state and local budgets.

States can adopt policies that provide a margin of safety for pension systems in the likely event of an eventual economic downturn. California, North Carolina, and Wisconsin provide examples of alternative approaches that can reduce investment risk for public pension funds and government budgets alike.

[...] Ed and I discussed the US public pension crisis. I alluded to The Pew Charitable Trusts 2017 study on state funding gaps (click here to read it) and said for many chronically underfunded state plans, they simply cannot afford another crisis, it will place them in an untenable situation where their funded status drops below 30% or worse.

Ed asked me why should Americans care if most of them are not part of these state plans? I again referred to the Pew study which states this:

Kentucky, New Jersey, and Illinois have the worst-funded retirement systems in the nation in part because policymakers did not consistently set aside the amount their own actuaries said was necessary to cover the cost of promised benefits to retirees. As a result, the pension funds in those three states had less than half of the assets needed to cover liabilities in 2017. Underfunding pensions also increases pension costs significantly over time. Pension contributions went up 424 percent in Illinois, 267 percent in Kentucky, and more than 100 percent in New Jersey from 2007 to 2017, reducing resources available for other important public priorities. Despite these increases in contributions, the three states collectively fell $11.5 billion short of the amount needed to keep pension debt from growing.

Those massive increases in pension contributions affect everyone. People which live in states where plans are chronically underfunded can expect higher property taxes to make up for the shortfall as more and more of state budgets go to contribute to these woefully underfunded plans.

So, yes, you'd better pay attention to the public pension crisis because it will impact you regardless of whether you're part of a plan or not.

What will happen to many state plans teetering on the edge of insolvency? As I told Ed, if we get a really bad crisis where asset prices and interest rates plunge and stay low for years, there will be no political will to raise taxes and nobody in their right mind will be buying pension obligation bonds.

At that point, Congress, the Fed and the Treasury department will step in to bail out many US state plans but there will be a heavy price paid for such a bailout, there will be a haircut on benefits and increase in contribution rates.

Those of you who think no bailout is coming, I refer you to two older comments of mine, The Mother of all US pension bailouts and a multibillion Thanksgiving pension bailout which took place a year ago.

If things get very bad, there will be a bailout, it won't be pretty, unions will scream bloody murder but they will bow down to creditors and accept whatever is offered to them.

Of course, as I explained in the $16 trillion global pension crisis, Congress, the Fed and the Treasury won't be bailing out public pensions for the hell of it, they will be doing so to bail out Wall Street and its large hedge fund and private equity clients, all of which benefit massively as long as they can keep milking the US public pension cow in perpetuity.

A lot of people will dismiss such a statement as "absurd" but I tell them to read C. Wright Mills'The Power Elite, to really understand the past, present and future of capitalism.

Just look at the 2008 crisis. Who really benefited the most a decade later and why? (answer: elite hedge funds and private equity funds and the big banks that serve them).

Anyway, I told Ed Harrison, the US public sector pension crisis will only get worse. Why? Because pensions are all about managing assets and liabilities and I foresee low to negative rates being with us for a very long time, especially if deflation strikes the US, which means liabilities will soar to unprecedented levels and assets will not deliver anywhere close to the requisite returns pensions need.

Ed and I got into a discussion of duration of assets versus liabilities. I told him the duration of liabilities is a lot bigger than the duration of assets (typical pension liabilities go out 75+ years) which means when rates fall, pension liabilities mushroom, especially when rates are already at ultra low levels and asset inflation, if there is any, won't make up for the shortfall.

[See a comment Zero Hedge posted,US Stock Markets Up 200%, Yet Illinois Pension Hole Deepens 75%, and more importantly, my comment from the end of August where I discussed why the pension world is reeling from the plunge in yields.]

I also told Ed there is plenty of blame to go around for this dire situation. Bankrupt state governments and corrupt public-sector unions not wanting to abandon their 8% pipe dreams in order to keep the contribution rate low is just one of many structural flaws.

But in my opinion, the biggest problem of all with US public pensions is there are too many of them (need to be amalgamated at the state level) and more importantly, the governance is all wrong!

I told Ed, in Canada, our large public pensions got three things right:

1. We got the discount rate right. Our large DB pensions use much lower discount rates that the assumed investment returns that US public pensions use to discount their future liabilities (anywhere between 7% to 8%; in Canada, they are discounted at 6% or lower).
2. We got the governance right. In Canada, our large public pensions operate totally independently from government. This means, independent qualified board members are sought to oversee these large pensions and they hire a CEO who hires senior managers to run the day-to-day affairs of these pensions. They are compensated appropriately and run these pensions much like large businesses, investing across public and private markets all over the world.
3. We got the risk sharing right. In Canada, large and some smaller public pensions (like CAAT Pension) are jointly governed and the risk of the plan is shared equally among all stakeholders, including retired members. Typically, this means adopting conditional inflation protection where indexation is partially or fully lifted if a pension is experiencing a deficit and restored retroactively once it reaches fully funded status again.

These are the three reasons why Canada's large public pensions are global leaders.

• No contribution holidays, ever!
• Get the discount rate down to a realistic level even if it means higher contributions
• Adopt conditional inflation protection
• Get the governance right!

Mom and pop are rushing back to risk. The ultra-rich want in. Positioning in bellwether mutual funds has virtually never been so bullish. This as the S&P 500 has surged 11% in less than three months.

Word is getting around about stocks, music to the ears of anyone who sells or manages them. But if you’re the type of market contrarian who thinks a better backdrop for gains is gloom, all the elation is worrying.

“Investors jump on momentum and ride the rally and then become convinced that it’s going to continue forever,” said Aron Pataki, a portfolio manager at Newton Investment Management, which overseas about $62 billion in assets. “Typically, there is euphoria before pullbacks.”

Not that enthusiasm isn’t warranted. The S&P 500 is up 30% this year with dividends. People who stress about euphoria can sound like they’re complaining about a rising market. It’s just that over the long term, enthusiasm hasn’t been the fuel that drove U.S. equities to a $25 trillion bull run.

The latest survey of fund managers from BofA Global Research showed “the bulls are alive,” according to a Dec. 17 report. Expectations for global economic growth jumped the most on record, while investor allocations to equities rose to the highest level in a year. Meanwhile, the firm found cash levels among those surveyed are the lowest in six years.

A December analysis of institutional investors from RBC Capital Markets also showed optimism flowing over. People describing themselves as “bearish” dropped to 15%, the lowest level since the third quarter of 2018, before the rout that sent the S&P 500 down 19.8%. At the same time, the ranks of bulls swelled, creating the largest gap between optimists and pessimists since RBC began collecting the data.

“The bulls have broken out and the bears have gone into hibernation,” wrote strategists including Lori Calvasina, the firm’s head of U.S. equity strategy. “If the market keeps grinding higher in the very near-term, these are likely to be important sign posts that will eventually help mark the top.”

Positioning among tactical mutual fund investors is nearing extremes. Jason Goepfert, the president of Sundial Capital Research, tracks the Rydex family of funds, and traders who use the products “have almost never been more bullish,” he says. In fact, a composite reading of different Rydex positioning measures ranks in the top 4% of all readings over the past quarter-century. Market watchers have followed the so-called Rydex Ratio for years, since the funds reported their asset levels and their clients actively trade.

Still, Goepfert notes that the signal isn’t as strong as it used to be, since investors have migrated to exchange-traded funds. But Bloomberg Intelligence data show burgeoning bliss across the $4 trillion ETF industry, too. All year long, flows into fixed income ETFs have trumped those into equity funds. That is, until now. In the fourth quarter, stock ETFs have taken in $75 billion, more than two times the amount that’s entered bond funds.

“Tons of our ultra-high-net-worth clients are calling and saying: I missed this, how do you get me in with low risk?” said Matthew Peron, chief investment officer for City National Rochdale, which oversees roughly $40 billion. “You are seeing some froth.”

Again, some optimism is far from indefensible. Global economic data has shown signs of bottoming and a strong U.S. labor market should keep consumers spending. The Federal Reserve has vowed it’s on hold after three 25 basis point rate cuts this year, and is expanding its balance sheet by the week. Bloomberg Intelligence strategists led by Gina Martin Adams don’t see the latest run as the kind of doomed, over-heating melt-up that should elicit worry.

In those kinds of spikes, optimism usually separates from fundamentals, and sentiment drives returns. But corporate profits are expected to rebound next year and the S&P 500’s cyclical adjusted earnings ratio, a valuation multiple based on 10-year earnings also known as CAPE, “may point to improving equities’ value in coming years,” Martin Adams said. The S&P 500 average daily returns and volatility are a little too low to panic over, she added.

Underneath the headline index level, however, more froth is visible, according to Michael O’Rourke, JonesTrading’s chief market strategist. Since early October, 72 companies in the S&P 500 have rallied more than 20%. Tesla Inc. has surged more than 60% over that same time period. Semiconductor company Qorvo Inc. has too, while Apple Inc. has added $225 billion in market-cap -- close to the equivalent of Coca-Cola Co.

“That’s how I know there’s euphoria out there,” O’Rourke said by phone. “The problem is, because of the mechanical nature of the market, I can’t say that this is the end of the move.”

Sooner or later the Fed will stop creating huge amounts of liquidity and the market will struggle but apparently that isn't going to happen in the last few weeks of 2019.

According to Morgan Stanley, the Fed balance sheet will increase by $60 billion per month through the end of the first quarter of 2020.

This is the not-QE that Fed Chairman Powell announced earlier this year.

Here is a chart of the Fed Balance Sheet:

Clearly the rally in equities over the last few months is correlated with the expansion in the Fed balance sheet. There doesn't appear to believe that there is any reason for it to abruptly end at this time. In fact, Morgan Stanley has stated that the current market rally "may be more due to the [Fed] balance sheet reversal than fundamentals,"... but with $60 billion/month scheduled through Q1, "we think this presents a powerful positive force that can take stocks well above fair value between now and then."

This is not a complicated argument. The Fed is the most powerful force in the market and it is going to continue to provide liquidity. There are few places for that liquidity to go but into equities.

At some point that balance sheet will contract and it will make it tough for equities but that is not something that we have to worry too much about right now.

Look out, above!

S&P 500 index monthly options expire this Friday, and Erik Lytikainen, longtime trader and founder of Viking Analytics, says that, just like this time last year, investors could be in store for some real fireworks.

Just not necessarily the bearish kind we saw in 2018.

“Last December, in and around the final option expiration of the year, the S&P 500 fell by nearly 300 points,” he wrote Wednesday in a post on RealInvestmentAdvice.com. “This dramatic decline coincided with a spike in market gamma. It is my view that this decline was furthered by forced selling by the put sellers who needed to sell the S&P 500 index to cut their losses.”

Without getting too deep in the weeds, gamma measures how much the price of an option accelerates when the price of the security it is based on changes. Lytikainen describes the study of gamma as akin to the study of market risk.

When gamma is high, risks are high. When it’s low, risk is low.

“The study of market gamma can be viewed as the ultimate smart money indicator,” he said, adding that this particular measure of smart money, as this chart illustrates, suggests we could be seeing the inverse of the market declines last year:

Lytikainen forecast that instead of the put option sellers feeling the pinch in 2018, call sellers could dictate the market’s next big move.

“While I am not saying that stocks will melt up through the remainder of the year, the possibility of that scenario playing out is looking more likely,” he said, pointing out that if this were to happen, the S&P 500 would enjoy a 100-point rally in a matter of days.

“Of course, there are other market risks such as China trade and impeachment proceedings,” Lytikainen said. “I will either be watching from the sidelines, or perhaps buy a straddle to profit from a big move in either direction.”

Meanwhile, there’s a calm before this predicted storm, with the Dow DJIA, (DIA), S&P 500 (SPY) and Nasdaq Composite (QQQ) all mostly flat in Wednesday’s trading session.

Stocks fell on Friday after the U.S. confirmed that an airstrike killed Iran’s top military commander, sending oil prices surging and ratcheting up geopolitical concerns.

The Dow Jones Industrial Average closed 233.92 points lower, or 0.6% at 28,634.88 and posted its biggest one-day loss since early December. The S&P 500 also had its worst day in a month, sliding 0.7% to 3,234.85. The Nasdaq Composite dropped 0.8% to 9,020.77. The Dow briefly dropped more than 360 points at the open. The major averages recovered some ground later in the session as oil prices came off their lows.

U.S. crude oil futures settled up 3% at $63.05 per barrel and briefly gained 4.8%, raising concerns about an energy shock on the global economy. Airline stocks fell broadly on the threat of higher oil prices. United, American and Delta all dropped more than 1.6%.

“Global oil markets will be volatile for weeks to come,” said Greg Valliere, chief U.S. policy strategist at AGF Investments, in a note. “There’s a reason, finally, for caution in the stock market.”

“Eventually there will be an uneasy truce ... But that’s a long, long way off; this will get worse before it gets better,” he added.

Energy stocks such as Concho Resources and Apache went up 3.7% and 1.3%, respectively. Devon Energy climbed 1.2%.

A weaker-than-expected reading on the manufacturing economy also weighed on stocks. December’s ISM manufacturing index came in at 47.2, the weakest in a decade and smaller than the 49 reading expected by economists polled by Dow Jones.

Investors largely fled risk assets such as stocks in favor of gold and Treasurys and other traditional safe havens. Gold futures jumped more than 1%. The benchmark 10-year Treasury yield, which moves inversely to the price, dropped to around 1.79%.

The U.S. announced late Thursday that it had killed Iran’s top commander, Gen. Qasem Soleimani, in Baghdad in an airstrike. Soleimani had been a key figure in Iranian politics, and his death has raised concerns over a potential retaliation from the Iranian forces.

Iranian Foreign Minister Mohammad Javad Zarif warned on Friday that Iran would retaliate against the U.S. for its actions.

“It’s a game-changer,” Dryden Pence, chief investment officer at Pence Wealth Management, told CNBC’s “Squawk Box” on Friday. “We now have vast, broader array of weapons systems that the president has at his disposal. We’ve been able to weaponize economic sanctions now where we can go after individuals … but now I think the ultimate sanction that the president is able to use is an airstrike.”

Pence added, however, that any market volatility “will be short-lived.”

Wall Street loaded up on safer assets on fears that an oil spike might spark a recession. That risk is also heightened by the fact that the global economy has been struggling amid a global manufacturing slowdown.

The market moves come after U.S. equities rose to all-time highs on Thursday on the back of a strong performance in the tech sector. The Dow surged more than 300 points on Thursday, while the S&P 500 and Nasdaq gained 0.8% and 1.3%, respectively.

That performance added followed the strong gains from 2019. The S&P 500 rallied nearly 29% in 2019, its best annual performance since 2013. The Nasdaq surged 35.2% last year while the Dow climbed 22.3%.

However, the optimism entering the new year seems to be fading amid political tensions, including North Korea and the impeachment of President Donald Trump.

The report was issued today by Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management^® (ISM^®) Manufacturing Business Survey Committee: "The December PMI^® registered 47.2 percent, a decrease of 0.9 percentage point from the November reading of 48.1 percent. This is the PMI^®'s lowest reading since June 2009, when it registered 46.3 percent. The New Orders Index registered 46.8 percent, a decrease of 0.4 percentage point from the November reading of 47.2 percent. The Production Index registered 43.2 percent, down 5.9 percentage points compared to the November reading of 49.1 percent. The Backlog of Orders Index registered 43.3 percent, up 0.3 percentage point compared to the November reading of 43 percent. The Employment Index registered 45.1 percent, a 1.5-percentage point decrease from the November reading of 46.6 percent. The Supplier Deliveries Index registered 54.6 percent, a 2.6-percentage point increase from the November reading of 52 percent. The Inventories Index registered 46.5 percent, an increase of 1 percentage point from the November reading of 45.5 percent. The Prices Index registered 51.7 percent, a 5-percentage point increase from the November reading of 46.7 percent. The New Export Orders Index registered 47.3 percent, a 0.6-percentage point decrease from the November reading of 47.9 percent. The Imports Index registered 48.8 percent, a 0.5-percentage point increase from the November reading of 48.3 percent.

Wall Street thinks the longest bull market in history is set to ride into the next decade.

The S&P 500 will climb 2.1 percent to 3,282, according to 2020 forecasts from nine Wall Street strategists compiled by FOX Business. The small gain would be a sharp contrast from 2019, which saw the S&P 500 gain over 28 percent, marking the best year for the markets since 2013.

“Rising political and policy uncertainty will keep the index range-bound” for most of 2020, wrote David Kostin, chief U.S. equity strategist at Goldman Sachs. He predicts the S&P 500 will hit 3,400 by year-end, up 5.7 percent from current levels, as equity markets typically outperform under a divided federal government. Equities are also expected to benefit from ongoing U.S. economic tailwinds.

A strong stock market is typical during election years.

Wells Fargo Institute crunched the numbers and found that the S&P 500 has experienced only four losing presidential election years out of the last 23 on a total return basis, gaining 11.3 percent on average.

JPMorgan Strategist Dubravko Lakos-Bujas sees pro-growth election-year rhetoric, the partial U.S.-China trade deal, a global cycle recovery and neutral investor positioning lifting the S&P 500 by 5.8 percent to 3,400 next year. He expects “most, if not all, of the market upside to be realized ahead of the U.S. elections.”

Meanwhile, Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America, thinks “trade risk has moderated and macro signals are showing signs of stabilization.” She thinks the S&P 500 will edge up 2.5 percent in 2020 to 3,300 driven almost entirely by multiple expansion.

But not everyone on Wall Street is bullish.

Mike Wilson, chief U.S. equity strategist and chief investment officer at Morgan Stanley, thinks the Fed expanding its balance sheet at a pace of $60 billion a month will goose the S&P 500 to a high of 3,250 in early 2020, but expects that rally to dissipate by April. His base case 2020 S&P 500 price target of 3,000 is nearly 7 percent below where the index finished 2019.

“The U.S. remains our least preferred region, given limited scope for multiple rerating or incremental flows, and earnings expectations that look materially too high to us,” Wilson said.

Francois Trahan, strategist at UBS, matches Wilson in his bearishness with a year-end target of 3,000, arguing that overly optimistic investors, a looming earnings decline a slowdown in the economy are the reasons why stock-market risks are skewed to the downside in 2020.

Trahan sees U.S. equities heading lower in the first half of the year before recovering just in time for the election.

“If history was a perfect guide, then the U.S. economy would bottom exactly as interest rates suggest in November of 2020 and equities would begin to discount that in Q2 '20 or thereabouts,” he said.

As private equity becomes a more sizeable part of Canadian pension portfolios, the British Columbia Investment Management Corp.’s resources and staffing are growing with it.

In April 2016, when Jim Pittman joined the BCI as its senior vice-president of private equity, his group comprised six or seven people. Three and a half years later, the private equity team has ballooned to 37 members, with 26 specifically focused on developing relationships within the private equity space and investing in funds and direct deals.

The organization’s allocation to private equity has also trended up, from 5.6 per cent of its portfolio in 2016 to 8.5 per cent in 2018. Between 2017 and 2018, the BCI committed more than $4.8 billion in new capital to private equity, with notable deals including its participation in an investor group that acquired payment and commerce solutions company VeriFone Systems Inc. and a co-investment to acquire custom window dressing company Springs Window Fashions, both in April 2018.

By comparison, its portfolio’s public equity presence is shrinking — it represented a weighty 48.3 per cent of total assets in 2017, but the proportion has dropped to 40.5 per cent in 2018.

For an organization like the BCI, both private and public equity allocations have to be considered through the lens of what its pension fund clients need, notes Pittman. “We have a number of clients, so we had to look through our client base — some clients want more [private equity] more quickly and some of them are a little bit slower, and part of that’s driven by their funding ratio. Some want to take more risks and some do not.”

A pension plan’s funded ratio is an important part of the private versus public equity conversation. While public equity’s liquidity may appeal to plans with a lower funded ratio, its volatility can present challenges. Private equity can offer more stability, but comes with the risk of locking up funds in investments for at least five to 10 years, preventing plans from cashing out if they need a liquidity infusion.

“We have to put all that into our crystal ball and look at how we make sure we provide our clients with the right mix of private equity and public equity,” says Pittman.

The case for private markets

The BCI is part of an ongoing shift as institutional investors — looking to improve returns, reduce volatility and diversify their portfolios — move from public to private equity. From 2006 to 2017, Canadian pension plans nearly doubled their allocations to alternative assets, starting at 15.3 per cent of investments and growing to 30.3 per cent, according to research by the Pension Investment Association of Canada.

A major factor driving institutional investors to private equity is historically low interest rates, which are depressing returns across asset classes, as well as the increasing volatility of the public markets, says Jafer Naqvi, vice-president and director of fixed income and multi-asset at TD Greystone Asset Management.

“The case for private markets . . . is institutional investors are trying to find a way to overcome this low interest-rate world with something other than taking on more risk in the stock market or higher-yielding debt,” he says. “With private markets, you can often derive an illiquidity premium for not being in the public markets.”

While many investors believe in the illiquidity premium — that higher returns for private equity are the natural reward for locking up assets in an investment for years — some experts dispute the idea. A March 2019 report by BlackRock suggested that the stronger returns from private market investments are more tied to their complexity or higher governance costs than their illiquid nature.

Another benefit of private equity is its low volatility and stable return profile, but Naqvi says the perception that it’s less risky is largely due to how often assets are measured. “There’s a smoothing effect because you’re not following the stock market’s ups and downs. We’ve tried to remove that effect . . . to determine what is the true risk of an asset class, and when we do that we find all private asset classes have more volatility than if you measured them infrequently. Private equity, when we do that, exhibits the risks and volatilities aligned with small-cap equities.”

He also notes private equity assets can have more risk depending on how much work is involved for the investor, such as restructuring a company to improve its prospects.

Maria Pacella, portfolio manager and senior vice-president of private equity at Vancouver-based PenderFund Capital Management Ltd., says private equity increasingly makes sense for investors looking for exposure to technology sector companies with high growth potential. “You really do have to look at private markets, otherwise it’s just Netflix and Apple and Microsoft,” she says.

A September 2019 paper by Willis Towers Watson’s Thinking Ahead Institute found the global private equity industry has grown by 500 per cent since 2000. This corresponds to the trend whereby companies are raising far more capital in the private market before turning to the public sphere. As well, private deals are increasingly preferable to listing on the public markets because they offer companies longer time horizons to start generating returns and don’t have the same regulatory compliance requirements.

“Public market investors are now accessing companies at a later stage in their development than in the past,” said Liang Yin, senior investment consultant at the Thinking Ahead Group, in a press release. “When these companies list publicly, they emerge as mature and larger companies, which can lead to public market investors missing out on significant growth opportunities and reduce the attractiveness of such investments.”

In addition, the growth in the private equity industry is reflecting a decrease in public equity markets. “Public equities, in the last 10 years, have generated nice returns,” says Karen Rode, partner in retirement solutions at Aon. “Of course, the last year has been a bit rocky, but [institutional investors are] seeking something more than that. . . . I’m not sure how much this is driving [the growth in private equity], but it’s an interesting thing that impacts the public markets — the number of public companies has dropped considerably.”

One reason for this trend is fewer companies are going or staying public, either because they’re first purchased by other firms or because they opt to go private, says Rode. “So your public market is decreasing. And anything that impacts the public market causes [institutional investors] to look elsewhere.”

In the current environment, these factors are influencing the shift to private equity, but the push in that direction can be traced back to the reaction to the 2008 financial crisis.

“Everyone was in 60/40 asset mixes that were predominantly Canadian-focused and traditional assets,” says Steve Mantle, managing director of institutional sales at private equity firm Ninepoint Partners LP. “After the credit crisis, they were really disadvantaged, and when they looked at [firms] closer to the endowment model, those didn’t seem to get the drawdown that they did, and they recovered faster. That was an eye-opener for a lot of people.”

Going direct

So how are institutional investors getting exposure to private equity?

It largely breaks down by size, with major players such as the Canada Pension Plan Investment Board, the Ontario Municipal Employees Retirement System and the Caisse de dépôt et placement du Québec more commonly making direct investments.

The BCI is currently targeting a goal of 40 per cent of its private equity holdings in direct deals. In those cases, it’s typically investing for a five- to 10-year period and taking between a 30 per cent and 70 per cent ownership stake in a company. “We have a lot of governance,” says Pittman. “We know the strategies of the corporations that we’re buying. We’re heavily involved in overseeing what those are.”

The BCI isn’t alone in ramping up direct investments. A 2017 BNY Mellon survey of 350 global institutional investors found 55 per cent are looking to increase their direct investment activity.

Another report, by CIBC Mellon in 2019, noted Canadian institutional investors are increasingly partnering up on co-investments, with 36 per cent of respondents saying their firm currently employs that investment model. Co-investments can improve the economics of investing in alternatives, the report noted, by reducing the fees paid to managers for each partner.

Funds on funds on funds

For small- and medium-sized plans, funds or funds of funds are typically the only option. A fund vehicle provides investors with exposure to a grouping of companies based on geography or industry; a fund of funds is a portfolio of investment funds. While this option makes sense for investors with less heft than the major players, Mantle notes it comes with the risk of investing in a bad “vintage,” a catchy term for the year the first major influx of capital flows into a new fund or company.

The year itself — especially if it’s at the peak or the bottom of an economic cycle — can impact the fund’s returns. “You might have a fantastic manager . . . and the first five vintages are fantastic, but this one could be terrible,” he says. “It’s the luck of the draw.”

The best way for investors to manage that risk, according to Mantle, is to diversify their vintages, by investing regularly in private equity funds.

From a manager perspective, the fund allocation process is far from simple, says James Livingstone, chief executive officer at Ardenton Capital Corp. It’s a highly competitive game that requires resources to do due diligence, build relationships that will bring in good deals and make the investments themselves.

As well, he notes, geography plays a significant role. Ardenton, which purchases and holds companies for up to 25 years, allowing pension funds and other investors to invest directly into a pool of companies or through funds, invests in low- and middle-market deals of less than $100 million in Canada, the U.K. and the U.S.

“In the U.S., it’s incredibly competitive, the pricing’s really high,” says Livingstone. “In Canada and England, it’s a bit better, but for valued businesses there’s just an incredible amount of competition right now.”

However, he notes, with the return guidance for the S&P 500 sitting at around five or six per cent, and benchmark private equity returns in the U.S. at between nine and 15 per cent, it makes it worthwhile to get in the game.

Institutional investors could also see higher returns by getting involved in Asia and other international markets, which involves taking more risks, especially with ongoing recessionary headwinds, adds Livingstone. “If you’re not invested in the States, which has a positive GDP of 2.5 per cent, you have to really know your industries and the risk you’re taking. There’s not a lot of places to go that can give you growth these days.”

That’s why the BCI has balanced out its direct deals by ramping up its investments in funds, says Pittman. These funds provide exposures the organization couldn’t easily get otherwise, such as Asia, emerging markets or “specific strategies in technology or disruption — areas that, as a pension plan, we’re not fully equipped as yet. We’re building teams around those themes, but we had to be realistic about what we can invest in today.”

With just six per cent of its assets in private equity, Alberta’s Local Authorities Pension Plan still manages to use three different methods of allocation. It has taken on co-investments, direct deals and private equity funds, all directed by the Alberta Investment Management Corp., says Chris Brown, the fund’s chief executive officer.

The fund is preparing for an asset mix review next year, he adds, noting he “would not be surprised” if the LAPP decides to move further into alternatives.

• Private equity is an important asset class. CalPERS says it produced the greatest returns over the last 20 years and its strategy is to develop two pillars in PE to invest in growth companies and do more co-investments (see details here). The critical point to remember is despite all this talk of "record dry powder", private equity remains a critically important asset class for all pensions.
• In the US, private equity is done mostly through fund investments but as CalPERS's CIO Ben Meng recently explained, getting allocations to top private equity funds is increasingly more difficult (because of increased competition) which makes it next to impossible to maintain a sizeable allocation to the asset class and deliver the requisite return target over the long run.
• Unlike the US, Canada's large pensions have the ability to invest in funds and co-invest alongside general partners on larger transactions where they pay no fees. They have this ability because they got the governance right and pay private equity professionals properly to analyze large co-investments quickly, allowing for quick turnaround times with GPs. 
• Importantly, it's private equity co-investments which allow Canada's large pensions to lower overall fees while maintaining or increasing their allocation to private equity (varies from 12% to 15% or higher depending on the fund).
• On top of co-investments which are a form of direct investing since you pay no fees, Canada's large pensions also do some purely direct investing where they bid on companies they know well (again from an existing fund relationship) when a fund winds down and keep it longer in their books. These type of purely direct deals, however, are nowhere as significant as co-investments which represent the bulk of direct deals.
• Pension fund clients love Private Equity because they get the returns over the long run without the volatility of public equities. Dale MacMaster, CIO of AIMCo, told me flat out that most of AIMCo's clients want more private equity.
• Canada's large pensions are increasingly looking to Asia (mostly China and India) and Latin America (mostly Brazil and Mexico) to develop their co-investment portfolios with trusted partners who know these markets well.

OUR APPROACH We invest in leverage buyout and growth equity opportunities that include market leading companies with tangible downside protection. Portfolio companies have a sustainable competitive advantage, offer value-added products and services, and are led by talented management teams. Our activities are driven by our sector focus — investing globally in the industrial, healthcare, financial and business services, technology, and consumer/retail sectors. We invest alongside strategic general partners with deep sector expertise as well as directly in deals lead by BCI. Our significant equity investments secure meaningful governance positions, allowing us to fulfill our role as an active asset manager in overseeing the strategic direction of each company. Value creation informs our activities and we seek businesses with stable cash flows over the duration of the investment holding.

PERFORMANCE ANALYSIS We are increasing our weighting to principal investments, consisting of both direct and co-investments, as they typically outperform fund returns over the longer term. The ratio of principal investments to total AUM has grown to 32 per cent from 25 per cent. Our private equity program invested a total of $1.8 billion to nine principal investments. Acquisitions included Verifone Systems, a global provider of payment and commerce solutions and Springs Window Fashions, a market leader in window coverings specializing in made-to-order products. The program committed approximately $3.0 billion to 15 funds, including six commitments to new strategic relationships. BCI is deploying capital that will allow clients to get closer to their allocation targets and ultimately manage the probability of meeting their return requirements. Larger equity stakes provide greater governance rights, allowing us to more closely align the interests of BCI, the portfolio companies, and our clients.

Both our externally managed fund investments and our principal investments delivered strong returns for the year ended December 31, 2018 1. Our private equity program returned 16.3 per cent against a one-year benchmark of 3.4 per cent. On a five-year basis the program returned 17.6 per cent against a benchmark of 12.1 per cent. The 10-year return outperformed its benchmark by 2.7 percentage points. The outperformance was attributed to a combination of robust distribution and valuation gains. Over the longer-term, our principal investments have outperformed fund investment returns and provided significant value add to our client's portfolios.

Ontario Teachers’ Pension Plan (Ontario Teachers’) has sold a minority interest of its indirect stake in Brussels Airport to each of TCorp and GPIF (through a StepStone managed vehicle). Ontario Teachers' will remain the largest individual shareholder in Brussels Airport.

Ontario Teachers' is Canada's largest single-profession pension plan. TCorp is the financial services provider to the New South Wales public sector in Australia and GPIF manages and invests Japan’s pension reserve fund.

"As a leading infrastructure investor with a global mandate, part of our strategy is to establish and deepen relationships with like-minded partners who bring new ideas, capital and expertise to the table. We look forward to working with our new co-investors in what is truly one of the premier capital city airports in Europe and a centre of economic activity in Belgium," said Dale Burgess, Senior Managing Director, Infrastructure and Natural Resources at Ontario Teachers'. “Under the new shareholder structure we will continue to focus on creating long-term value for all stakeholders including the 26 million passengers who fly through Brussels Airport every year."

Ontario Teachers' is the largest private investor in airports in Europe, with holdings in five freehold airports: Copenhagen Airport, Brussels Airport, Bristol Airport, Birmingham Airport and London City Airport. Ontario Teachers' has been an investor in Brussels Airport since 2011.

Stewart Brentnall, Chief Investment Officer of TCorp, said “we are delighted to invest with Ontario Teachers again. This further cements our investment partnership following our 2017 investment in Bristol and Birmingham Airports with like-minded, sophisticated investors. We share, and are committed to, common objectives, values and investment horizons. This transaction allows us to expand our global infrastructure investments, further diversify risk and provide consistent, sustainable returns over the long term.” James O’Leary, Head of StepStone Infrastructure & Real Assets, said “making a co-investment on behalf of GPIF, alongside Ontario Teachers and TCorp, is very appealing, and consistent with our model of partnering with leading investors around the world. As a responsible investor, the opportunity to co-invest in a long term, sustainable infrastructure asset in a quality market such as Belgium is very attractive. This is supported further by Ontario Teachers’ long pre-existing ownership of the asset."

About Ontario Teachers'

The Ontario Teachers’ Pension Plan (Ontario Teachers’) is Canada’s largest single-profession pension plan, with $201.4 billion in net assets at June 30, 2019. It holds a diverse global portfolio of assets, approximately 80% of which is managed in-house, and has earned an annual total-fund net return of 9.7% since the plan’s founding in 1990 (all figures as at Dec. 31, 2018 unless noted). Ontario Teachers’ is an independent organization headquartered in Toronto. Its Asia-Pacific region office is located in Hong Kong and its Europe, Middle East & Africa region office is in London. The defined-benefit plan, which is fully funded, invests and administers the pensions of the province of Ontario’s 327,000 active and retired teachers. For more information, visit otpp.com and follow us on Twitter @OtppInfo.

About TCorp

TCorp provides best-in-class investment management, financial management, solutions and advice to the New South Wales (NSW) public sector. With A$107 billion of funds under management, TCorp is a top five Australian asset manager and is the central borrowing authority of the state of NSW, with a balance sheet of A$75 billion. For more information, visit www.tcorp.nsw.gov.au and follow us on LinkedIn www.linkedin.com/company/tcorp-nswtreasurycorporation

About GPIF

The Government Pension Investment Fund (GPIF) manages and invests Japan’s pension reserve fund and is the largest pension fund in the world. GPIF’s goal is to contribute to the stability of the pension scheme by investing the pension reserve in capital markets in Japan and overseas, with returns distributed to the government. GPIF is focused on long-term, diversified investments and had assets under management of ¥162 trillion as at June 2019. GPIF has given StepStone a discretionary investment mandate to focus on long term infrastructure assets as part of its overall investment programme.

About StepStone Infrastructure & Real Assets

StepStone Infrastructure & Real Assets ("SIRA") is part of StepStone Group, a global private markets investment firm providing solutions for the world’s most sophisticated investors using a highly disciplined research-focused approach that prudently integrates fund investments, secondaries, and co-investments. With more than $280 billion of total capital allocations as of September 30, 2019, including $58 billion in assets under management, StepStone covers a broad spectrum of opportunities in private markets across the globe from its 19 offices in 13 countries. As of September 30, 2019, SIRA managed or advised on more than $29 billion of private capital allocations and is one of the most active infrastructure investors globally, focused on supporting investors at all stages of their investment programs. For more information, please visit www.stepstoneglobal.com.

• Teachers' Infrastructure portfolio has a "very sizeable" investment in European airports and wants to reduce its stake to invest in infrastructure elsewhere.
• Importantly, Dale told me that they're not looking to divest from infrastructure assets and are "net buyers" as Teachers' is "under-allocated to Real Assets" (mostly Real Estate and Infrastructure) and wants to increase its Real Asset allocation in the coming years (from current 26% to over 30%).
• He said they are fortunate to partner up with GPIF and TCorp on this deal as they are like-minded partners who they have worked with in the past. Recall, in October 2017, Teachers sold a minority stake in Bristol and Birmingham airports to GPIF, TCorp and Australia's Sunsuper. Again, this was the first phase of Teachers' reducing its massive European airport exposure.
• In each deal, however, you will note Teachers' maintains its majority stake and is the "lead investor". Dale explained that Teachers' has a dedicated team of airport specialists based in London that manages all operational aspects of these airports. 
• In fact, Ontario Airports Investments (OAIL) is a wholly controlled subsidiary of Ontario Teachers’ Pension Plan that manages and oversees its airport investments across Europe. Airports currently under active management by the London-based team include Birmingham, Bristol, Brussels, Copenhagen and the recently acquired London City.
• So GPIF and TCorp don't just gain access to prized airports in Europe, they also gain the expertise of Ontario Airports Investments which they need to properly manage these assets.
• I asked Dale where they will be deploying their funds going forward and specifically mentioned Asia. He said they have a team in place in Latin America (I covered the recent IDEAL deal in Mexico here) and are in the process of building out a team based in Asia (right now, Hong Kong office only houses an equities team). 
• He told me "there's no question" Asia is where growth will be and "under Jo Taylor (Teachers' new CEO), the organization will build its global brand." He also said partners like GPIF and TCorp will be instrumental in helping Teachers' invest across Asia. I told him they can literally fly their airport experts to Asia to evaluate deals there and he agreed.
• What else? I asked him if Teachers' Infrastructure team is doing any greenfield investments and he told me they're looking at greenfield and renewable projects where they'd like to take development risk and the person in charge of this is Chris Ireland. Another team member, Maria Morsillo, is in charge of value creation and analytics (see the entire team here). These two individuals took over from Olivia Steedman who is now leads Teachers' Innovation Platform (TIP). 
• Lastly, I also had a frank discussion with Dale on the ridiculously high valuations on prized infrastructure assets and specifically mentioned the London City Airport deal which some experts later told me was done at "nosebleed valuations". But I also told Dale with interest rates at record low levels, especially in Europe where they're negative, there's not much of a choice. He agreed and told me that low rates present challenges to all investors and "we're all in the same boat and need to be cognizant of the risks." He also said however, as bonds and equities run up to record levels, investors are getting nervous and need to allocate more to real assets which offer safe, predictable yields.

One of Canada’s leading pension experts is warning Albertans to consider the “double jeopardy” of falling contributions and investment asset values they might be subjecting future generations to if they replace the Canada Pension Plan with a provincial alternative.

In a report published on Wednesday, Keith Ambachtsheer, president of KPA Advisory Services and director emeritus at the International Center for Pension Management, said that a potential switch to a provincially run pension plan could cost hundreds of millions of dollars to establish and would also put its contributors in danger of facing serious underwriting and investment risks.

Primarily, Ambachtsheer is concerned an Alberta Pension Plan could be used to double down on the oil and gas industry.

“It’s a simple diversification argument: If your underlying economy is to a significant degree dependent on the health of a particular industry that if you also put your retirement savings into that industry, it’s double jeopardy,” said Ambachtsheer. He added that Norway avoided making the same error with its fossil fuel industry by ensuring its pension plan’s investments are all international and beginning the process to divest from oil and gas.

In November, Alberta Premier Jason Kenney floated the idea of pulling the $40 billion Alberta has in the CPP and putting it under the management of the Alberta Investment Management Corporation amid frustrations that the province’s economic interests were being neglected by Ottawa. A “fair deal” panel made up of former politicians and business leaders has since been created and has been consulting with Albertans through town halls about withdrawing from the pension, among other issues. The panel will present its report to the government by March 31.

An Alberta Treasury Board and Finance spokesperson said it welcomes all submissions about the potential creation of an Alberta Pension Plan to the panel, including Ambachtsheer’s.

“It is worth noting that there have been a variety of views expressed by experts on this topic, including those from the Fraser Institute, the CD Howe Institute and the Alberta Investment Management Corporation, all of which highlighted potential benefits of an Alberta Pension Plan,” the spokesperson said.

Some of the appeal surrounding a withdrawal is centered around the potential for Albertans to make lower contributions than the current 9.9 per cent of pay. Studies from the Fraser Institute and C.D. Howe suggested that an Alberta Pension Plan could cut contributions to the six-to-eight-per-cent range while providing the same benefits. This is mostly due to the fact that the majority of Alberta’s contributors are much younger and higher-paid than the rest of Canada’s.

That younger population — the median age, according to Statistics Canada, is 37.1 years old and the youngest in the country — has led to Albertans contributing more than they otherwise would to the plan, Kenney argued in November.

Ambachtsheer questioned the legitimacy of a lower contribution rate due to the potential of Alberta’s younger citizens leaving the province for greener pastures should the oil and gas industry continue to decline.

Should the industry continue to struggle, Ambachtsheer said he worries there could be fewer jobs available in the province, especially those that pay well. That could impact the total contributions made to the APP and the only way to make up for the lost capital would be to raise the rate.

Building out and administering the plan could also lead to a exorbitant bill for taxpayers to front. Ambachtsheer points to the $70 million Ontario spent developing a potential pension plan of its own between 2014 and 2016, before joining the CPP expansion instead.

As for the costs to operate it, Ambachtsheer uses the example of the Alberta Pension Services Corporation, which provides pension administration services to 375,000 public sector employees in the province. It pays $175 per person, per year to do so. Using that math, it would cost $525 million to administer the plan to the three million Albertans currently making CPP contributions.

The process has yet to be tested, but no province has ever withdrawn from the CPP.

1. What underwriting risks would current and future APP members be undertaking by shifting from the CPP to an APP?
2. What costs would Alberta taxpayers be incurring in setting up and managing an APP?
3. What investment risks would current and future APP members be undertaking by shifting from the CPP to an APP?

1. By shifting to an APP, Albertans would be taking on material underwriting risks. To mitigate these risks it would be imprudent to lower the base APP contribution rate below the CPP’s current 9.9% of pay up to the maximum earnings.
2. Establishing an APP would incur set-up and operating costs in the $100s of million dollars.
3. Establishing an APP would also expose plan members to political involvement in deciding APP’s investment policy. Would its assets be managed ‘at arm’s length’, or would they be used to shore up a potentially declining oil and gas industry? The latter outcome would expose APP members to a double jeopardy possibility of falling APP contributions and asset values at the same.

Presumably, the Alberta Investment Management Corporation (AIMCO) would manage the assets of an APP. As AIMCO’s structure is based on the globally-admired Canada Model, it likely would make a competent job of it. It already manages over $100 billion of assets related to such provincial asset pools as those of the provincial public sector workplace pension plans and of the Alberta Heritage Fund. Instead, a possible investment risk lies in the AIMCO legislation clause that reads: “…..the Government may issue directives that must be followed by the Corporation”. Where could this lead somewhere down the road?

Consider recent comments on the APP idea made by former Wild Rose Party Leader Danielle Smith: “I think that’s part of the reason why Albertans are looking to have their own investment fund. They know there is a divestment mood in all of the pension funds across Canada and internationally. If the CPP starts bailing out of energy resources, we don’t want to be in a position where our money is being used to support solar or wind or other experiments that the CPP might want to invest in….”. From a different perspective, the former Chair of the Alberta Teachers Pension Board, Greg Meeker agrees. Commenting on legislation which requires AIMCO to manage the assets of the teachers’ pension plan: “We’re really worried that [the government is] going to treat these huge pools of assets as monopoly money that they can play with to support some agenda that they haven’t articulated to the public but that might include making risky investments in what most people see as a sunset industry.”

Premier Kenney and his Finance Minister Travis Toews respond that such fears are unfounded. The assets will be prudently managed at ‘arm’s length’. Indeed, the AIMCO legislation requires it. Yet, it is worth recalling how Norway has handled the financial windfall from its fossil fuel industry over the last four decades. It diverted most of this windfall in a national endowment fund called the Government Pension Fund – Global. Today, the GPFG has an asset value of some C$1.3 trillion, belonging to a population of 5.3 million (i.e., about C$250,000 per Norwegian). In contrast the Alberta Heritage Fund value is about C$18 billion, belonging to a population of 4.4 million (i.e., about C$4,000 per Albertan). As further gestures to long term investment care and prudence, the GPFG does not invest inside Norway and more recently, has begun a process leading to the exclusion of fossil fuel investments world-wide. Why? Because it wants to avoid the double jeopardy of having its financial assets invested in the same country and industry that is also a major source of employment and government revenues in that country.

Why compare the financial behavior of a sovereign country to that of a province of a federation? Clearly, Alberta did not have the same decision options as Norway did over the course of the last 40 years. The reason is to point to the reality that creating an APP will require political decisions to be made regarding its investment policy. The previously cited quite different views of Danielle Smith and Greg Meeker recognize this reality. What would other political views be on how the assets of an APP should be managed? Creating an APP would require this question to be addressed and decisions made.

Alberta leaving the Canada Pension Plan (CPP) and creating its own Alberta Pension Plan (APP) has been discussed for many years, and has resurfaced as the newly elected Premier of Alberta has said there is a compelling case for creating an APP, and launched a formal study.

The case for creating an APP is straightforward – at least on the surface – but far from a slam dunk.

Base benefits – benefits that were in place before the creation of additional benefits that are now being phased-in – are the major component of the CPP. They are financed primarily by a direct transfer of income from working age contributors to retired beneficiaries. The higher the ratio of contributors to beneficiaries, the lower the contribution rate. A relatively youthful population will have a relatively low contribution rate and an older population will have a high contribution rate.

Because Alberta is relatively young, it is argued that Alberta could create an APP that would be similar to the CPP in its benefit provisions and financing with a lower contribution rate. The contribution rate for base benefits in an APP could be roughly two percentage points or more below the CPP rate of 9.9 percent. So convinced are some prominent Albertans of this line of argument that the advantage of a separate APP has been called a slam dunk.

If Alberta could be sure of staying forever young, this argument would have merit. As always however, there is uncertainty about the future and in Alberta’s case there is real uncertainty about its ability to remain forever young.

Globally, age structures are determined by basic demographic factors: the number of children born per adult female (the fertility rate) and the length of time that people live beyond birth or other specific ages like retirement age. But Alberta’s youthfulness is not based on these demographic factors. Fertility rates and life expectancies in Alberta are very similar to those for Canada as a whole. What distinguishes Alberta is its receipt of a very large inflow of young interprovincial migrants whose move to Alberta has been driven by a strong oil and gas industry.

This source of youthfulness faces a serious challenge as we look to the future. The downward global pressure on the use of carbon-based energy is inexorable and its adverse effects will be felt most acutely by high-cost producers. Stagnation or even contraction of oil and gas production in Alberta are likely to bring with them a significant decline in inbound migration and undermine Alberta’s relatively youthful status and its lower-cost APP benefits.

Quebec provides a cautionary tale on this kind of demographic gamble. At the time it decided to create a separate QPP, it was a relatively youthful province. That is no longer the case and the QPP contribution rate for base benefits is higher than the CPP rate.

It is also worth noting two things that produce an overstatement of the potential advantage of an APP.

Some analyses that promote the advantage of an APP focus exclusively on the base benefits and ignore the newly created additional CPP benefits.

Alberta’s demographic advantage is basically irrelevant to the additional benefits because they are to be fully funded with invested contributions and returns. Cost advantages for the additional benefits will be determined by the rates of return garnered by the CPP Investment Board and the Alberta fund manager, AIMCO. AIMCO has a very good track record as an investment manager. But it will still be relatively small compared to CPPIB even after an equitable asset transfer from the CPPIB. So it isn’t clear AIMCO would have any advantage over the CPPIB in generating the returns necessary to sustain the additional benefits.

Some analyses also tend to assume that administrative costs for the APP will be at the same level as for the CPP. This is very unlikely given the economies of scale that exist in pension administration. Startup costs will be substantial. Alberta will have to create a capacity to collect contributions, calculate and pay benefits, maintain earnings records and adjudicate disputes. The government will have to add APP-related analytical capacity.

All things considered, the creation of a separate APP looks less like a slam dunk than a three-point shot from midcourt.

I just learned AIMCo has offices in Toronto, London and Luxembourg, as opposed to ATRF which has one office in Edmonton, attracting world class investment professionals to live and work in Alberta. Which approach is better for our economy? #abed#ableghttps://t.co/ymiuDKjcOO

— Jonathan Teghtmeyer (@atypicalalbertn) January 8, 2020

AIMCo should know that the performance “fees” are not really fees at all, they are profit sharing arrangements paid to partners upon success of the investment. AIMCo has lower performance fees because their assets, get this, do not perform as well.

— Greg Meeker (@yomeeks) November 15, 2019

Wall Street’s worst fears of a year-end funding squeeze never materialized thanks in large part to the quarter-trillion dollars the Federal Reserve stuffed into the market to ensure nothing became gummed up.

The question now, though, is what it will take for the U.S. central bank to withdraw from its daily liquidity operations in the $2.2 trillion market for repurchase agreements, or repos - after it became a dominant player in a short three months.

“The repo operations are a band-aid, but the wound isn’t healed fully,” said Gennadiy Goldberg, an interest rate strategist at TD Securities.

The New York Fed began injecting billions of dollars of liquidity into the repo market in mid-September, when a confluence of events sent the cost of overnight loans as high as 10%, more than four times the Fed’s rate at the time. A month later, the Fed moved to expand its balance sheet - and boost the level of reserves - by snapping up $60 billion a month in U.S. Treasury bills.

The Fed will continue pumping tens of billions a day into the repo market through at least the end of January. Its ability to exit from the repo market after that time will depend on how long it takes the central bank to make the balance sheet large enough so there are adequate reserves in the banking system - and the repo operations are no longer needed.

“It seems implausible to me that the Fed will be able to stop their repo operations by the end of January,” said Mark Cabana, head of U.S. rates strategy at Bank of America Merrill Lynch.

Minutes from the Fed’s December policy meeting released on Friday showed its staffers expected repo operations to be “gradually” reduced after mid-January. However, staff members also said the central bank may need to continue offering some repo operations until at least April, when tax payments could reduce the level of reserves.

Another challenge for Fed officials: Deciding just how big the central bank’s balance sheet, which is currently about $4 trillion, should be.

“There are people at the Fed who have a preference for the smallest possible balance sheet, and we just don’t know how much their views have evolved,” said Lou Crandall, chief economist at Wrightson ICAP, a research firm.

Fed policymakers have said they will continue purchasing Treasury bills into the second quarter of 2020 with the goal of bringing reserves back above the level seen in mid-September, when they fell below $1.5 trillion.

Bringing reserves to $1.7 trillion would provide a cushion of about $200 billion to absorb shocks during periods of tight liquidity, said Joseph Abate, a short rate strategist for Barclays. Holding up to $2 trillion in reserves could offer a bigger cushion and reduce the likelihood of volatility in short-term borrowing markets, depending on what the demand is for reserves, he said.

‘LONG-TERM CONVERSATIONS’

Some financial firms are urging the Fed to stay involved permanently through a standing repo facility, which would allow firms to trade Treasury holdings for cash. But Fed officials are still working out the details and plan to keep discussing the issue at future meetings, the minutes from Friday showed.

Richmond Fed President Thomas Barkin said on Friday that in addition to a standing repo facility, long-term fixes for providing more liquidity in money markets could include adjusting liquidity regulations and setting restrictions on other programs that can affect reserves, such as the foreign repo pool.

“All those are legitimate long-term conversations to have now that we’re through the short term,” Barkin told reporters after a speech to the Maryland Bankers Association in Baltimore.

In the meantime, Fed officials could make changes to the repo offerings to help wean markets off the temporary support. Officials could reduce the frequency or the size of the repo offerings after January and bring them back during times of expected stress, Abate said.

One issue is that the Fed is allowing dealers to borrow cash at a cheaper rate than is available from other market participants, which discourages firms from borrowing in the private market they used before the Fed began to intervene, Goldberg said.

Figuring out the right structure could take some time. “What they want to do is incentivize the market to go to fellow market participants first and the Fed second, and I don’t think we’re there yet,” Goldberg said.

Market concerns focused on a cash crunch stemming from Treasury settlements, as well as big banks concerned about meeting end-of-year capital requirements being reluctant to provide funding to institutions that need it.

To address the issues, the Fed has conducted daily operations thus far totaling more than $234 billion to dampen market volatility and keep the central bank’s overnight funds level, which is used as a benchmark for multiple other short-term interest rates, within a range of 1.5%-1.75%.

On Monday alone (December 30), the Fed injected another $18.65 billion for a two-day repo operation — exchanging high-quality capital for cash — and $30.8 billion in a one-day offering. However, both issues were undersubscribed, having offered $75 billion and $35 billion, respectively. That means there was less demand and thus lower funding pressures.

While there’s still one trading day left in the year, it appears that the Fed will close 2019 in control of the banking industry’s vital plumbing system.

Our focus this week is on the eerie resemblance between the current environment and the rapid advance in US equities in the second half of 2017, up until early in 2018 (see our Chart of the Week below). Back then, equity markets were cheering the US fiscal boost and strengthening global growth prospects. This time around, we believe trade optimism and Fed liquidity injections are supporting the advance. The end result is the same: a fear of missing out on further gains in the stock market. But the market buying frenzy eventually hit a climax by the end of January 2018. Growing fears of a trade war with China and expectations that the Fed would hike rates at a rapid pace eventually spooked markets. Interestingly, the market is trading at similar valuation multiples compared to levels prevailing near the 2018 market peak. However, the earnings backdrop is much less supportive, as equity analysts are cutting estimates (third panel). That said, currently, the tape is bullish. Investors should simply acknowledge that fact but stand ready to de-risk rapidly on any change in sentiment.

Sonali Basak of Bloomberg News wrote a comment on LinkedIn on scouring the Earth for hedge fund returns:

Bill Ackman rebounded to a blowout year -- his publicly traded fund jumped 58% in 2019 -- but Ray Dalio is having his worst run in two decades at his best-known hedge fund. Ken Griffin’s ready to celebrate the 30th year of Citadel with its Wellington fund beating multistrategy hedge fund peers, and some of his firm’s alumni are raising major sums for new hedge funds that we’ll be watching closely. With the S&P rising 29% last year and the purge of funds deepening, here are some of the winners and losers as tracked by our investing team:

• Tiger Cubs rally. Chase Coleman’s Tiger Global returned 33%, while Institutional Investor reports that Tiger “Grandcub” Dan Sundheim had a 22.4% gain in his firm’s most popular share class. Both firms increased despite a Juul drag. Andreas Halvorsen’s Viking hedge fund climbed 18% and Philippe Laffont’s Coatue rose as well.
• Gabe Plotkin, a Steve Cohen protege, had a 47% increase. His Melvin Capital Management is a standout as most equity hedge funds trailed the market, my colleague Hema Parmar notes. Still, David Einhorn bounced back with a 14% gain, while Dan Loeb’s Third Point said its offshore fund was up 17% for the year.
• Here’s where Citadel stood in relation to Millennium, Point72 and Balyasny.
• The download on Dalio, plus our read-through for Bloomberg Television, where we talk through Ken Griffin’s gains as well.

Meanwhile, it’s time to ask: Have we reached peak quant? Cliff Asness’s AQR has faced assets slipping by almost 20% and headcount has dwindled to well below 1,000, where it was at the end of 2018. He’s cutting 5% to 10% more of his workforce, according to a story Bloomberg’s Saijel Kishan broke this week. We explain the under-performance for Bloomberg TV.

He’s not the only quant facing troubles. Igor Tulchinsky’s WorldQuant cut about 130 employees and is shuttering offices, Bloomberg’s Katia Porzecanski reported. Others -- D.E. Shaw and Renaissance Technologies, according to the FT -- have been faring a lot better.

It's early in 2020 but already news is breaking out about how top hedge funds performed last year.

For these elite funds, annual performance is important for three reasons:

1. Bragging rights: Who earned the most in 2019?
2. Marketing to prospective investors always helps when coming off a great year and
3. Retaining and poaching top talent to make sure you maintain your edge.

There's no doubt the king of hedge funds in 2019 was Ken Griffin whose Citadel beat out rival fund, Steve Cohen's Point72, with a 19% gain last year:

Ken Griffin’s $30 billion Citadel saw its main multistrategy hedge fund soar 19.4% last year, topping rivals including Steve Cohen’s Point72 Asset Management.

Citadel’s Wellington fund gained across all five of the firm’s strategies after besting peers for most of the year, a person familiar with the returns said. Its Tactical Trading fund, a separate multistrategy fund that uses equity and quantitative approaches, rose about 20%. Point72 advanced about 16%, people said.

Citadel and Point72’s performance stands in contrast to the industry. Hedge funds returned 9% last year rebounding from a decline the year before, according to preliminary figures from the Bloomberg Hedge Fund Indices. Hedge Fund Research reported a 7.7% gain for the year on an asset-weighted basis. Meanwhile, the S&P 500 Index rallied 29%, extending the longest bull market in history.

Equities were the best performing fund strategy.

Sculptor Capital Management, formerly called Och Ziff, was up almost 15% return for the year. Dmitry Balyasny’s namesake firm returned 12% in its Atlas Enhanced fund, another person said. Meanwhile, Izzy Englander’s Millennium Management gained 9.8% and ExodusPoint Capital Management, run by Michael Gelband, ended 2019 up 6.8%.

Citadel’s Wellington fund rose 2.3% last month. Citadel also returned 2019 profits in full to investors, amounting to more than $6 billion.

Multistrategy funds trade across assets from company stocks and bonds to currencies and interest rates.

Representatives for the firms declined to comment.

Tensions between Griffin and Cohen extended beyond traditional fund competitiveness in 2019. At least five of Point72's portfolio managers left the firm for Citadel through the year, The Wall Street Journal reported in July. The departures upset Cohen, sources told The Journal, and the fund manager reportedly refused to shake one portfolio manager's hand when he revealed he took a job at Griffin's fund.

About 20 portfolio managers in total left Point72 last year, The Journal reported.

Point72 is Cohen's second foray into the hedge fund industry following the closure of SAC Capital in 2016. The first firm was among the most profitable hedge funds in the US before it pleaded guilty to an insider trading scheme in November 2013 and paid $1.8 billion in penalties.

SAC was also known as one of the nation's highest-paying funds, former employees told The Journal, saying that Point72's pay isn't as high compared to Cohen's first firm. Cohen expressed surprise at Citadel's compensation packages and looked for ways to boost payment at Point72, sources familiar told The Journal in July.

Hedge funds returned 6.96%, on average, throughout 2019, according to data out Thursday, lagging the gains enjoyed in the broader stock market.

The data come from Eurekahedge, which compiled hedge-fund performance across four regions and nine strategies, with 85% of hedge funds reporting their November returns as of Dec. 31.

The strongest gains in all regions were found among long-short equity funds, which returned 8.64%. In contrast, the Dow Jones Industrial Average DJIA, +0.15% gained 22.3%, the S&P 500 SPX, +0.48% rose 28.9%, and the Nasdaq Composite Index COMP, +0.78% jumped 35.2% over the course of 2019.

While the broad aggregate averages reported here conceal lots of individual variation, it has been a tough year for hedge funds. Big-name investors like David Tepper converted his fund into a family office, returning all outside money back to his investors. Mick McGuire and Louis Bacon, meanwhile, recently closed their funds, with Bacon citing “disappointing results.”

Globally, investors pulled $131.8 billion out of hedge funds last year, Eurekahedge said, nearly $59 billion of which was in North America. In contrast, throughout most of 2019, investors plowed approximately $660.8 billion into exchange-traded funds, approximately 98% of which are passively managed investing tools. (That data came from the Investment Company Institute, and represents total exchange-traded fund assets as of Nov. 30, 2019, compared with total assets 12 months earlier.)

Not a good look. PointState Capital is blocking investors from getting all their cash back when they ask to pull it from the firm, and is creating "side pockets" for hard-to-sell assets. https://t.co/m74mkDZz4a

— Lisa Abramowicz (@lisaabramowicz1) January 10, 2020

Larry Fink seems to be listening to his critics. The BlackRock boss on Tuesday published his annual letter to CEOs of the companies the $7 trillion fund manager invests in. To a greater degree than in the past, tackling climate change is the priority.

Fink might argue that previous letters, which called for companies to help stakeholders as well as shareholders, were on a similar path. BlackRock is no stranger to applying environmental, social and governance criteria to its investment processes. But its public record on pushing companies to tackle global warming has been criticised by activists, who point out that its funds vote against most climate-related resolutions.

Fink’s letter flips the script in multiple ways. BlackRock now sees sustainable investing as the “strongest foundation” for client portfolios, rather than lowering potential investment returns. It also flags the dangers of financial markets repricing climate-related risks sooner rather than later. By mid-2020, the firm’s active fund managers will therefore stop investing in groups that generate over a quarter of their revenue from thermal coal production.

This is welcome, but hardly revolutionary. BlackRock funds will still own shares and bonds of carbon-emitting oil and gas companies. The company also sees 2 degrees Celsius of warming from pre-industrial levels as the danger point, rather than the 1.5 degrees Celsius many scientists say is a big problem. And only a quarter of BlackRock’s assets are actively managed. The majority are passive index-trackers which cannot selectively sell securities.

Fink’s most eye-catching shift is therefore to change how BlackRock plans to engage with the companies it invests in, whether active or passive. From now on, it will be “increasingly disposed” to vote against directors at companies that are not doing enough. That includes those like Exxon Mobil which lobbyist CDP argues have been slow to explain how their balance sheets would be affected by higher temperatures.

BlackRock itself is evidence of what such a change can achieve. Fink’s greater focus on climate change owes much to the firm’s own clients – such as Japan’s huge Government Pension Investment Fund – shoving it in this direction. If Fink is serious about applying the same pressure on the companies BlackRock invests in, his 2020 letter may be seen as a watershed.

As an asset manager, BlackRock invests on behalf of others, and I am writing to you as an advisor and fiduciary to these clients. The money we manage is not our own. It belongs to people in dozens of countries trying to finance long-term goals like retirement. And we have a deep responsibility to these institutions and individuals – who are shareholders in your company and thousands of others – to promote long-term value.

Climate change has become a defining factor in companies’ long-term prospects. Last September, when millions of people took to the streets to demand action on climate change, many of them emphasized the significant and lasting impact that it will have on economic growth and prosperity – a risk that markets to date have been slower to reflect. But awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance.

The evidence on climate risk is compelling investors to reassess core assumptions about modern finance. Research from a wide range of organizations – including the UN’s Intergovernmental Panel on Climate Change, the BlackRock Investment Institute, and many others, including new studies from McKinsey on the socioeconomic implications of physical climate risk – is deepening our understanding of how climate risk will impact both our physical world and the global system that finances economic growth.

Will cities, for example, be able to afford their infrastructure needs as climate risk reshapes the market for municipal bonds? What will happen to the 30-year mortgage – a key building block of finance – if lenders can’t estimate the impact of climate risk over such a long timeline, and if there is no viable market for flood or fire insurance in impacted areas? What happens to inflation, and in turn interest rates, if the cost of food climbs from drought and flooding? How can we model economic growth if emerging markets see their productivity decline due to extreme heat and other climate impacts?

Investors are increasingly reckoning with these questions and recognizing that climate risk is investment risk. Indeed, climate change is almost invariably the top issue that clients around the world raise with BlackRock. From Europe to Australia, South America to China, Florida to Oregon, investors are asking how they should modify their portfolios. They are seeking to understand both the physical risks associated with climate change as well as the ways that climate policy will impact prices, costs, and demand across the entire economy.

These questions are driving a profound reassessment of risk and asset values. And because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself. In the near future – and sooner than most anticipate – there will be a significant reallocation of capital.

Climate Risk Is Investment Risk

As a fiduciary, our responsibility is to help clients navigate this transition. Our investment conviction is that sustainability- and climate-integrated portfolios can provide better risk-adjusted returns to investors. And with the impact of sustainability on investment returns increasing, we believe that sustainable investing is the strongest foundation for client portfolios going forward.

In a letter to our clients today, BlackRock announced a number of initiatives to place sustainability at the center of our investment approach, including: making sustainability integral to portfolio construction and risk management; exiting investments that present a high sustainability-related risk, such as thermal coal producers; launching new investment products that screen fossil fuels; and strengthening our commitment to sustainability and transparency in our investment stewardship activities.

Over the next few years, one of the most important questions we will face is the scale and scope of government action on climate change, which will generally define the speed with which we move to a low-carbon economy. This challenge cannot be solved without a coordinated, international response from governments, aligned with the goals of the Paris Agreement.

Under any scenario, the energy transition will still take decades. Despite recent rapid advances, the technology does not yet exist to cost-effectively replace many of today’s essential uses of hydrocarbons. We need to be mindful of the economic, scientific, social and political realities of the energy transition. Governments and the private sector must work together to pursue a transition that is both fair and just – we cannot leave behind parts of society, or entire countries in developing markets, as we pursue the path to a low-carbon world.

While government must lead the way in this transition, companies and investors also have a meaningful role to play. As part of this responsibility, BlackRock was a founding member of the Task Force on Climate-related Financial Disclosures (TCFD). We are a signatory to the UN’s Principles for Responsible Investment, and we signed the Vatican’s 2019 statement advocating carbon pricing regimes, which we believe are essential to combating climate change.

BlackRock has joined with France, Germany, and global foundations to establish the Climate Finance Partnership, which is one of several public-private efforts to improve financing mechanisms for infrastructure investment. The need is particularly urgent for cities, because the many components of municipal infrastructure – from roads to sewers to transit – have been built for tolerances and weather conditions that do not align with the new climate reality. In the short term, some of the work to mitigate climate risk could create more economic activity. Yet we are facing the ultimate long-term problem. We don’t yet know which predictions about the climate will be most accurate, nor what effects we have failed to consider. But there is no denying the direction we are heading. Every government, company, and shareholder must confront climate change.

Improved Disclosure for Shareholders

We believe that all investors, along with regulators, insurers, and the public, need a clearer picture of how companies are managing sustainability-related questions. This data should extend beyond climate to questions around how each company serves its full set of stakeholders, such as the diversity of its workforce, the sustainability of its supply chain, or how well it protects its customers’ data. Each company’s prospects for growth are inextricable from its ability to operate sustainably and serve its full set of stakeholders.

The importance of serving stakeholders and embracing purpose is becoming increasingly central to the way that companies understand their role in society. As I have written in past letters, a company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders. A pharmaceutical company that hikes prices ruthlessly, a mining company that shortchanges safety, a bank that fails to respect its clients – these companies may maximize returns in the short term. But, as we have seen again and again, these actions that damage society will catch up with a company and destroy shareholder value. By contrast, a strong sense of purpose and a commitment to stakeholders helps a company connect more deeply to its customers and adjust to the changing demands of society. Ultimately, purpose is the engine of long-term profitability.

Over time, companies and countries that do not respond to stakeholders and address sustainability risks will encounter growing skepticism from the markets, and in turn, a higher cost of capital. Companies and countries that champion transparency and demonstrate their responsiveness to stakeholders, by contrast, will attract investment more effectively, including higher-quality, more patient capital.

Important progress improving disclosure has already been made – and many companies already do an exemplary job of integrating and reporting on sustainability – but we need to achieve more widespread and standardized adoption. While no framework is perfect, BlackRock believes that the Sustainability Accounting Standards Board (SASB) provides a clear set of standards for reporting sustainability information across a wide range of issues, from labor practices to data privacy to business ethics. For evaluating and reporting climate-related risks, as well as the related governance issues that are essential to managing them, the TCFD provides a valuable framework.

We recognize that reporting to these standards requires significant time, analysis, and effort. BlackRock itself is not yet where we want to be, and we are continuously working to improve our own reporting. Our SASB-aligned disclosure is available on our website, and we will be releasing a TCFD-aligned disclosure by the end of 2020.

BlackRock has been engaging with companies for several years on their progress towards TCFD- and SASB-aligned reporting. This year, we are asking the companies that we invest in on behalf of our clients to: (1) publish a disclosure in line with industry-specific SASB guidelines by year-end, if you have not already done so, or disclose a similar set of data in a way that is relevant to your particular business; and (2) disclose climate-related risks in line with the TCFD’s recommendations, if you have not already done so. This should include your plan for operating under a scenario where the Paris Agreement’s goal of limiting global warming to less than two degrees is fully realized, as expressed by the TCFD guidelines.

We will use these disclosures and our engagements to ascertain whether companies are properly managing and overseeing these risks within their business and adequately planning for the future. In the absence of robust disclosures, investors, including BlackRock, will increasingly conclude that companies are not adequately managing risk.

We believe that when a company is not effectively addressing a material issue, its directors should be held accountable. Last year BlackRock voted against or withheld votes from 4,800 directors at 2,700 different companies. Where we feel companies and boards are not producing effective sustainability disclosures or implementing frameworks for managing these issues, we will hold board members accountable. Given the groundwork we have already laid engaging on disclosure, and the growing investment risks surrounding sustainability, we will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.

1. Publish a disclosure in line with industry-specific SASB guidelines by year-end, if you have not already done so, or disclose a similar set of data in a way that is relevant to your particular business; and
2. Disclose climate-related risks in line with the TCFD’s recommendations, if you have not already done so.

@CalSTRS has officially rejected irresponsible Fossil Fuel Divestment, maintaining the integrity of the 248B pension:https://t.co/u12wUhzR9n#ESG#responsibleinvesting#pensions#CalSTRS

— Institute for Pension Fund Integrity (@SecurePensions) January 14, 2020

The head of buyouts at one of Canada’s largest pension plans says the amount of cash it plans to invest in private equity will double to around C$30bn in the next 10 years.

Mark Redman, global head of private equity at Ontario Municipal Employees Retirement System, says the pension plan expects total assets under management to increase from C$100bn to C$200bn by 2030, with 15% of that targeted at private equity.

Omers, like its larger Canadian peers, is under pressure to boost returns as plan beneficiaries live longer and because slow economic growth and low interest rates are a drag on fund performance. Many large North American pension funds are allocating higher amounts of capital to alternative investments, including private equity.

The Canada Pension Plan Investment Board has boosted buyout assets to C$93bn, up from 20.3% of the total fund in 2018 to 23.7% in 2019. The California State Teachers’ Retirement System, which has $226.5bn in AUM, and the California Public Employees’ Retirement System, which has $355bn in AUM, have both also adopted new models that emphasise direct and co-investments in private equity to boost returns and lower their fees. Omers’ provincial peer, the Ontario Teachers’ Pension Plan, has C$32bn in private equity assets.

Redman says Omers plans to further grow and strengthen the firm’s private markets business. “You stand still in this business and you’re dead,” he says. “The world is moving quicker and quicker.”

The buyout arm currently has $14.2bn in assets under management, with 85% invested directly. About 21% of that is invested in Europe, worth about $3bn.

European operations

Redman moved to Europe 10 years ago to set up private equity operations in the region.

The 51-year-old struck Omers’ first European deal in 2009, taking a minority stake in commercial lender Haymarket Financial. Since then, the equity cheques for acquisitions have gone from C$100m to C$600m.

Over 10 years, the private equity investments have delivered an internal rate of return of more than 16% net, according to people familiar with the fund. Omers declined to comment.

So far, Redman’s focus has been on the UK, Benelux and France. In 2018, Omers acquired London-based recruitment firm Alexander Mann Solutions in a $1.1bn deal. The fund also bought French industrial measurement company Trescal for €670m in 2017. Now, Redman has his sights on opportunities in other geographies, mainly German speaking Europe.

Redman is also planning to increase the firm’s investment in private credit. Pension funds have traditionally steered clear of private credit, but it has become increasingly popular recently as yields elsewhere have become hard to come by. Calpers’ chief investment officer Ben Meng said in a December board meeting that the pension fund should include private debt in its portfolio as well. Many large buyout firms have already allocated billions of dollars to specialised debt divisions, making the sector increasingly competitive.

Redman said it’s important for Omers’ venture capital arm to work closely with the private equity division.

“Venture capital might only account for 1% of the balance sheet, but it can influence 99% of it,” Redman says. “There are obvious synergies between the two – one world disrupts the other – and so it makes sense to bring our colleagues into discussions.”

London hires

Omers Ventures opened an office in Silicon Valley in January 2019 as part of the group’s plans to find new businesses to invest in. A few months later, it set up a branch in London. The pension fund hired former Balderton principal Harry Briggs and Tara Reeves, the co-founder of carsharing company Turo. In March, it launched a €300m fund targeting the European market and in December hired a former Uber executive as managing partner.

Other financial institutions, including Bank of Montreal and the multinational technology company Cisco have also committed cash to Omers Ventures. The unit has so far invested $500m in 41 disruptive technology companies and has $700m under management. In Europe, it has invested €76m into companies including content management infrastructure provider Contentful, insurance tech startup Wefox, and digital veterinarian FirstVet.

Redman says the fund is proud of what he calls “cuddly capital”– the reputation of Canadian pension funds as being “the nice guys” of private equity. “As part of a pension fund, we need to take a more conservative approach. We’ve been deliberately slow and steady doing one to two deals a year.”

He added he isn’t under the same pressure as traditional buyout groups to raise third party capital. It also doesn’t have to pay carried interest out to its investment teams.

Redman’s business operates with a smaller team than some of its much bigger buyout rivals. Omers Private Equity has 50 executives globally, with 16 based in Europe. The hit rate in terms of offers made versus deals won ran at about 50% last year.

It typically holds its investments for one to two years longer than the average three to five year holding period for buyout groups, so it can afford to be more patient.

The system named Wallace to the position on Tuesday, the Globe and Mail reported, after she served as senior vice president of pension services and communications for nearly two years.

OMERS announced Hutcheson’s appointment last month. He succeeds Michael Latimer, who had a two-decade run at the organization, serving six of them as CEO. He will formally step down from his position and retire on May 31.

Wallace previously served as managing director of infrastructure at OMERS between 2016 – 2018, and served as vice president of OMERS Infrastructure (called Borealis Infrastructure at the time) for nearly four years before that. She currently sits on the board of directors at Infrastructure Ontario, Alectra, and Bruce Power.

As senior vice president, Wallace oversaw a transformational modernization of the pension’s IT services, intended to improve the administration of the pension plan. She also led a team that provides services to OMERS’ 500,000 pension plan members and 1,000 employers across Ontario to increase member and employer engagement and satisfaction.

Latimer, whose departure brought about the flurry of promotions within the firm, said in a statement, “As the outgoing CEO, I would like to thank each and every employee of OMERS, past and present, for their contributions to our significant growth over these years. I would also like to thank our Board of Directors for their support. Without both, achieving our goals would not have been possible.”

Under Latimer’s leadership, OMERS’s assets have grown from $65 billion to over $100 billion, with a consistent generation of 8% in annual net returns, improving the plan’s position to near full funding.

Annesley has been with the Pension Services team for almost two years (most recently as SVP Pension Services and Communications) and under her leadership the team has started on a journey to digitally transform OMERS engagement model with its 500,000 members. As Chief Pension Officer she will be a member of OMERS Senior Executive Team, and will continue driving the innovation agenda across all of OMERS.

Before joining Pension Services, Annesley was a Managing Director with OMERS Infrastructure. She has a Masters Degree in Engineering and in Business Administration.

Quote:“I am grateful for the opportunity to lead the OMERS pensions business, as we continue to deliver exceptional services to our 500,000 members across Ontario. Today, we have an opportunity to further the member experience by leveraging the expertise and innovative mindsets of our teams. Ultimately our goal is to ensure that the value of an OMERS membership is felt on day one and grows with each member every step of the way into retirement. I am excited to be part of this journey with OMERS.” – Annesley Wallace

Bio: Annesley is a high-energy executive who thrives on unlocking the best from her teams in creating innovative and creative business solutions. She has developed a highly successful track record as a leader across various industries and roles in engineering, finance and pensions. Currently Annesley is Chief Pension Officer at OMERS, leading a team that delivers exceptional services to 500,000 pension plan members across Ontario. Prior to this role, Annesley was a Managing Director at OMERS Infrastructure, responsible for a multi-billion dollar portfolio of investments across energy, transportation and social infrastructure sectors delivering long-term value for the pension fund. Annesley is currently a Director on the Boards of Bruce Power and Infrastructure Ontario and holds graduate degrees in mechanical and materials engineering from Queen’s University and business administration from the Schulich School of Business, York University.

Montreal-based CN Investment Division’s recent search for a quantitative analyst in its absolute return team is a timely reminder that pension funds must now align with the tech sector on compensation, culture and work environment to secure talent.

When Marlene Puffer, president and chief executive at the division which manages the $18 billion pension fund for Canadian National, Canada’s freight rail group, reached out to her network enquiring after candidates she was more conscious than ever that she was going head to head with the tech and start up sectors.

“They recruit for similar talent,” she said. “The financial sector is not as obvious a draw for a business school or STEM graduate as it used to be, but it should be. We need to explain the great opportunities in order to be able to attract and retain talent.”

Puffer, whose role spans everything from using her network to help field candidates for the 40-strong investment team to writing the annual report or getting into the weeds of a private equity decision, believes CNID has that pulling power.

Compensation involves a “competitive salary plus a variable component where investment professionals get paid well when performance is strong” in a model, she says, that keeps “reasonable pace” with top-paying Canadian peers.

Montreal’s ability to compete with global financial or tech centres is bolstered by locals returning home after pursuing careers elsewhere. As for culture, she believes CNID’s size, sophistication and long history of internal management offers a sweet spot that allows the investment team to evolve, ensuring individual portfolio managers can really have an impact.

Governance

CNID’s ability to recruit top talent also comes down to governance. Much of its ability to ensure good ideas are implemented without lengthy and arduous processes (at least in public markets – it takes longer in private markets) comes from the board.

It’s an area where Puffer has real expertise following a nine-year stint as chair of the asset liability management committee at $74 billion Healthcare of Ontario Pension Plan (HOOP).

It meant investment decisions and investment-related initiatives come through her on route to going to the board for approval. The experience has given her inside knowledge on how boards work – particularly the investment approval process – and left her convinced that open and transparent communication between the board and investment team is one of a pension fund’s most important pillars.

“I am bringing all my experience on the board at HOOP to bear in the context of reporting to the board. I am very familiar with board concerns and I have a pretty good idea how to be proactive and provide the right information for them to make informed decisions.”

At CNID, board education resides with the investment team. When something is new and different, like the quant strategies in the absolute return fund, it can require several steppingstone meetings ahead of any decision, she says.

Set up in 1935, serving 50,000 members most of whom are retired, CNID is one of the most mature, open pension funds around. The asset mix and risk profile are shaped around the constraints of paying out around $1 billion a year in benefits.

It means the backbone to Puffer’s asset liability and risk management strategy resides in a large bond portfolio that provides a liquidity pool on an ongoing basis.

“Because our plan is very mature, our portfolio is probably a little lower on public equity and private and illiquid return-seeking assets than other plans, and higher on fixed income, and we include absolute return strategies as a core part of our long-term asset mix, ”she says.

Equity

CNID’s equity allocation, all actively managed, has seen some of the biggest changes in recent years. Geographic silos in five portfolios (Canada, US, Asia, Europe and emerging markets) have been shifted to one global benchmark, MSCI All Country World Index, while bottom-up research is organised globally by sector.

The old system based on geography was a legacy stemming from when Canadian pension funds’ foreign investments were restricted prior to 2004, she explains. Although Canadian asset managers have run their equity allocations globally for a while, pension funds have been slower to change.

“It’s more efficient because we are not duplicating efforts within sectors, and the focus on the total equity portfolio outperforming its benchmark is clearer.”

Elsewhere she notes that current portfolio strategy is erring on the defensive side given today’s market conditions. But rather than adjust the long-term asset mix in response, she prefers to tactically position within asset classes. For example, CNID’s actively managed, bottom-up, fundamental analysis of individual companies with a long investment horizon has a very successful track record, and still offers exciting opportunities.

“We can always find some value in individual businesses with a long-term view,” she says.

She is also examining the diversification benefits of private equity in light of current markets. CNID currently has a small allocation to private equity, mostly because of its liquidity priorities.

“My view of private equity is to focus on its ability to offer some access to different business models currently unavailable in public markets, rather than seeing it as a distinct asset class. But that opportunity set comes with a heavy fee structure, and you have to wade through this very carefully.”

She also continues to see opportunities in private debt in the US as bank disintermediation continues to play out.

“There are opportunities within private debt resulting from the regulatory change since the financial crisis such as leveraged loans, SME enterprise lending, peer-to-peer lending.”

Internal management

CNID’s long history of internal management means the bulk of assets are now internally managed, setting the fund apart from peers.

“Most peers of our size in the North American market would either be primarily externally managed or may manage their fixed income or foreign exchange internally.”

Much of CNID’s internal expertise has been drawn from its manager relationships over the years, all shaped around CNID’s quest for strategic advice and knowledge sharing.

“When we have a new idea, we may engage our external managers and build parallel internal strategies. We may eventually wholly internalise the strategy. We are transparent about our needs and have positive, constructive relationships.”

Currently visible in building out the diverse, factor-based quant team which she very much considers “our own,” but which has also been developed and crafted with the help of external managers relationships.

[...] she oversees a very mature $18 billion pension plan at CN where there are 3 retired workers for every active member and she needs to make sure they have the $1 billion a year they need to make payouts every year.

She said she was balancing out liability hedging component with return seeking component. They hedge a lot of interest rate risk and they have their board's approval to prudently leverage their balance sheet (her experience sitting on HOOPP's ALM committee for years came in handy there).

She stated they are trying to generate the same return using less risk using all the tools available and are investing across public and private markets and anything that falls in between but are managing their liquidity very tightly.

Perhaps, cribbing from the lyrics to the viral song “Old Town Road,” David Tepper is going to take his horse and ride till he can’t no more.

That is essentially the sentiment conveyed by the founder of hedge fund Appaloosa Management to CNBC on Friday.

Tepper told the network’s anchor Joe Kernen that he “has been long and will continue that way.”

The U.S. stock market has enjoyed a nearly uninterrupted assault on records, highlighted by the Dow Jones Industrial Average closing at a milestone above 29,000 for the first time and the S&P 500 achieving its own landmark close above the psychological round-number at 3,300, while investors in the Nasdaq Composite Index may have their sights trained on 10,000.

The ascent for stocks has made investors uneasy, primarily, because markets are already coming off a stellar 2019 and further gains, while possible, were expected to be more subdued than the current start for major indexes in the third week of 2020.

On top of that, U.S. economic expansion its in its record-setting 11th year, with experts and statisticians making the case that the expansion and bull run for markets can’t last forever.

The Dow ended 2019 up 22.3%, its best year since 2017, while the S&P 500 saw its best year since 2013, gaining 28.9%. The Nasdaq produced its loftiest annual performance in six years after rallying 35.2% last year.

So far this year, the Dow and S&P 500 are both up by about 2.9% in January and the Nasdaq Composite is up more than 4.5% in the first three weeks of the year.

The gains have even made well-known professor of finance at the University of Pennsylvania’s Wharton School of Business fear that investors may be “throwing risk to the wind.”

Tepper’s bull thesis appears to be the equivalent of the oft-used Wall Street investing mantra: Don’t fight the tape.

He tells CNBC that “at some point, the market will get to a level that I will slow down that horse and eventually get off.”

When is that point? No one really knows.

Optimist have pointed to a partial resolution of China-U.S. trade tensions but even many bullish investors are getting nervousness about huge gains in an election year that could deliver surprises, including the possibility that business-friendly President Trump lose to a progressive Democratic candidate.

Making Wall Street prognostications isn’t the norm for Tepper, who has tended to cut a low-key figure as an investment manager.

Tepper may be best known for the concentrated bets he made on the financial system during the 2007-09 financial crisis, when he cited the backstop provided by the Federal Reserve as a reason to own beaten-down bank shares.

Tepper’s net worth was estimated at $12 billion by Forbes, ranking him as the world’s fifth-wealthiest hedge-fund manager. Tepper has also been an outspoken critic of President Donald Trump.

Since buying the National Football League’s Carolina Panthers, Tepper has retreated further from Wall Street. Back in May, he started converting his hedge-fund firm to a family office, according to reports.

Appaloosa Management LP has earned an average annual return of 25% since its inception in 1993. The fund regularly features among the ranks of all-time top performers.

U.S. stock rose at the start of trade Friday, with the major benchmarks reaching new highs in just the third week of the year, after data on new U.S. home construction showed it surging to 13-year highs in December. The Dow Jones Industrial Average gained 0.1% at 29,334, the S&P 500 index rose 0.2% at 3,322, while the Nasdaq Composite Index advanced 0.3% to reach 9,381 at Friday's start. Gains on the day have been bolstered by strong economic data. December housing starts showed home constructing rising 16.9%, to annual rate of 1.608 million units, to the fastest pace since 2006, well above the consensus forecast of 1.375 million, according to a MarketWatch poll of economists. Investors optimism wasn't dented by China reporting its worst annual growth in three decades of 6.1%.

The Bridgewater Associates founder, in an interview at the World Economic Forum back in January 2018, told investors that they were going to “feel pretty stupid” if they were holding cash as stocks climbed toward record highs.

So, how stupid did they feel? Not very, at least initially. Just look at this chart from Kevin Muir, veteran trader and author of the Macro Tourist blog:

Of course, Dalio was eventually right, as the market found its footing and has since exploded to highs. And anybody who invested in him that year certainly wasn’t complaining about his impressive performance numbers.

But he was comically wrong at the time as the bottom almost immediately fell out of the S&P in the following weeks.

Now, with the market “running like it stole something,” Muir suggests that we could have a repeat of the swift downturn that proved Dalio so wrong.

“Could we go higher? For sure!” he wrote. “The momentum is electrifying and the stock market’s rise has begun to capture the public’s attention with stocks like Tesla (TSLA) and Apple (AAPL) gapping higher every night.”

But all the optimism out there has Muir feeling rather short-term bearish, considering overconfidence often leads to shocks, as was the case with Dalio.

“Be careful up here,” he wrote. “As the speed of the move increases, the risks for a painful correction increase. The possibility of another quick correction like 2018 are high. I just don’t know if it will be from this level, or another 5% higher.”

• Following the bad Santa selloff of 2018, the Fed did a complete 180 degree U-tun and went from restrictive to accommodative mode by cutting rates. That alone was enough to make stocks great again as everyone rebalanced their portfolio to take more risk.
• Importantly, the Fed's rate cuts work their way into the system with a lag so we are still feeling the effects of these rate cuts.
• Then came Quant Quake 2.0 and QE Infinity in mid-September of last year at the same time the "repo crisis" hit banks. The Fed scrambled to pump massive liquidity into big banks and there's nothing more big US banks love than money for nothing and risk for free to speculate on risk assets. And this week, we learned the Fed is considering lending to hedge funds directly when the next repo crisis strikes. More money for nothing and risk for free.
• Commodity Trading Advisors (CTAs) which control large pools of capital have also added to this powerful rally as their models remain super long the S&P 500.

The persistence of the rally over the last 3 months has been amazing. The chart below is of SPX. I have marked where the Fed announced the “not QE” program back in October. The blue line is the 10-day moving average of SPX.

I have noted a few times lately that the market has gone an extended period without any closes below the 10ma. But what is more remarkable is how few days it has closed below the 10ma since “not QE” was announced on October 11th. In the last 67 trading days, there have only been 5 closes below the 10ma for SPX. There has not been a 67-day period with only 5 closes below the 10ma since 1972. And looking back to 1928 (when the S&P 500 was the S&P 90), there have only been 6 other instances: September 1929, July 1933, March 1943, June 1957, November 1965, and late February / early March of 1972. In other words, the persistence of this rally is extremely rare, and over the last 48 years, it is unheard of.

• Alphabet (GOOG) just surpassed the trillion-dollar market cap.
• Collectively, five mega cap tech companies -- Apple, Microsoft, Amazon, Alphabet (Google) and Facebook -- now make up 5 trillion of market cap collectively and account for 17% of the stock market. 
• Over the last year, tech stocks have outperformed the overall market by 26%.