The biggest global funds should all be monitoring their investments in illiquid assets, according to the head of Canada’s largest pension fund.

“I do ring the alarm bell on not to be too invested in illiquid assets,” Mark Machin, chief executive officer of the Canada Pension Plan Investment Board, said in a Bloomberg Television interview Monday at the World Economic Forum in Davos. “We are very comfortable with our risk models and what we would do in various lurches down markets, but I do worry about the expansion of a lot of funds like us around the world into private illiquid assets.”

Lower-for-longer interest rates have pushed pension funds and asset managers to cast their nets far and wide in search for returns amid a slew of geopolitical risks and trade tensions. Investors looking to diversify their portfolios are seeking shelter in low volatility assets that tend to be illiquid like infrastructure investments.

But the rapid dash to alternative assets by the stewards of retirement cash comes with risks, and it’s caught the attention of regulators. One major worry is that a downturn in funds would struggle to pull cash out of illiquid assets. While pension funds typically hold debt until maturity it doesn’t mean they can’t be hurt by mark-to-market losses.

The head of CPPIB said that while there’s little to worry about in the near-term, investors should be very careful about the huge shift of assets from public to private markets which could trigger steeper selloffs and exacerbate a crisis.

Trade Tensions

“You have to be very careful to make sure that you truly understand the liquidity positions, that you truly understand if that thing turns out to not be liquid you can still cope, and if you can still pay the university, the pensioners,” he said.

The Toronto-based pension fund manages $409.5 billion in assets for about 20 million Canadian pensioners. Half of that is in illiquid assets, Machin said. CPPIB reported a 2.3-per-cent return on investments for the quarter ended Sept. 30. Its ten and five-year annualized net nominal returns were 10.2 per cent and 10.3 per cent respectively.

“Our view is that these global trade tensions will continue and create some weight on global trading and supply chains and technology. There is nowhere to hide from that so you need to diversify,” he said. “If you sell, you have to hold something. For us, you’d have to invest in something else either its cash or some physical commodities.”

CPPIB, which currently holds about 85 per cent of its assets outside of Canada, plans to boost exposure to better-yielding emerging markets, lifting that allocation to one-third of its portfolio in the next five years. The pension fund still sees private equity as a good asset class from a risk return point of view and is relying on venture capital to participate early in the next market trends.

• On a slowing economy: There are "mixed views out there about slowing growth". One view from general economists on Wall Street is that a pause in the escalation of tensions between the US and China is a platform for renewed growth. "Our view is that on the surface that may be a little bit of a rapprochement but probably these tensions will continue and therefore will create some weight on global trading, global supply chains, and technology and many other things which will probably keep a damper on growth." Given their view, "there's nowhere really to hide from that, all you can do is diversify in many different markets, sectors and strategies."
• On selling private equity investments:“If you sell, you have to hold something. For us, we’d have to invest in something else either its cash or some physical commodity or something. We have a portfolio designed for long-term investing. We want to be generally deployed but we want to be invested in a broad range of assets. Some may perform well in a slower market, some less well but we want a diversified portfolio.”
• On private equity trends:"I think the trend towards private equity is pretty robust. When we look out at expected returns in different asset classes, even on a risk-adjusted basis, private equity is very robust. North American private equity, European and Asian PE isstill a decent asset class to be invested in."
• On the risks of illiquid assets:“The thing I continuously ring the alarm bell on is not to be too invested in illiquid assets. We have half our portfolio is in illiquid assets and we are very comfortable with our risk models and what we would do in various lurches down markets, but I do worry about the expansion of a lot of funds like us around the world into private illiquid assets. What you could see if there is a lurch down in markets and people are relying on liquid investments to sell but if everyone is selling the same liquid things at the same time and it's not liquid, then it triggers the risk models, etc. You have to be very careful to make sure that you truly understand the liquidity positions, that you truly understand if that thing turns out to not be liquid you can still cope, and if you can still pay their pensioners, their university, or whatever it is they need to be paying” he said.
• On systemic risk: Machin was careful not to sound the alarm but he stressed this is one of those things people should pay attention to because "it can exacerbate the lurch down" and"it's one of those things that could create a systemic issue down the road."
• On private equity fees:"Well, it's one of the remarkable things, name something else in finance that over the last 40 years has maintained its fees yet grown in massive volume. The argument is though that it continues to create value for investors. We are one of the biggest private equity fund investors in the world. We also do a lot of direct investing alongside those funds, the funds that we have great relationships with, and that's one way of reducing the fee drag for us. There's continued inflows, more asset owners like us are putting more capital in private equity so maybe fee compression but it's not on the horizon right now."
• On getting into venture capital:"We decided to go into it at this time because we want insight into all those companies staying private for longer...and the disruption that's happening. Everybody is talking about the accelerating speed of disruption in the world, we find that by not being in those earlier companies, we are a little less clear eyed on those changes than we'd like to be. I wouldn't say we're blind, we have a thematic investment strategy that goes deep in some areas but getting into venture cap is one way we hope we can partner with them to get insight on those earlier trends."
• On sustainability and climate change: "This is a huge issue, we identified it a major issue 11 years ago for a long-term investor. It's a complex issue. Our job is to identify all the possible risks in the investments we make and the overall portfolio whether that's physical changes, whether they're regulatory changes, consumer preference changes...all these changes that will spill through the portfolio and create risks. For every major investment, the teams identify all those risks and make sure we are compensated for them or we are not going to make the investment."

According to LCH Investments’ annual ranking of the 20 most successful hedge funds of all time, TCI Fund Management generated $8.4 billion of net gains last year. That’s more than the after-expense trading profits of Ray Dalio’s Bridgewaer Associates, David Tepper’s Appaloosa Management, Ken Griffin’s Citadel, or Steve Cohen’s Point72 Asset Management.

Hohn has definitely entered the elite of the hedge fund game. His firm now manages $30 billion, making it one of the industry’s biggest, and its main hedge fund posted strong performance in 2019, when it returned 41% and crushed the average hedge fund, which returned 10.35%, data provider HFR says.

Based in London, Hohn is known for his activist investments, where he shakes up boards and management of companies in which he owns shares. Last year, during which the U.S. stock market returned 31.5%, he benefited from being generally long equities, but big positions in Moody’s, Microsoft and Charter Communications, juiced his returns.

While many prominent hedge fund managers have struggled over the last decade, Hohn has consistently scored good returns. His hedge fund has now produced $22.8 billion of net gains since its 2004 inception, making Hohn the 14th greatest hedge fund manager ever, according to LCH Investments, which ranks hedge fund managers based on the absolute total dollar amounts they produce, not their annualized percentage returns. Hohn first got on the list two years ago, then dropped off for a year after his hedge fund dipped in the red in 2018, a year in which it still beat the U.S. stock market and the average hedge fund manager.

Last year, Hohn took his corporate activism in a new direction due to his concerns over climate change, saying he would put pressure on corporate boards of companies that did not disclose their carbon dioxide emissions.

Ray Dalio’s Bridgewater Associates, the world’s biggest hedge fund firm, tops the LCH list because its strong historic track record was compounding a huge assets base. It manages about $131.9 billion of hedge fund assets and has made $58.5 billion since inception, according to LCH. It made $600 million trading financial markets in 2019, says LCH.

The hedge fund industry has no shortage of aggressive, in-your-face players, but few are as tough as Chris Hohn. The British billionaire takes the typical playbook to new levels—scuttling deals, pushing to remove bosses, and battering companies with litigation and threats. One opponent was so peeved after losing a boardroom battle with Hohn that he titled a book about the experience Invasion of the Locusts. That approach made Hohn’s TCI Fund Management the world’s best-performing, large hedge fund last year.

Now Hohn is bringing his hardball tactics to the fight against global warming. The money manager, with US$30 billion in assets, is pushing portfolio companies to dramatically reduce greenhouse gas emissions and disclose their carbon footprint. If they don’t, he says he’ll oust their boards or dump their shares. Just in case anyone doubts his commitment, last fall Hohn and his charity donated £200,000 (US$260,000) to Extinction Rebellion, the radical climate change movement whose members have blocked traffic in London and glued themselves to jetliners.

“In the war against fossil fuels, you can’t be super-picky about your allies,” says Jeremy Grantham, co-founder of Boston money manager GMO, a legendary investor who has long warned of climate catastrophe. Hohn “has shown you can make a big impact on companies with a lot of arm-twisting.”

For Hohn, 53, a cerebral and deeply private financier who’s worth $2 billion, his campaign is just a first step in shaking up an asset management industry he says has ignored a planetary crisis. He’s calling on investors to fire money managers who don’t press companies to reduce their carbon footprint, and he wants banks to stop lending to companies that ignore climate change.

Still, for all of Hohn’s zeal, his crusade is fraught with the inconsistencies of green investing. TCI once held a big stake in an Indian coal producer; even now, it owns shares in three railroads that burn tons of diesel and ship fossil fuels, including from oil sands, one of the worst sources of greenhouse gases. Another key holding: Ferrovial SA, the Madrid-based conglomerate that runs airports that include London’s Heathrow.

“On the one hand, he’s trying to be green—and on the other, he makes money out of polluters,” says Jacob Schmidt, chief executive officer of Schmidt Research Partners, a London investment firm. “The question is, how committed are you in actually following your principles?”

Hohn says it’s far more productive to engage with carbon-heavy companies than to ignore them. On Nov. 30, TCI sent letters to the CEOs of the 17 companies in his portfolio with specific instructions on shortcomings that must be fixed. TCI said it will vote against directors of companies that don’t hit its targets, as well as auditors who fail to report “material climate risks,” and it may even sell all its shares in a company.

In a letter to Ferrovial, Hohn acknowledged that “de-carbonizing” airports is a massive challenge and lauded the company’s A grade for disclosing its greenhouse gas emissions. Yet TCI said Ferrovial’s target of cutting emissions almost a third by 2030 could be increased, and he called on the company to support measures such as a carbon tax and a mandate that airlines shift to greener jet fuel.

He told Canadian Pacific Railway Ltd. that its method of disclosing emissions got a C grade by the nonprofit Carbon Disclosure Project, and that its plan to boost that to a B would still be “unsatisfactory.” TCI, the railroad’s No. 1 stockholder, with an 8 per cent stake, said it requires the company to have a “credible, publicly-disclosed plan” to reduce emissions that meets seven objectives, including offsetting emissions from corporate travel and making facilities more energy efficient. Canadian Pacific says it engages in dialogue with stockholders on topics including sustainability, and that it has long reported its emissions to improve its practices. Hohn declined to be interviewed for this story.

Emotional Makeup

Hohn launched TCI and an affiliated charity, the Children’s Investment Fund Foundation, in 2004 after earning a reputation as a gifted stockpicker in the London office of Perry Capital, a New York-based hedge fund. His wife, Jamie Cooper, whom Hohn met at Harvard in the early ‘90s, ran the foundation, and they became a London power couple as TCI pumped money into the charity.

Thanks to Hohn, the foundation has $5.1 billion that it uses to fund programs such as strengthening nutrition for youngsters in deprived communities, protecting adolescents from slavery and human trafficking, and expanding pediatric HIV treatment in Africa. Hohn and Cooper regularly traded notes with Bill and Melinda Gates, and in 2012, David Cameron, then Britain’s prime minister, invited Hohn to speak at a summit on malnutrition at No. 10 Downing Street.

At TCI, the vibe was decidedly more mercenary. Hohn developed an investment strategy predicated on his own “personal, intellectual, and emotional makeup,” as he put it to Justice Jennifer Roberts, who presided over his 2014 divorce, which resulted in a £337 million settlement for Cooper. Hohn’s approach meant conducting meticulous analysis and searching for weak management teams that other investors avoid. “Think of it like the damaged goods department of a department store where you can get 80 to 90 per cent off because most people won’t buy,” Hohn said in a video interview with Institutional Investor magazine in 2013.

When he settles on a target, Hohn takes highly concentrated stakes; a single stock can account for more than 15% of his portfolio. Then he goes to work agitating for changes in the company’s strategy. In 2005, he took a sizable stake in Deutsche Boerse in Frankfurt to stop what he called a “value-destructive acquisition” of the London Stock Exchange. Rebuffed, he called on shareholders to remove CEO Werner Seifert and kill the deal. The board acquiesced, and after Seifert left the company, he characterized Hohn and other shareholder activists as locusts.

Hohn was the catalyst for one of the most disastrous banking deals in memory. In 2007, TCI bought 1% of ABN Amro and started calling for a sale of the Dutch lender. After stockholders supported TCI, ABN Amro was sold to a consortium led by Royal Bank of Scotland Group in the biggest European banking merger ever. TCI pocketed $1 billion, but the global financial crash of 2008 poleaxed the newly combined institution and led to its nationalization by the British government.

TCI has also exploited scandals such as the 2011 crisis at Rupert Murdoch’s News Corp. The company’s U.K. newspapers had hacked mobile telephones and voice mail accounts of celebrities, royals, and a murdered 13-year-old girl. As the media giant’s stock plunged, Hohn purchased almost $1 billion in shares. After News Corp. settled lawsuits in the affair, Murdoch bought back shares and broke up the company. The stock rallied over the next two years, earning a 57 per cent return for TCI—and, for Hohn, reinforcing his reputation as a gifted money manager.

Yet he has suffered defeats that show the limitations of his activism. In 2012, TCI sought to force Coal India, a state-controlled producer, to boost dividends and stop selling super-cheap coal to nearby power plants. But the government had little interest in seeing energy prices rise; in 2014, TCI gave up and bailed out of the stock, which had fallen 19% during the campaign. Four years later, the London Stock Exchange Group Plc spurned Hohn’s demands to oust its chairman and renew the CEO’s contract. After that effort was rebuffed, TCI sold most of its 5% stake in the company, only to see its shares almost double the following year.

Value vs. “Values"

Hohn is rolling out his green efforts as the asset management industry struggles to find a way to address climate change while delivering the kind of returns investors demand. Index fund giants have long used an investing style dubbed ESG—based on environmental, social, and governance criteria—but they maintain that investment stewardship is ultimately about maximizing value, not imposing social “values” on companies.

But amid mounting anxiety about record-breaking global temperatures, Larry Fink, chief executive officer of BlackRock Inc., acknowledged on Jan. 14 that climate change has become a “defining factor” in the long-term prospects of companies worldwide. BlackRock, the world’s biggest investment firm, with $7.4 trillion in assets, will start cashing out of firms with “high sustainability-related risk” and plans to make emissions a fundamental consideration in investments.

Tackling global warming will test Hohn’s approach as never before. First, he’s betting that companies will heed his demands, and then that he won’t dampen returns by destabilizing companies that reject them. In tying TCI’s fortunes to a climate change agenda, Hohn is wagering that the economic risks from the mounting crisis are so great that it would be foolish not to spur companies to get real on emissions.

“Green investing and hedge funds are not terms many investors would put in the same sentence,” says Marc de Kloe, a partner at Theta Capital Management in Amsterdam and an investor in TCI’s fund. “However, we have been proponents of the idea that hedge funds are in some way best suited to implement strong green policies, given their unconstrained nature and ability to deploy activist tactics.”

Climate change activists say it’s about time, given the confusion around ESG, which has become a megatrend in the investing world. More than $30 trillion was held in assets classified as sustainable or green in 2018, up more than a third from 2016, according to the Global Sustainable Investment Alliance, a group that tracks money flows.

But critics contend that ESG is often little more than a public relations gimmick to “greenwash” a firm’s credentials. There’s no standard definition of ESG, so it’s virtually impossible to compare companies against a universal benchmark. Moreover, subscribing to the approach doesn’t mean institutional investors will actually pressure portfolio companies to reduce emissions. In November, ShareAction, an advocacy group in London, released a study finding that Capital Group, T. Rowe Price, and BlackRock supported fewer than 7 per cent of the shareholder resolutions on climate risks in 2017 and 2018, even though they all subscribe to ESG.

While it might be odd to look to hedge funds for support in the fight against climate change, that’s where the story is going, says Catherine Howarth, CEO of ShareAction. “Historically, large institutional investors have encouraged companies to do the right thing in vague, bland terms, and the whole asset management field is finally waking up,” Howarth says. “Now we need activist investors like Chris Hohn to push like crazy for what they want.”

When investors look at public markets today, many see high current valuations, low expected returns and a likelihood of increased volatility. Against this backdrop, it’s little surprise that more than a few are increasing their focus on private markets, and on private equity specifically. Their interest is amplified by a shift in the public-private balance of company ownership. With more companies going private or staying private for longer, allocators who want to be invested in growth over the next decade have even more reason to consider private equity.

There are several ways for institutional investors to access private equity today, including the traditional route of being invested in GP/LP structures; co-investments alongside those structures; and secondary markets. As private equity matures and investors’ needs evolve, the need for innovation increases — setting the stage for a direct, flexible-hold strategy, aimed at better alignment among GPs, LPs, and portfolio companies to maximize value and capital appreciation.

This II interview with BlackRock’s Colm Lanigan, Co-Founder, Managing Director and Senior Investor, Long Term Private Capital, focuses on value creation in such a strategy, and is one of a three-part series on creating persistent alpha in private equity.

You are a founding partner of a flexible-hold private equity strategy. There’s a perception among some people that such a strategy is a form of hands-off, passive private equity ownership. Do you see it that way?

Not at all. There’s almost nothing passive about private equity. In the private markets there is much greater disparity across both scale and quality, so the whole screening process is, itself, active. In addition, fees are not the differentiator between alpha and beta in private equity. They’re part of it, but a much bigger part of alpha generation is the active management of the business, active governance, and value creation — regardless of the time frame, shorter or longer.

There have been approaches to longer-term investing in private equity that focused on asset selection as the number one indicator of earnings over a longer period, and then used the long holding periods to achieve something resembling private equity multiples, though not alpha. But those approaches have focused on assets that are infrastructure-like or on asset-intensive businesses with stable earnings, as opposed to businesses that can drive private equity IRR and multiples over long periods of time. There’s a big difference between the two, and the key to the latter is still active management of the business and active governance to drive return on invested capital (ROIC) and growth.

You’re an advocate of the importance of persistent private equity returns. What are the keys to achieving them?

I think what we’ve learned is that good companies often remain good companies as long as they are effectively managed. The business model matters – do they have a slightly better mouse trap? – as do other things, such as having better gross margins than their competitors. But it really comes down to superb management teams who think and act like company founders, and who unfailingly and unwaveringly focus on execution of the plan and the strategy that they know makes their companies successful. And part of that founder mindset is rigor around capital allocation. Favorable market positioning from differentiated business models, durable economics, and seasoned management teams with disciplined strategy execution are what drive ROIC, and those companies succeed for longer periods of time. Sponsors covet those types of companies because they know they have the potential to make them even more successful.

What do you see as the most important aspects of a value-creation plan?

Developing a value-creation plan begins with identifying the fundamental variables that drive the business’ success. You’re looking for no more than five such points that allow you to focus management practices and create continuing value. For example, operational excellence is one, and it’s a must-have for every successful business. Drivers of scale are another. Which elements of the business are on the right side of pervasive disruption is another, so you can focus your efforts on the greatest opportunities for growth. A final one should be your digital strategy — it’s imperative that it supports your day-to-day analytics so you can make the right decisions in an environment that’s moving faster, and is tougher to navigate, than ever.

When you focus on those few things that matter the most, you don’t overstretch your organization, and you can match capabilities with goals and incentives. People’s behaviors are shaped by incentives and associated performance metrics. If employees know that you are focused on — and measuring — the right things, and that’s how they’re going to be compensated from top to bottom in the organization, you have all the ingredients of success.

Are there any special considerations that come into play in a late-cycle climate?

Having managed through a couple of cycles, I would mention several.

You need to be careful about leverage, which instead of adding to your returns can very easily subtract from them when the cycle turns. And you have to be wary of deals that have a lot of execution risk — for example, from moving plants or expanding margins. If you haven’t built in a recession scenario, you’re probably playing with a little bit more risk than you anticipated. Looking left on the return curve — thinking about what could go wrong and factoring that into your due diligence and underwriting — is probably even more important right now than looking to the right.

In good times, extra volume through a business can hide a lot of inefficiencies and problems. It has been a little easier to take lower-confidence bets when you’ve had margin expansion due to 12 years of economic prosperity and growth that’s higher than trend. Multiple expansion has been a major driver of returns in the deals done since 2010. You’d be on shaky ground if you relied on that continuing. It may, but it’s less likely than before.

If it looks like the business will be tested by an economic trough, it is key to focus on the fundamental business variables that generate lasting value and to position for growth. That can help generate a couple of quick wins to build confidence throughout the organization and put you in a slightly better position going into what could be a tougher period.

A robust capital structure is a big plus. Private equity is a long option, and if you have a capital structure that can withstand some of the hiccups, you’ll come through the other side. I would focus a little more on the balance sheet in this environment, too. If you have enough capital available, you’re in position to be the consolidator of your weaker competitors over time.

Of course, human capital is perhaps the most important element of all. To achieve long-lasting success, there is no substitute for having the right people and forging the right partnerships.

Private equity executives at firms of all sizes are trying to figure out how to better attract and retain younger staff, resorting to tactics such as offering free lunches and relaxing their dress codes.

Sixty percent of private equity CFOs surveyed by EY said it was at least somewhat difficult to recruit millennial and Generation Z employees — and an even greater proportion found it challenging to retain such talent. The largest private equity firms, those with at least $15 billion in assets, appear to be struggling the most to keep younger employees around, with 82 percent reporting some level of difficulty in retention.

Given these challenges, the vast majority of surveyed executives told EY that they were taking action to better appeal to millennial and Gen-Z talent.

“With an aging workforce, advances in technology, and a constantly changing world, a strategic CFO has to be focused on attracting and retaining younger generation talent,” EY said in its report on the findings.

More than two-thirds of survey respondents said that they had improved their in-office amenities, offering for example free lunches or gym access. Other tactics employed by a majority of respondents included relaxing the office dress code, giving employees flexibility to work from home, and implementing health and wellness reimbursement programs. Meanwhile 45 percent said their firms were offering mentors or career coaching, and 36 percent had instituted formal career road maps or progression targets for employees.

“For smaller funds, which may not have the ability to make significant investments in amenities, more than 70 percent are providing their employees with the flexibility to work from home,” EY reported.

Beyond focusing on young talent, private equity firms have also prioritized diversity and inclusion, according to the EY report. Executives cited increasing gender representation as their top objective in talent management, followed by the goals of creating a more inclusive culture and increasing ethnic minority representation, the survey showed.

Among the surveyed firms, 88 percent said women held less than a third of their front-office positions. “This challenge is even more glaring among the mid-sized and largest firms, where fewer than 10 percent of firms report that they have more than 30 percent of their investment professional roles filled by women,” the report stated.

The back office had higher female representation, with women accounting for more than half of traditional finance function roles at 41 percent of the surveyed firms. However, that figure dropped to 27 percent at firms with assets above $15 billion.

Just under half of executives polled by EY said their firms had set targets for gender diversity, while another 10 percent planned to implement targets. A similar proportion of firms had either set targets or planned to target improvements in ethnic diversity, with the largest funds placing the most emphasis on hiring minorities.

Surveyed executives said they planned to increase the diversity of their firms by recruiting from a broader group of colleges and universities and establishing or increasing family planning policies such as parental leave. Other tactics included establishing diversity groups and adding or increasing health and wellness policies.

Developing a value-creation plan begins with identifying the fundamental variables that drive the business’ success. You’re looking for no more than five such points that allow you to focus management practices and create continuing value. For example, operational excellence is one, and it’s a must-have for every successful business. Drivers of scale are another. Which elements of the business are on the right side of pervasive disruption is another, so you can focus your efforts on the greatest opportunities for growth. A final one should be your digital strategy— it’s imperative that it supports your day-to-day analytics so you can make the right decisions in an environment that’s moving faster, and is tougher to navigate, than ever.

I am not current on the scope of OMERS investments where they are the sole investor, and sourced in the marketplace but I do know they did at least a few transactions like that, perhaps they have ramped up this activity considerably, probably by making a few very large investments.

I suspect it is quite likely this true direct activity is larger than you might expect, probably now the most significant of the large pensions. Whether successful of course takes some time and cyclicalities to know. But for example, I believe one of their disclosed US investments Caliber Collision was acquired from ONCAP, and has done quite well so far under the OMERS ownership.

It is not impossible to compete with the more intrusive ownership approach of the main buyout firms. You can just pay more, and combined with a lighter touch some companies will prefer an OMERS. Their teams headcount and backgrounds look suitable for direct investing of all flavors.

Jeff Cox of CNBC reports the stock market just set another record, this one going back to 1972:

The seemingly unstoppable U.S. stock market continues to set new records, with the latest standard a trend that hasn’t been beaten since 1972.

One gauge closely watched by traders is where the market is in relation to its moving averages, which track the market’s performance over various time periods.

In this case, FOREX.com looked at how many times the S&P 500 has closed below its 10-day moving average over the past 70 days, a time frame used because it entails the time since the Federal Reserve started expanding the bond holdings on its balance sheet.

The result is that the index has had just five such closings over the period, the lowest going back to 1972, or some 48 years, FOREX.com said, citing data from Quantitative Edges.

Fed officials have insisted that its latest round of bond buying is not like the quantitative easing it instituted during and after the financial crisis. Instead, the central bank has been conducting operations in the short-term repo market to keep its benchmark funds rate within the range the Fed uses as a target.

But stocks have risen almost perfectly proportionately to the expansion in the Fed’s balance sheet.

“By this measure, US stocks haven’t seen this consistent of a rally since most of us have been alive,” Matt Weller, global head of market research at FOREX.com, said in a note. “Of course, as any Statistics 101 student will tell you, correlation does not necessarily indicate causation, but given the remarkably reliable rally we’ve seen, US index traders should definitely be paying close attention to any changes in the Fed’s ‘Not QE’ schedule of repo purchases.”

Interestingly, I cited the same data from Quantifiable Edges (not Quantitative Edges) last week when I went over whether or not to fight the "Tepper" tape.

Anyway, it's Friday, time to cover markets again and this week we had several more hedge fund billionaires sharing their market views at Davos.

In a CNBC interview, Bridgewater founder Ray Dalio warned that 'cash is trash' (while Buffett sits on $128 billion cash). Dalio struck a similar chord at Davos two years ago, saying investors would "feel pretty stupid" if they hoarded cash. That turned out to be one of the worst short-term market calls in recent memory.

In another CNBC interview, Paul Tudor Jones said this market has "explosive upside" but warned that the new coranavisus could put a damper on things.

Given the global spread of the coranavirus (see live updates here), with the CDC just confirming a second US case and monitoring dozens of other potential cases, it's fair to assume markets can head south very fast if this virus isn't contained very soon.

Unfortunately, we simply don't know enough about this new virus yet and it's spreading fast. More worrisome, new fresh research published in the prestigious Lancet journal stating the new coronavirus can cause infections with no symptoms and sicken otherwise healthy people:

Two papers published Friday in the journal the Lancet offer some of the first rigorous analyses of patients who contracted a novel coronavirus that has broken out in China and spread to other countries. Among their discoveries: The virus does not only affect people with other, underlying health conditions, and people who are not showing symptoms can still be carrying the virus.

In one study, researchers analyzed data from the first 41 patients who were admitted to hospitals with confirmed cases of the infection in the central Chinese city of Wuhan, where the outbreak is believed to have originated last month. Two-thirds had been to a large seafood market that also sold wild animals for meat and is thought to be where the virus jumped from an animal source to people. The median age of the patients was 49.

The patients displayed a wide range of symptoms, many of which were similar to those caused by SARS, another coronavirus, which caused a global outbreak in 2002-2003 that started in China. All of them had pneumonia, and most had fever and cough.Some people had fatigue; rarer symptoms included headache and diarrhea. The researchers noted that patients with SARS more frequently had runny noses, sore throats, and diarrhea than those with the novel coronavirus, which is provisionally being called 2019-nCoV.

One key finding: It’s not only people with other health conditions that are getting sick, the researchers reported. Some of the fatal cases caused by the virus have been among people with underlying diseases like diabetes, liver disease, and hypertension, but the majority of the first 41 patients infected with the disease in Wuhan were healthy. The researchers noted that SARS infections similarly did not only affect people with other conditions.

About a third of the 41 patients needed intensive care, and six of them died. Some of the patients with more serious illnesses suffered from a dangerous immune system overreaction called a cytokine storm, but the researchers said they still did not have a good understanding of how the virus affects the immune system.

As of Friday, there were more than 830 cases of the coronavirus infection in China, with 25 deaths, and a handful of cases in places — including Thailand, Japan, South Korea, and the United States— that were in people who traveled to those countries from China.

The second paper focused on one family who came down with pneumonia in Shenzhen. Five family members had recently traveled to Wuhan and had the virus, as did one relative who had not traveled to Wuhan.

So far, authorities have only confirmed human-to-human transmission of the virus among families and in health care clinics — settings where people are likely to be in close contact with each other, according to the World Health Organization. This appears to be the case with the family that was studied. Still, health officials do not know exactly how efficiently the virus can pass among people.

One child with the virus did not show any symptoms. Health authorities have said that people with the virus have shown a range of symptoms, from very mild to very severe. But an asymptomatic infection raises the question of whether people have to be showing signs of the disease to pass it to people, a question that experts are rushing to answer.

“Because asymptomatic infection appears possible, controlling the epidemic will also rely on isolating patients, tracing and quarantining contacts as early as possible, educating the public on both food and personal hygiene, and ensuring health care workers comply with infection control,” Dr. Kwok-Yung Yuen from the University of Hong Kong-Shenzhen Hospital, who led the research, said in a statement.

In a commentary piece also published Friday by the Lancet, Dr. David Heymann, an infectious disease epidemiologist at the London School of Hygiene and Tropical Medicine, wrote that “the picture these two manuscripts paint is of a disease with a 3-6 day incubation period and insidious onset.”

The researchers who wrote the two papers and other experts cautioned that these were small studies with limited numbers of patients in a rapidly evolving outbreak. But they noted that sharing information like this as quickly and rigorously as possible can help shape the response.

“The information in these articles are pieces of the jigsaw puzzle that are being fit together by WHO as it continues to collect official reports and informal information from its virtual groups of national clinicians, epidemiologists, and virologists working at outbreak sites and brought together from around the world,” Heymann wrote. “When pieced together, these emerging data will permit regular refinement of the risk assessment, and real-time guidance to countries for patient management and outbreak control, including the best case definition for use in surveillance around outbreak sites and elsewhere.”

 

Bruc Iberia Energy Investment Partners has acquired from Solarpack two solar photovoltaic power plants under construction in Spain with a combined capacity of 100 MW. The plants represent a total investment of 65 million euros and have a project finance in place from Banco Sabadell.

The two 50 MW plants are located in Alvarado-La Risca, a town in the municipality of Badajoz (Extremadura region). Both plants are currently under construction and anticipated to become fully operational in the third quarter of 2020. Together, they will avoid an estimated 53,000 tons of CO2e annually, and provide enough electricity to power the equivalent of almost 40,000 homes. The plants have been developed by Solarpack who will continue to manage the projects throughout construction and operations. The sale of the energy is secured by a Power Purchase Agreement (PPA).

This is the first investment in Spain made by Bruc Iberia Energy Partners, with shareholders including Juan Béjar, OPTrust and Green Investment Group. Bruc Management, also led by Juan Béjar, advised and managed Bruc Iberia Energy Partners. Macquarie Capital is acting as financial advisor.

Morgan is a Managing Director within OPTrust’s Private Markets Group and the head of OPTrust’s London office. Morgan has responsibility for European private equity and infrastructure investment. Morgan has worked across North America, Europe and Asia as a principal investor. The OPTrust Private Markets Group has a global mandate to invest $6 billion of OPTrust’s assets in private equity and infrastructure. Prior to joining OPTrust in 2007, Morgan worked in investment banking for CIBC World Markets. 

With net assets of almost $20 billion, OPTrust invests and manages one of Canada's largest pension funds and administers the OPSEU Pension Plan, a defined benefit plan with almost 95,000 members and retirees. OPTrust was established to give plan members and the Government of Ontario an equal voice in the administration of the Plan and the investment of its assets, through joint trusteeship. OPTrust is governed by a 10-member Board of Trustees, five of whom are appointed by OPSEU and five by the Government of Ontario.

OPTrust's private markets program was launched in 2005 to build diversified private equity and infrastructure portfolios. The team was recruited internationally and seeks to construct well diversified portfolios across investment strategies, geographies, investment vehicles, partner base and sectors.

In 2018, private equity accounted for 11.5% of OPTrust’s total plan assets, committing to 10 new investments, totaling $434 million, as well as funding ongoing growth and expansion initiatives in various portfolio companies. OPTrust’s private equity portfolio generated a net return of 15.7% for the year.

Infrastructure accounted for 12.4%. of OPTrust’s total plan assets in 2018. As asset valuations have remained elevated in a record year for fundraising within the asset class, OPTrust found better value in smaller scale opportunities and establishing platforms to pursue them. In 2018, OPTrust completed six new transactions in this space, totaling $569 million, and generating a net return of 9.9%.

Bruc Management is a investment fund manager specializing in the renewable energy infrastructure sector. We currently invests in solar photovoltaic assets in Spain and Japan. Bruc’s main objective is to originate investment opportunities that imply attractive returns by generating value through a disciplined approach and selective investment criteria.

The main shareholders of Bruc are its own management, led by Juan Béjar, Macquarie Capital and OPTrust.

Vision

Bruc considers that an energy transition towards a decarbonized economy is urgently required. Part of this transition rests on the development of clean energy, with growing contribution from this sector to the energy mix. The mission of Bruc is to generate attractive investment opportunities in the renewable energy industry with the aim of contributing to the sustainability of energy supply systems and to significantly reduce their environmental impact.

Spain will have to exert itself if it wants to meet the expectations included in the Global Market Outlook For Solar Power 2019/2023 by Solar Power Europe, an organization that represents more than 200 members from different parts of the industry value chain of solar energy. This study points out that, in an average scenario, Spain will have an installed solar energy power of 19,452 MW in 2023, compared to the 5,915 registered at the end of 2018. This figure represents a compound annual increase of 34%.

It is true that winds drive growth. The European Union was one of the first promoters of clean energy by setting ambitious energy and climate goals: 20% reduction in greenhouse gas emissions, 20% renewable energy and 20% increase in efficiency energy by 2020. The countries of the Union thus illuminated a path that boosted investment in infrastructure, research and innovation. It was a call to action that has now been imitated by other countries around the world.

With the Paris Agreement, the EU has pledged to continue moving forward and achieve a reduction in greenhouse gas emissions of at least 40% by 2030. To respond to this challenge and continue to lead the global energy transition, the EU has adopted a set of new ambitious standards, defining the legislative parameters for the coming years. This new framework is called the “Clean Energy for all Europeans” Package.

This is the world’s most advanced legislative package to transform the energy sector and decarbonize the economy: a new renewable energy target of at least 32% binding in the EU and a new main EU energy efficiency target of at least 32.5%. Both objectives include the possibility of a new upward revision in 2023. When fully implemented, they could lead to a reduction in greenhouse gas emissions in the EU of around 45% in 2030. Solar energy plays an important role in achieving these ends.

Spanish legislation is aligned with the EU’s commitment, although it has to refine some processes to achieve the proposed objectives. Thus, in the field of solar energy, the National Energy and Climate Plan (PNIEC) for the period 2021-2030 proposes the installation of an average of 3 GW of new photovoltaic power per year, beginning 2021, to reach a total of 28,000 MW of new installed photovoltaic power. This objective involves an investment of 28,000 million euros.

One deciding factor will be technology maturity. Proof of this is that photovoltaic energy has reduced its costs up to 95% in the last decade, a cut that allows it to be competitive in market conditions and that, together with terrestrial wind energy, is the main tool to decarbonize the production of electricity in Spain.

1. Provide long-term, stable assets which provide a steady source of income going out over 30 years (better duration match with OPTrust's long dated liabilities).
2. Spain benefits because of its climate
3. Solar is a low level cost of energy
4. Created certainty of cash flows through Power Purchase agreement (PPA)

Owen Clark of the Financial Times reports that a large UK pension scheme is threatening managers over climate risk:

One of Britain’s largest pension schemes has given its 130 asset managers a two-year deadline to reduce their exposure to climate change or risk being fired.

Brunel Pension Partnership, which manages £30bn on behalf of 700,000 members and 10 government bodies, also threatened to vote against directors at the companies it invests in and divest if they do not demonstrate significant progress on managing climate risk by 2022.

“Climate change is a rapidly escalating investment issue,” said Mark Mansley, chief investment officer at Brunel, which manages the retirement schemes for nine local authorities and the government’s Environment Agency.

“We found that the finance sector is part of the problem, when it could and should be part of the solution for addressing climate change. How the sector prices assets, manages risk and benchmarks performance all need to be challenged.”

Brunel’s move comes at a time of heightened pressure on fund managers and financial groups over their role in financing companies that contribute to climate change. Discussions about the environment dominated last week’s annual get-together of political and business leaders at the World Economic Forum in Davos.

Lauren Peacock, campaign manager at ShareAction, the lobby group, said she expected more pension funds to take a tougher stance with their investment managers.

“All asset owners should now be scrutinising their managers’ voting record on climate issues and giving mandates to smarter, more responsible asset managers,” she said. “We fully expect this to become the new normal.”

Last year Japan’s $1.5tn Global Pension Investment Fund withdrew a large mandate from BlackRock over its lack of action on environmental, social and governance issues. The New York manager has since refocused its attention on climate risk.

On Monday, Brunel unveiled a new climate policy, which includes a five-point plan aimed at building a financial system that is fit for a zero-carbon future.

Under the plan, the pension provider said it would stress-test its portfolios under a range of climate scenarios. It will also challenge its investment managers to demonstrate reduced exposure to climate risk and show they have engaged with the companies they invest in to meet goals set by the Paris Agreement.

“Now is the time for everyone in the finance sector to show leadership in response to the climate emergency,” said Emma Howard Boyd, chair of the Environment Agency. “As investors we have a responsibility to our beneficiaries to ensure the assets entrusted to us are resilient to climate risks.”

Brunel was created in 2017 and is one of eight national pooled pension funds. Its members include the local authority pension funds of Avon, Buckinghamshire, Cornwall, Devon, Dorset, Gloucestershire, Oxfordshire, Somerset and Wiltshire.

On Monday, Brunel Pension Partnership put out a press release calling the finance sector 'not fit for purpose' for addressing climate change:

Brunel Pension Partnership, one of eight pooled Local Government Pension Scheme funds across the UK, has set out a groundbreaking new approach to managing climate-related financial risk. Its new climate policy, published today, commits Brunel to using its influence to challenge the asset manager industry, which it describes as “not fit for purpose” for addressing climate change.

Brunel’s new policy – ‘A five-point plan to build a financial system which is fit for a carbon-zero future’ – builds on insights gained in the course of procuring new asset managers for its 10 LGPS clients. Brunel engaged 130 asset managers and reviewed 530 investment strategies from a climate perspective.

Chief Investment Officer Mark Mansley said,

“Climate change is a rapidly escalating investment issue. We found that the finance sector is part of the problem, when it could and should be part of the solution for addressing climate change. How the sector prices assets, manages risk, and benchmarks performance all need to be challenged.”

Some of the practical implications of the policy state that between now and 2022, Brunel will demand that their material holdings take steps to align their emissions with Paris benchmarks and improve their climate management quality.

Those that fail to do so will face the threat of votes against the re-appointment of Board members, or being removed from Brunel’s portfolios when the partnership carries out a stocktake of its policy’s effectiveness in 2022.

Equally, Brunel will challenge their investment managers to demonstrate reduced exposure to climate risk and effective corporate engagement that puts companies and portfolios on a trajectory to align with a 2°C economy. Managers that fail to do so face the threat of having their mandates removed.

Chief Executive Officer Laura Chappell said,

“Our clients have high ambitions on climate change, but the finance sector does not currently offer a sufficient range or quality of climate-aware products and expertise across all asset classes to meet their needs. We want to enable our clients to integrate climate change mitigation and adaptation across their investment strategies in a substantive way.”

Chief Responsible Investment Officer Faith Ward said,

“We have a climate emergency on our hands and it would be irresponsible of us to accept the status quo. We need to systematically change the investment industry in order to keep temperature rise to well below 2°C.”

Specific challenges within the finance sector identified by Brunel include:

• An emphasis on short-term rather than long-term performance, which drives short-term thinking by investors and companies
• An unwillingness by asset managers to invest in the low carbon economy, especially in areas which depend on public support or where technologies are perceived to be unproven
• Backward-looking investment risk models that are inherently flawed at taking future climate risk into account
• Instances of perverse incentives and conflicts of interest throughout the system – not least, the use of conventional market-weighted benchmarks to measure performance, when climate risk is not adequately priced by the market

A five-point plan to build a financial system which is fit for a carbon-zero future

Brunel already conducts carbon footprints of its listed equity portfolios and allocates 35% of client infrastructure portfolio investments to renewable energy funds. Building on these strong foundations, its new policy commits the partnership to taking action as follows.

• Policy– Brunel will encourage policymakers to adopt policies such as a meaningful price on carbon and removal of fossil fuel subsidies.
• Products– Brunel will identify product areas where there is client demand for more innovative products, and invest in their development.
• Portfolios– Brunel will stress-test its portfolios under a range of climate scenarios. It will challenge its investment managers to demonstrate reduced exposure to climate risk and effective corporate engagement that puts companies on a trajectory to align with a 2°C future. Managers that fail to do so will be replaced.
• Positive Impact– Brunel will report on the proportion of its portfolios invested in the low-carbon transition and on how its portfolios align with the goals of the Paris Agreement.
• Persuasion– Brunel will engage with its material holdings to persuade them to improve their climate management quality, using the Transition Pathway Initiative assessment framework. It will ask its material holdings to advance at least one level on the TPI management quality staircase each year, with the aspiration of all material holdings being on TPI Level 4 by 2022. In cases where companies fail to show progress, Brunel will vote against the reappointment of the Chair and other board members.

In the course of developing this policy, Brunel undertook an exhaustive consultation process with its clients and other stakeholders in the local government finance sector. Those clients are now showing their support, with Wiltshire Pension Fund today announcing that it has allocated approximately 20% of their assets into Brunel’s Low Carbon Passive Equity portfolio.

Emma Howard Boyd, Chair of the Environment Agency – whose pension fund is a Brunel client– said,

“Now is the time for everyone in the finance sector to show leadership in response to the climate emergency. The Environment Agency Pension Fund was one of the first pension funds to recognise the financial risks from climate change. As investors we have a responsibility to our beneficiaries to ensure the assets entrusted to us are resilient to climate risks. I’m delighted to join with partners across the Brunel Partnership in calling for an investment industry fit for a net zero future.”

Tony Bartlett, Head of Business Finance & Pensions at Avon Pension Fund, another of Brunel’s 10 clients, also voiced support for the policy, saying,

“This groundbreaking policy sets out ambitious expectations for our investment managers and assets, which will enable us to protect our beneficiaries’ pensions well into the future. And it demonstrates the power of partnership – within the Brunel pool and beyond – that will be required to respond effectively to the financial risks posed by climate change.”

Note: The criteria for decisions to vote against board members, exclude companies or remove mandates from investment managers will be established in partnership with Brunel’s clients over the next 12 months.

About Brunel Pension Partnership Limited

Brunel Pension Partnership Limited (Brunel) brings together circa £30 billion investments of 10 likeminded Local Government Pension Scheme funds. We believe in making long-term sustainable investments supported by robust and transparent process. We are here to protect the interests of our clients and their members. In collaboration with all our stakeholders we are forging better futures by investing for a world worth living in.

Brunel is one of eight national pooled funds and manages the investment of the pension assets for the funds of Avon, Buckinghamshire, Cornwall, Devon, Dorset, Environment Agency, Gloucestershire, Oxfordshire, Somerset and Wiltshire. Find out more at www.brunelpensionpartnership.org

1. Policy– Brunel will encourage policymakers to adopt policies such as a meaningful price on carbon and removal of fossil fuel subsidies.
2. Products– Brunel will identify product areas where there is client demand for more innovative products, and invest in their development.
3. Portfolios– Brunel will stress-test its portfolios under a range of climate scenarios. It will challenge its investment managers to demonstrate reduced exposure to climate risk and effective corporate engagement that puts companies on a trajectory to align with a 2°C future. Managers that fail to do so will be replaced.
4. Positive Impact– Brunel will report on the proportion of its portfolios invested in the low-carbon transition and on how its portfolios align with the goals of the Paris Agreement.
5. Persuasion– Brunel will engage with its material holdings to persuade them to improve their climate management quality, using the Transition Pathway Initiative assessment framework. It will ask its material holdings to advance at least one level on the TPI management quality staircase each year, with the aspiration of all material holdings being on TPI Level 4 by 2022. In cases where companies fail to show progress, Brunel will vote against the reappointment of the Chair and other board members.

Truvalue Labs, which analyzes AI-driven environmental, social and governance (ESG) data, has been appointed by the UK’s Brunel Pension Partnership to evaluate the ESG and reputational risks across all Brunel’s managers and their holdings for listed equities and bonds.

Brunel was the first of the Local Government Pension Scheme, or LGPS, funds to become a signatory to the UN-supported Principles for Responsible Investing (PRI) and has, in partnership with its client funds, “embedded ESG considerations into all of its decision-making processes,” says Faith Ward, chief responsible investment officer, Brunel Pension Partnership. “Responsible investment is central to how Brunel fulfils its fiduciary duty."

“We appoint managers that share the view that concentrating on the fundamental long-term performance of businesses, which includes the integration of risks, is most likely to deliver a successful long-term performance outcome,” says Ward.

Of Truvalue Labs, Ward comments, “We like the objectivity of Truvalue Labs’ data that isn’t dependent upon what companies publish about themselves. Their timely material ESG data helps us to continually monitor the managers in our client partners funds and to evaluate and select new managers.”

Truvalue Labs leverages its powerful Truvalue AI engine to process vast amounts of data in seconds and score companies on key measures. For example, the Insight score ranks ESG behaviour at a given point in time, and the momentum score shows the company’s trajectory of ESG performance – whether it is improving or declining.

“It can be difficult to find data that captures the ups as well as the downsides, but Truvalue Labs covers both positive and negative aspects of companies’ ESG track records,” says Helen Price, assistant investment officer at Brunel.

“We think that this combination of the long-term and momentum is a strength over other tools that may just be using a single rating,” Ward says. “We evaluated a number of providers on the market and concluded that Truvalue Labs had the tool we wanted as a primary source, both for communicating with managers and for evaluating the risks in our portfolios,” she concludes.

Pension funds and endowments have been the backbone of the hedge fund industry for much of the past decade. But many of these institutional investors are now turning away from the $3tn-in-assets sector, dismayed by high fees and relatively lacklustre returns.

“We got out of most of the hedge fund portfolio,” said Scott Wilson, chief investment officer of the $8.9bn endowment fund at the Washington University in St Louis, Missouri. “We don’t want any investment just for the sake of having that investment.”

Since Mr Wilson’s appointment two years ago the fund has slashed its allocation to hedge funds from about 20 per cent of the portfolio to little over 10 per cent. He plans to rebuild that share to about 15 to 20 per cent over time, but will do so cautiously. “It’s not that all hedge funds are bad, but you have to be very careful in the selection process,” he said.

The reshuffle comes after years of largely uninspiring performance from the hedge fund sector. Managers have underperformed the S&P 500 stock index every year since 2009, both in rising and falling markets. Last year provided hedge funds with their best returns in a decade, but they were still well behind the market.

The current bull run in stocks — the longest in history — has increased the appeal of tracker funds, which charge much less than hedge funds. Interest in private equity and debt has also boomed as investors have looked beyond expensive public markets for opportunities.

Mike Powell, head of the private markets group at London-based USS Investment Management, which manages the £68bn Universities Superannuation Scheme, said it had reduced its hedge-fund holdings to less than 2 per cent of assets, from 4 per cent five years ago.

The pension fund is also planning to further reduce the number of hedge fund positions “to focus only on those that offer strategic alignment with our investment priorities and clear value-for-money”, said Mr Powell. The key problem with respect to hedge funds has been “the continued disappointing performance . . . at a time when fees have remained high”, he said.

UK local authority pension funds, including West Yorkshire Pension Fund and Hampshire Pension Fund, are also turning away from the sector. Hampshire is selling out of a hedge fund portfolio with Morgan Stanley, in favour of a private debt mandate with JPMorgan.

“The current low volatility environment has made it difficult for hedge funds to perform and, as a result, [investors] are asking questions on how they allocate in a way that they previously did not,” said Dan Nolan, a director at Duff & Phelps, a professional services group.

Tracking institutional investors’ appetite for hedge funds is tricky. Investors in aggregate pulled $43bn from hedge funds last year, their second-highest withdrawal since 2009, after $38bn of withdrawals in 2018, according to data group HFR.

Since 2015, the share of total hedge fund assets coming from public and private sector pension funds, endowments, foundations and insurance companies has slipped from 71 per cent to 67 per cent, according to data from the Alternative Investment Management Association, a London-based body.

Any sign that institutional investors are moving out en masse would be a blow for a hedge fund sector that has grown dependent on their cash, after many wealthy investors and private banks pulled back during the credit crisis.

“It is true there has been a waning of interest over the past two years,” said Jack Inglis, AIMA’s chief executive. “However, recent investor surveys suggest that sentiment for 2020 has turned positive and institutional investors are stating an intention to increase their allocations once again.”

The data are not conclusive. A Deutsche Bank survey early last year of investors with $1.7tn in hedge fund assets found that 42 per cent of pension funds had increased their exposure, while just 14 per cent reduced it.

However, an EY study, based on 62 interviews with investors managing $1.8tn in assets, found that institutional investors’ allocation to hedge funds had dropped to 33 per cent of their alternative investments last year from 40 per cent in 2018.

Some big-name institutions had already pared back their allocations. In 2014, US public pension fund Calpers said it would stop investing in hedge funds, while the following year Dutch pension fund PFZW said it had “all but eradicated” its hedge fund positions.

Others are considering similarly radical measures, after two years of losses in the past five. “There’s a very strong recency bias in all investment decisions,” said Sanjiv Bhatia, who runs the Pembroke Emerging Markets hedge fund in London and previously managed emerging-markets portfolios for Harvard’s endowment.

“People chase returns, and it’s no different at the top of pension funds,” he said. “People up there are not more visionary.”

I've never met John Paulson. I have met other hedge fund titans like Ray Dalio and discussed deflation and deleveraging with him long before Bridgewater jumped on that bandwagon.

But even though I've never met Paulson, I can tell you that I always thought his fame and status was grossly inflated by the media, allowing him to gather billions in assets. Now that he's struggling, his publicized woes will work against him.

Look, Paulson wasn't alone to profit big time off the 2008 financial crisis. One of my favorite hedge fund managers, Andrew Lahde, returned 866% betting on the subprime collapse and then had the foresight to walk away and say goodbye.

Paulson decided to stick around. His life, his prerogative, I don't fault any man who wants to continue earning a living doing what he loves best.

But I will tell you Paulson's rise and fall is nothing new. I've seen it many times before. Typically, hedge funds have a great track record, or an incredible year, consultants and brokers start spreading the word to institutional investors and in no time assets under management explode up.

That's when your antennas should go up and you need to start thinking of pulling out. Whenever I see assets explode up, from $5 billion to $40 billion, I pay very close attention because it usually spells trouble ahead.

That's exactly what happened with Paulson. He was riding the coattails of his outsized returns, assets under management mushroomed and returns subsequently faltered. Seen this so many times and yet the institutional herd keeps piling onto yesterday's winners like moths to a flames.

It's all part of human nature. Nobody wants to hold losers in their portfolio. Only winners. But in the game of hedge fund investing, the easiest thing is to write a big fat cheque to some well known hedge fund. Much harder to know when to pull the plug and when to allocate more to a struggling manager.

[...] my best advice for 2020 is stick with Griffin and Cohen but also increase exposure to Izzy Englander’s Millennium and Dmitry Balyasny’s Balyasny Asset Management as they tend to outperform in tougher markets (on a risk-adjusted basis and not always the case).

• Too much money investors chasing alpha leads to a lot of crowded trades among top funds. All the top hedge funds are all playing in the same trading field and all are managing their liquidity risk very closely.
• Long bond yields have plunged and along with them, returns are coming down.
• The Fed and other central banks have flushed the financial system with excess money and keep doing so, effectively making beta great again. This has led to the rise in passive investing and has made in exceedingly difficult for hedge funds which used to profit off of major dislocations (lack of trends in major markets).
• Investors are tired of paying excessive fees to hedge funds especially if they're underperforming in up and down markets.In a low-rate, low-return world, it becomes much harder justifying 2 & 20 or even 1 & 15.
• Investors prefer illiquid alternatives like real estate, private equity, infrastructure and private debt over liquid alternatives (hedge funds) because they can scale into them and get better alignment of interests over the long run.

Following a thorough and rigorous selection process, the Board of Directors of Caisse de dépôt et placement du Québec (CDPQ) has appointed Charles Émond as President and Chief Executive Officer. In accordance with CDPQ’s incorporating act, the appointment was made by CDPQ’s Board of Directors and approved by the Government of Québec today. His appointment takes effect on February 1, 2020.

Charles Émond is currently Executive Vice-President, Québec, Private Equity and Strategic Planning at CDPQ, which he joined in February 2019 after nearly 20 years at Scotia Bank. In addition to leading the Québec investment strategy, he heads the Private Equity (Québec and International) teams, which include direct and indirect investments in nearly 800 companies. He also leads CDPQ’s annual strategic planning process.

When he left Scotia Bank, he was based in Toronto as Global Head, Investment Banking and Capital Markets, and Head of Canadian Corporate Banking. In these roles, he oversaw a team of over 500 professionals in Canada, the United States, Europe, Asia and Latin America. At the same time, he continued to lead Scotia Capital’s Québec activities, serving as the bank’s most senior representative to world-class companies and their various stakeholders. See Charles Émond’s complete biographical notes

“For over 25 years, Charles has acquired extensive international experience and a deep understanding of Québec’s companies and business community. As a leader, he is recognized for his sound judgment, his technical and managerial abilities and for his communications skills. A seasoned negotiator, Charles has demonstrated throughout his career that he can successfully conclude complex and major projects by mobilizing his teams and managing stakeholder relationships with a long-term perspective.This rich combination of experience and skills led to the Board’s decision,” said Robert Tessier, CDPQ’s Chairman of the Board.

“I am very pleased that he has agreed to steer CDPQ through the next stage of its evolution and continue building an organization that is even more solid and resilient,” he added.

“Leading CDPQ is a challenge that I am incredibly proud and greatly humbled to accept. I also accept it with confidence, because I know I can count on the expertise and immense talent of our teams. CDPQ is a unique institution with a distinctive signature, as it plays a key role in our economy and exports its investment know-how around the world, to the benefit of Quebecers,” said Charles Émond. “I want to continue building this organization to firmly position it to face the major challenges of our time, including developing our economy for tomorrow and investing sustainably while generating returns for our depositors in the future.”

“On behalf of my colleagues on the Board of Directors and all CDPQ employees, I would like to once again thank Michael Sabia for his vision and profound dedication, which have made CDPQ what it is today,” concluded Mr. Tessier.

Caisse de Depot et Placement du Quebec picked an insider and banking veteran to lead Canada’s second-largest pension fund manager in an era of low-interest rates and trade tensions.

Charles Emond, 47, who oversees private equity and the fund’s investment strategy in Quebec, will start as chief executive officer and president on Feb. 1, the Montreal-based Caisse said on Wednesday. He is taking over from Michael Sabia, 66, who oversaw a near tripling of assets to more than C$326 billion ($247 billion) and pushed into overseas markets and climate-conscious investing during his 11-year tenure.

“I want to continue building this organization to firmly position it to face the major challenges of our time, including developing our economy for tomorrow and investing sustainably while generating returns for our depositors in the future,” Emond said in a statement.

Emond, who worked at Bank of Nova Scotia for almost two decades before joining the Caisse last year, represents the latest shift in the changing of the guard at Canadian pension funds. Blake Hutcheson will take over as the new head of Ontario Municipal Employment Retirement System in June, following the appointment of Jo Taylor as the head of Ontario Teachers’ Pension Plan, who succeeded Ron Mock who retired Jan. 1.

“Over the course of his more than 18 years at Scotiabank, he proved to be a strong banker, leader and relationship manager with a clear focus on clients and results,” Brian Porter, CEO of Scotiabank, said in a statement.

Tasked with a rare twin mandate of generating optimal returns while contributing to Quebec’s economic development, the new CEO will need to navigate the geopolitical risks that have roiled markets --from U.S. tensions with China and Iran to the coronavirus--as well as the intricacies of provincial politics. His appointment was vetted by the government.

Scotiabank Background

Lower-for-longer interest rates have pushed pension funds and asset managers to cast their nets far and wide in search for returns. Emond inherits an institution that has 64% of its funds invested in global markets, against 36% when Sabia took over in 2009.

That diversification, combined with investments in low volatility assets such as private equity and real estate, helped drive annual returns of 9.9% over the past 10 years.

Emond, who led Scotiabank’s 2018 acquisition of Jarislowsky Fraser Ltd., joined the Caisse about a year ago and was given increased responsibilities in November. While independent, he will need to define a working relationship with the nationalist government of Premier Francois Legault, who has vowed to increase wealth in the province of 8.5 million and preserve head offices.

In a May interview with La Presse, Emond said the institution’s dual mandate was “an interesting challenge.” Protecting head offices doesn’t just happen defensively at the time of a transaction, but also offensively when helping local companies expand or modernize, he said.

Unique Role

As a shareholder in a slew of Quebec-based companies, La Caisse can be a key player in the economic landscape. Last year it publicly lost patience with struggling engineering company SNC-Lavalin Group Inc. The fund’s 30% stake in ailing Bombardier Inc.’s train unit could prove decisive for the company as it considers asset sales. Emond has a seat on the unit’s board.

The Caisse plays a unique role in Quebec, where many feel ownership of the institution that manages their savings. It was set up by the government in 1965, during a period of deep changes known as “the quiet revolution” that saw the province take steps to gain greater autonomy on everything from education to natural resources.

In a November speech, Sabia shared that people regularly walk up to him at the grocery store or at restaurants to thank him. But the Caisse is under close scrutiny by politicians and local media, including on its recent efforts to design, build and operate a public transit system for the first time -- a light rail in Montreal.

Sabia is leaving to head up the Munk School of Global Affairs and Public Policy at the University of Toronto.

“In Quebec, the Caisse president is almost a public persona,” said Michel Magnan, a Concordia University professor in Montreal who specializes in governance. “There’s a political dimension to the job.”

Anyway, the Caisse's Board of Directors has come to a decision to appoint an experienced internal candidate to succeed Michael Sabia.

I can't say I'm surprised as I think this is a very logical and excellent decision, one I publicly supported. Also, I ran into Michael Sabia over the holidays at an event we were both invited to and he told me even though he didn't know who the Board will choose, he was certain “it would look at all external and internal candidates”.

Read between the lines. There's no doubt in my mind Sabia recommended Macky Tall to Robert Tessier and the Board knew him well so they chose "continuation" rather than risk bringing in someone new from the outside.

Sabia has been carefully grooming Macky for this position and I'm sure his position was transmitted to board members even if he wasn't part of the selection process. He might have also leaked this story to the media to get public opinion on Macky Tall's side, and if that's the case, it seems to be working.

If Macky Tall is nominated to this position, he will have to polish his PR game, get more comfortable under the limelight and accept a lot of political nonsense which will come his way. Quebec's media are ruthless and always have an angle to play. A guy like Louis Vachon would decapitate journalists who report nonsense and ask irritating questions. Like Sabia, he doesn't put up with nonsense. Macky Tall is more reserved and soft-spoken but he needs to be tough when the media aren't reporting the facts accurately (which happens often when it comes to the Caisse).

Now, as the article above mentions, this isn't a done deal. Quebec's Premier and Minister of Finance will need to sign off on it which they should do. Going against the board of directors to place someone else would be a disastrous decision and make the governance of the Caisse the laughingstock of the international financial community.

But this is Quebec and Quebec is fraught with terrible political decisions so it ain't over until the fat lady (or fat premier) sings.

As far as Charles Émond, the Head of Quebec and Global Private Equity, I'm sure he's highly qualified but in my opinion, he has to be there at least ten years before he can assume the role of President & CEO. Nobody likes when "superstars" who haven't earned their stripes are parachuted in and quickly catapulted to the top job, it's simply not right and sends the wrong signal to employees at the Caisse.

Don't know the guy personally but here are my comments:

1) Legault picked him because he is in line with the CAQ position that CDPQ must help Quebec Inc. to remain in Quebec.

2) Recall that Macky Tall is in charge of the REM project. As I recall, the CAQ was not in favor of this project. The REM is perceived by some Caquistes as being a project for the West Island, and not for East of Montreal.

3) Nobody wanted Bourbonnais at CDPQ because of the mess he left behind at PSP.

Félicitations à Charles Emond! Un leader stratégique qui dirigera l’évolution de la Caisse vers de nouveaux sommets d’excellence. #polqc#cdpq

— Eric Girard (@EricGirardMFQ) January 29, 2020

C’est officiel: c’est le banquier Charles Émond qui succédera au président et chef de la direction de la Caisse de dépôt et placement du Québec https://t.co/3LE0rf2Jgbpic.twitter.com/L07CgWwbqt

— TVA nouvelles (@tvanouvelles) January 29, 2020

Pour les entreprises québécoises, «la meilleure défensive, c'est l'offensive» dit le nouveau pdg de la Caisse Charles Émond. https://t.co/cbIC8ribnf

— Gérald Fillion (@geraldfillion) January 30, 2020

Charles Émond à la tête de la Caisse de dépôt :

«J’aime me décrire comme quelqu’un qui a évolué dans le service à la clientèle. [...] Je suis ouvert, j'aime parler aux gens et offrir des solutions»- Charles Émond, nouveau patron de la Caisse de dépôt et placement du Québec pic.twitter.com/1Z2gCr5GNh

— Patrice Roy (@PatriceRoyTJ) January 29, 2020

Protéger les fleurons du Québec:

«C’est une initiative de tous les jours de défendre et encourager nos entreprises à croître. [...] Mais il faut aussi en créer de nouvelles [...] les aider à se mondialiser» - Charles Émond, nouveau patron de la Caisse de dépôt et placement pic.twitter.com/J9O1jbds6K

— Patrice Roy (@PatriceRoyTJ) January 29, 2020

La mission de la Caisse de dépôt:

«Il y a un consensus [sur] ce double mandat de la Caisse, les rendements et le développement économique qu’on met en opposition. [...] Mais pour moi, ils vont de pair» - Charles Émond, nouveau patron de la Caisse de dépôt et placement du Québec pic.twitter.com/q8Hx2riptJ

— Patrice Roy (@PatriceRoyTJ) January 29, 2020

Le projet du REM:

«C’est un projet structurant pour Montréal et pour le Québec, ça redéfinit toute la mobilité durable dans la ville. Alors pour moi, ça vient exactement dans ce double mandat [de la Caisse]»- Charles Émond, nouveau patron de la Caisse de dépôt et placement pic.twitter.com/d0PaysXLE7

— Patrice Roy (@PatriceRoyTJ) January 29, 2020

La Caisse et la transition énergétique:

«La question de l’investissement durable est intégrée dans l’ADN de l’organisation. [...] Mais il s’agit de le faire progressivement, continuellement, de façon intelligente»- Charles Émond, nouveau patron de la Caisse de dépôt et placement pic.twitter.com/H0oRPmlUdt

— Patrice Roy (@PatriceRoyTJ) January 29, 2020

Stocks fell sharply on Friday, wiping out the Dow Jones Industrial Average’s gain for January, as investors grew increasingly worried about the potential economic impact of China’s fast-spreading coronavirus.

The Dow dropped 524 points, or 1.8%, after Delta and American suspended all flights between China and the U.S. United Airlines announced similar measures later in the day. The S&P 500 was down 1.5% while the Nasdaq Composite dipped 0.9%.

The major averages hit their lows of the day as the New York Daily News reported New York City’s first coronavirus case. CNBC could not confirm the report. Stocks bounced after the Daily News updated the report to show the case was not confirmed.

Stocks dropped even as Amazon surged 8.6% to a $1 trillion market value, joining an elite club shared only by Apple, Microsoft and Alphabet.

Ilya Feygin, senior strategist at WallachBeth Capital, noted traders were unwinding equity positions added on Thursday and in overnight futures trading after the World Health Organization didn’t recommend a travel restriction on China while sentiment got a boost from Amazon’s earnings report.

But now “there’s fear going into the weekend,” Feygin added. “The theme coming into this year was the Fed and Trump are going to bail us out of any problems, but the virus is something neither one can do anything about. That’s a reason to become more fearful.”

China’s National Health Commission confirmed on Friday that there have been 9,692 confirmed cases of the coronavirus, with 213 deaths.

The WHO recognized the deadly pneumonia-like virus as a global health emergency on Thursday, citing concern that the outbreak continues to spread to other countries with weaker health systems. WHO’s designation was made to help the United Nations health agency mobilize financial and political support to contain the outbreak.

The virus, which was first discovered in the Chinese city of Wuhan, has now spread to at least 18 other countries and has dampened sentiment over global economic growth.

“The outbreak of the coronavirus has added another headwind to the near-term outlook for stocks,” said Peter Berezin, chief global strategist at BCA Research, said in a note. “Viruses often become less lethal as they mutate because a virus that kills its host is also a virus that kills itself. Unfortunately, in a world of mass travel, a virus can spread across the globe before it has time to lose potency.”

Las Vegas Sands and Wynn Resorts, two stocks that are coronavirus proxies given their gaming exposure in China, fell more than 1.5% each. Airline stocks such as American and United dropped more than 2.5% each while Delta slid 2%. Travel stocks also got hit as the Trump administration mulls over tighter travel restrictions to China.

In corporate news, Caterpillar shares fell 1.6% after the industrial giant’s CEO warned about “global economic uncertainty” in the company’s latest quarterly earnings report. Caterpillar also issued disappointing earnings guidance for 2020. Those losses were mitigated, however, by a surge in Amazon shares.

Amazon posted a quarterly profit and revenue that easily beat analyst expectations. Amazon Web Services, the company’s cloud business, saw stronger-than-expected revenues.

Investors are nearly halfway through the corporate earnings season. More than 70% of the 226 S&P 500 companies that have reported have beaten analyst earnings expectations, FactSet data shows.

Volatile January

The major averages saw an uptick in volatility this month as investors grappled with rising tensions between Iran and the U.S., trade worries with China and the recent coronavirus scare.

The S&P 500 was on pace to close lower in January, snapping a four-month winning streak. The Dow was also headed for its first monthly loss since August. The Nasdaq is up 2.2% and is on track for a five-month winning streak.

The Cboe Volatility Index (VIX), widely considered to be the best fear gauge in the market, rose to above 19 this month from 13.78, a gain of more than 37%.

Stocks could face some seasonal headwinds next month. February has not been the market’s best month historically. Data from The Stock Trader’s Almanac shows the S&P 500 averages a gain of just 0.1%. Investors will also face a number of obstacles in the new month, including worries over how the U.S. presidential election shakes out. Coronavirus fears could also persist in February.

“That’s going to hurt China,” said Tom Martin, senior portfolio manager at GLOBALT. “For an economy that is increasingly trying to transition to the consumer, it’s definitely a headwind.”

“When you start seeing real actions on the part of multinational companies, as well as people trying to put a number on it, it’s no longer something that is not going to have an impact at all,” Martin said.

I believe the information in the article is critically important because it tells me one thing: this new coranavirus can easily spread from asymptomatic people who have it to infect others and that's quite disturbing and has huge implications for global health authorities rushing to contain a virus which increasingly appears to be next to impossible to contain.

In other words, this new virus has all the makings on the next global pandemic, so it's best not to dismiss it and track it closely because if it does spread like wildfire the repercussions on the global economy and financial markets will be dire.

People showing no symptoms appear to be able to spread the novel coronavirus that has caused an outbreak in China and led world health authorities to declare a global emergency, researchers reported Thursday in the New England Journal of Medicine. If confirmed, the finding will make it much harder to contain the virus.

The case described — from Germany — could help resolve one of the major unknowns about the virus, which as of Thursday night had infected nearly 9,700 people in China and killed 213. About 100 more infections have been reported in 18 other countries, but no deaths.

Some viruses, including SARS, which is another coronavirus, can only be passed when a person is showing symptoms. Others, like the flu, can be spread a day or two before the onset of symptoms. If people are contagious before they become sick, they can be unknowingly spreading the virus as they go shopping or to work or to the movies. Trying to snuff out the virus in that case is a much more difficult task.

1. The spread of the virus gets under control through public health interventions. This is the best-case scenario, and essentially what happened with the SARS (severe acute respiratory syndrome) outbreak in 2003. In late 2002 and 2003, SARS infected 8,096 people (mainly in China), and killed 774 people in 17 countries. Remarkably, by 2004, SARS was basically gone.“SARS was the classic case of how various public health interventions can work and stop an outbreak,” Jessica Fairley, a professor of global health medicine at Emory University, explains.
2. The virus burns itself out after it infects all or most of the people most susceptible to it. Michael Mina, an epidemiologist at the Harvard School of Public Health, offers the 2015-2016 Zika virus epidemic in Puerto Rico and South America as an example of an epidemic that essentially burned itself out. “Tons and tons of people got infected very rapidly,” he says. (There were more than than 35,000 cases in Puerto Rico in 2016.) But then the number of people susceptible to the disease dwindled. Those who were most at risk of coming into contact with the disease-carrying mosquitoes already got the disease. “And that ultimately leaves fewer people for those viruses to go in and infect.” 
3. Coronavirus becomes yet another common virus. There’s a third scenario about how this outbreak ends. That it doesn’t. Adalja explains there are now four coronavirus strains that commonly infect humans as common colds or pneumonia. It’s possible that this virus becomes the fifth — and like the flu, it could come and go with the seasons. Possibly, it could become a seasonal virus in China. Or, it could, like the flu, envelop the whole world. 

The Federal Reserve will keep injecting cash into the banking system and buying billions of dollars of Treasury bills for a few more months, but it aims to start dialing back on both in the second quarter, Chair Jerome Powell said Wednesday.

Powell’s comments, following the Fed’s latest interest-rate setting meeting, provided investors with some clarity on just how much longer the Fed plans to keep pumping liquidity into U.S. money markets and lifting the level of bank reserves. It has been doing both since last fall in response to a jarring surge in borrowing costs in bank funding markets.

Here is a look at what is known about the central bank’s plans for its bond holdings and market interventions:

WHEN DID THE FED START REBUILDING ITS BALANCE SHEET AND WHY?

The Fed acquired a vast portfolio of Treasuries and mortgage-backed securities in the wake of the financial crisis through three operations known as quantitative easing, or QE. These were meant to stimulate the economy by bringing down long-term yields and lowering borrowing costs.

It started reducing the size of its balance sheet in late 2017 to slowly unwind that stimulus, a process that ended last August. But September’s money market upheaval indicated officials had let the balance sheet get too small.

In response, it began daily cash injections in the repurchase agreement, or repo, market. In addition, it started buying Treasury bills to return bank reserves to level from early September.

HOW MUCH IS THE FED BUYING AND HOW LONG WILL IT CONTINUE?

Since mid-October, the Fed has been buying $60 billion a month of T-bills, and reserve levels have risen by more than $270 billion since then to roughly $1.67 trillion.

While Powell did not give a specific target, he set a floor: $1.5 trillion. That was roughly the level in early September before the liquidity problems arose. “We want to be clear that will be the bottom end of the range,” Powell said.

Powell said the aim is to reduce support in the least disruptive and most transparent manner possible, but he offered no specific schedule.

Jon Hill, an interest rate strategist for BMO Capital Markets, expects the Fed could taper purchases to $30 billion a month starting in March. Others expect the Fed to hold the current pace for longer.

POWELL SAYS THIS IS NOT QUANTITATIVE EASING. HOW DOES IT DIFFER?

The Fed’s previous rounds of asset purchases focused on long-term bonds in an effort to bring down interest rates. The purchases were paired with a strong message from the Fed that it was trying to stimulate the economy and intended to keep rates low.

This time, it is buying only short-term Treasury bills and making no pledge about long-term rate levels. Minneapolis Fed President Neel Kashkari recently likened it to trading one short-term risk-free investment for another.

IS THE FED’S BALANCE SHEET PROGRAM LIFTING THE STOCK MARKET?

A number of investors say so, contending it is inadvertently fueling higher stock prices because some market participants still associate it with stimulus.

Powell deflected questions about that on Wednesday, repeating his assertion the current action is purely technical and is not meant to be stimulative.

“It’s very hard to say what is affecting financial markets with any precision,” Powell said during the press conference.

Powell said Wednesday officials expect to reach an “ample” level of reserves, where the market is less reliant on the Fed, at some point in the second quarter.

Alicia McElhaney of Institutional Investor reports that private equity is falling short of expectations at New York State Teachers’:

The New York State Teachers’ Retirement System has made a bevy of new commitments to private equity, an asset class where the pension fund has recently underperformed.

Documents from NYSTRS’ Wednesday investment committee meeting show that the retirement system’s private equity portfolio lagged its benchmarks for the three-, five-, and ten-year periods ending on September 30, 2019 — despite slightly beating expectations over the 12-month period.

The results mark a continuation of the underperformance reported by the pension fund at its October committee meeting, which addressed private equity returns for the period ending June 30. At that time, NYSTRS said that its 12-month return through mid-2019 was 12.1 percent, below its benchmark of 15.4 percent. The pension fund judges private equity returns against the performance of Standard & Poor’s 500 index plus five percent.

According to Wednesday’s meeting materials, NYSTRS’ private equity portfolio returned 9.9 percent over the year ending September 30, beating a benchmark of 9.3 percent. Meanwhile, the private equity portfolio’s three-year return trailed expectations, measuring at 14.7 percent, as compared to the benchmark return of 18.4 percent. Similarly, five- and ten-year returns of 13.9 percent and 14.2 percent came in below benchmark returns of 15.8 percent and 18.2 percent, respectively.

NYSTRS has a total of $21.6 billion in active commitments to private equity, according to the meeting documents.

The documents also show that the pension fund closed on eight new private equity investments between October 1 and December 31.

These included a commitment of up to $150 million to MBK Partners Fund V, a large-cap buyout fund targeting investments in media, financial services, and retail companies in Korea, Japan, and Greater China. NYSTRS also committed up to $150 million to the fifth fund raised by Valor Equity Partners, a growth investment firm that focuses on tech-related companies. Another $150 million maximum was dedicated to the retirement system’s coinvested fund with HarbourVest Partners.

In addition, NYSTRS committed up to $200 million each to a separate account with Abbott Capital Partners and Clearlake Capital Partners’ sixth vehicle, a middle-market buyout fund focused on industrials, energy, tech, and software companies.

Other new private equity investments included commitments to two funds at EIV Capital, a Houston-based private equity firm that invests in the energy industry, and a commitment of up to $100 million to the Cortec Group’s seventh fund, which focuses on middle-market leveraged buyout opportunities.

Blackstone’s (ticker: BX) corporate private-equity funds had gross returns of 9.3% in 2019, way behind the S&P 500’s total return of 31.5%, and down from 19.1% in 2018, when the funds handily topped the S&P’s negative 4.4% return. The 2019 returns were reported in the firm’s fourth-quarter earnings report earlier Thursday.

Blackstone, the industry leader, didn’t provide net returns after fees, which can run at around 2% annually plus 20% of profits industry-wide.

The firm now manages $90 billion of corporate private-equity investments in 94 portfolio companies. The private-equity industry is sitting on a massive amount of uninvested capital or “dry powder.” Competition for new deals remains intense, with transaction prices at or near record levels. All this acts as a damper on returns.

On Blackstone’s earnings conference call earlier Thursday, Jonathan Gray, the firm’s president, said that “opportunities for continued growth, even in a challenging investment environment, are significant.” Gray noted on the call that Blackstone historically has generated 15% net annual returns in private equity.

On the call, the company’s chief financial officer, Michael Chae, referred to declines in “two public positions” as a reason for a lackluster 1.5% return on the private-equity funds in the fourth quarter, when the S&P 500 returned 9%. Excluding those two holdings, the appreciation was 4.7%.

One of those losing fourth-quarter positions could be Cheniere Energy Partners (CQP), whose units fell 12% during the fourth quarter. Cheniere operates a large liquefied natural gas, or LNG, facility in Louisiana that is a major exporter of LNG. Cheniere is Blackstone’s largest public equity investment at $8 billion, followed by Gates Industrial (GTES) at around $3 billion. LNG prices are weakening globally.

Cheniere returned more than 16% last year while Gates, a maker of auto parts, returned about 4%. Blackstone had no comment on the private-equity returns, but the firm has emphasized in the past that returns should be evaluated over a multiyear period.

Blackstone scored in 2019 when the London Stock Exchange agreed to buy Refinitiv, which was owned by a Blackstone-led consortium and Thomson Reuters, for $27 billion.

Blackstone continued to deploy considerable cash in new private-equity deals last year. It was part of a consortium of investors that bought Merlin Entertainments, a U.K. theme-park operator, for about $7.5 billion in late 2019.

Blackstone’s distressed-debt returns were weak last year at negative 4.4%, while the firm’s core-plus real-estate funds returned 9.2% on a gross basis.

Blackstone, the largest manager of private-equity and other alternative assets, reported fourth-quarter distributable earnings of 72 cents, up 26% from the year-earlier period. Full-year 2019 distributable earnings were $2.31 a share, up 6% from 2018.

Blackstone remained a magnet for new investments in 2019, as the firm had $134 billion of capital inflows and ended the year with $571 billion of assets under management, up 21% year over year. The firm’s shares declined $1.54 to $61.11 Thursday, but have nearly doubled in the past year.

The big advance in the stock reflects strong continued inflows to Blackstone funds, the firm’s move to change to a corporate structure from a partnership that broadened its investor base, and an investor preference for fast-growing alternative asset managers over traditional investment managers.

The firm’s real-estate business, which has grown rapidly in recent years, now is the biggest contributor to earnings.

While private-equity returns can be lumpy, the Blackstone 2019 returns indicate that the game might be getting tougher even for the best managers.

The median holding time of private equity assets continues to decline. As of the end of 2019, it's down to 4.9 years, the first sub-five-year reading since 2011, according to PitchBook's 2019 Annual US PE Breakdown. During the time period since 2011, PE holding times saw a peak of 6.2 years back in 2014.

Much of the overall downfall is due to top-quartile hold times, which were down to 7.1 years on a median basis last year. In 2016, top-quartile hold times peaked at almost nine years. That's a fairly quick collapse in just a few years, probably a healthy one. We'll likely see an increase in top-decile holding times because of the growing proliferation of long-dated funds hitting the market.

Knowing when to sell, however, isn't always straightforward.

Portfolio companies aren't "positions" that can be pared down or modified if market conditions change. Whole companies are big and clunky compared with tradable shares, and buy-side love is in the eye of the beholder. But exits have been a bit easier to achieve in recent years amidst a broader M&A boom. That's made it easier to offload companies a bit sooner than in the past. There's also a motivation to spend more time on the fundraising trail, which, perhaps coincidentally, has been on fire since 2016.

Less coincidental is a rise in exit committees across the industry. Formalized investment committees date back to PE's earliest days, and each portfolio company tends to have a cheerleader who spearheads the firm's investment.

For a long time, investment decisions have passed through a more rigorous approval process while exit decisions are made by one or two senior directors who were responsible for that investment. Emotions get involved at the exit stage, and an increasing number of firms are formalizing those decisions and taking away individual decision-making. That trend is probably contributing to shorter holding times—likely making many LPs happy twice over.

Cliff Asness’s firm doesn’t want investors to get excited. AQR expects the real return of a U.S. portfolio divvied up 60 percent in stocks and 40 percent in bonds to be 2.4 percent. That’s around half its long-term average of nearly 5 percent since 1900.

“The year 2019 saw a reverse of 2018’s cheapening, with expected returns falling for both equities and (especially) bonds,” according to the firm’s capital market assumptions for major asset classes, published Wednesday. The firm’s research focuses on medium-term expected returns — over five to 10 years — and updates the forecast annually. All of AQR’s estimates are lower than last year because of increased asset prices in 2019.

The firm says the results aren’t surprising, particularly given low yields that have persisted for years. What investors earn on cash influences every other investment result. Central banks around the world have kept rates extraordinarily low for a decade, a policy that has altered market fundamentals.

“We should not be surprised that many long-only investments have low expected returns today. In theory, all assets are priced according to the present value of their expected cash flows. The riskless yield is the common component of all assets’ discount rates, and when it is lower than historical averages it tends to make all assets expensive,” AQR’s latest study said.

In AQR’s analysis of alternative risk premia, it argues that aggregate valuations of multiple style factors like value and momentum are near long-term averages.

“Among equity styles, defensive and momentum styles are mildly rich by some measures, while value has been looking increasingly cheap,” wrote the study’s authors. “Our research suggests there is only a weak link between the value spreads of style factors and their future returns, making it difficult to use tactical timing based on valuations to outperform a strategic multi-style portfolio.”

But the alternatives firm believes that last year some value factors became cheap enough to earn an overweight in multi-factor strategies.

Even though data is less available on illiquid assets like private equity and real estate, AQR started modeling expectations for these asset classes last year.

Using the average of two different frameworks, AQR estimates a 4.3 percent net-of-fee return for private equity. That compares to AQR’s expected 4 percent returns for U.S. large-cap equity. AQR expects 3 percent returns for un-levered real estate.

“As of January 2020, these estimates are soberingly low,” concluded AQR. “They suggest that over the next decade, many investors may struggle to meet return objectives anchored to a rosier past. Low expected cash returns are one clear culprit, dragging down expected total returns on all risky investments.”

Alicia McElhaney of Institutional Investor reports that CalSTRS is looking to cut public equity allocation in favor of private markets:

The California State Teachers’ Retirement System is moving money from public to private markets as a part of an updated asset allocation strategy.

CalSTRS plans to decrease its allocation to the public equities market by eight percentage points to invest more money in private equity, real estate, and what the retirement system calls “inflation-sensitive real assets.”

This move follows a decision by CalSTRS’s peer, the California Public Employees’ Retirement System, which increased its private equity commitments by $1.4 billion during fiscal year 2018-2019. CalPERS would need to commit another $10 billion per year to stay on track with its allocation target, plan documents showed.

While CalSTRS isn’t making such a drastic change, the move nonetheless marks a shift. The CalSTRS board’s plans to change its long-term allocation strategy were approved in November, but at January 30 meeting, board members discussed how to implement those changes.

CalSTRS plans to decrease its public equities allocation from 50 percent, which was the allocation on November 1, 2019, to 42 percent, according to the plan revision.

Doing so will allow the plan to increase its allocation to private equity from 9.4 percent to 13 percent. The retirement system will increase its allocation to real estate from 13.9 percent to 15 percent, the plan revision shows.

CalSTRS also plans to increase its allocation to inflation-sensitive real assets from 2.7 percent to 6 percent, an increase of 3.3 percentage points, the plan revision shows. This asset class includes global inflation-linked bonds and securities and infrastructure investments, according to the plan revision.

“CalSTRS has learned from experience that setting a rigid timeline is inefficient as investment opportunities ebb and flow and do not follow a calendar time frame,” the plan documents stated.

To solve for that, CalSTRS said it would make these changes in slow steps, at the recommendation of its consultant, Meketa Investment Strategies, the plan revision shows. For instance, it plans to gradually decrease its public equity allocation from 51 percent to 49 percent, then to 47 percent, and so on.

“If investment opportunities present themselves then staff will move quicker,” according to the plan revision. “However, if a steady allocation is more prudent, such as the allocation to private equity, where time diversification is critical, then an opportunity-based approach is more appropriate.”

A spokesperson for CalSTRS declined to comment on its allocation strategy.

The next step in the process is to plot a course from the current asset allocation to the new long-term target. CalSTRS has learned from experience that setting a rigid timeline is inefficient as investment opportunities ebb and flow and do not follow a calendar time frame. Therefore, the implementation plan is expressed in “Steps” toward the long-term target. If investment opportunities present themselves then Staff will move quicker, as has been demonstrated in the past with the shift to a true global equity portfolio and the funding of the Risk Mitigating Strategies. However, if a steady allocation is more prudent, such as the allocation to Private Equity, where time diversification is critical, then an opportunity-based approach is more appropriate.

The Implementation Plan:

Staff and the Consultant will regularly monitor the asset allocation and will make recommendations to shift the Policy Targets at quarter end where appropriate. As the target allocations are adjusted, the Total Fund benchmark will also change for performance measurement purposes.

The investment staff of the California State Teachers’ Retirement System (CalSTRS) wants to double the number of co-investments in the system’s approximate $18 billion private equity program in the next two to five years, adding 15 new staffers and possibly opening an office in San Francisco to handle the additional investments.

The West Sacramento-based pension’s plan to build its private equity program is contained in agenda material for its January 30 investment committee meeting. The investment committee is being asked to approve CalSTRS’s strategic direction in efforts to expand the private equity program, the pension system’s best-producing asset class over the short and long term.

CalSTRS’s overall private equity returns for the one-year period ending March 31 (2019) totaled 15.5%, the largest return of any asset class.

CalSTRS currently has 8.1% of its overall portfolio devoted to private equity, but its long-term target is 13%.

CalSTRS investment officials see co-investments as a way to get to that target. Co-investments only account for a small part of the plan’s private equity portfolio, around 5%, said a September report from the Meketa Investment Group, which serves as a CalSTRS investment consultant.

The new January 30 plan said that over the last two calendar years, the CalSTRS private equity program has made new commitments of approximately $6 billion to $7 billion a year with co-investments representing approximately 8% to 9% of total new commitments.

The plan says private equity’s current team of 23 professionals, 18 who specialize in investments and five operational personnel, are at capacity for the current investment pace and that an additional 15 hires are needed to at least double co-investments.

CalSTRS paid more than $500 million in management and profit-sharing fees to its private equity general managers in calendar year 2017, the most recent data available. The CalSTRS plan says that “increasing co-invest represents the most immediate, largest, and greatest opportunity to reduce costs and increase investment returns.”

Under co-investments, CalSTRS and other pension plans are offered additional stakes in portfolio companies acquired by private equity firms, often at little or no additional fees. This is usually in addition to the pension plan’s investment as a limited partner in a co-mingled fund with a general partner.

Officials of the $214.9 billion CalSTRS see co-investments as a possible entry point to make direct investments in private equity at a later point without external managers.

CalSTRS’s approach contrasts with that of its larger Sacramento neighbor, the California Public Employees’ Retirement System (CalPERS), which is proposing to invest $20 billion in additional private equity funds through two direct-style investment vehicles. One vehicle, called Innovation, would take stakes in late-stage companies in the venture capital cycle. The other vehicle, known as Horizon, would take buy-and-hold stakes in established companies. CalPERS currently has around $28 billion invested in private equity.

The CalSTRS plan says the competition for high-quality co-investment professionals “makes it advisable to budget for a higher average salary for such professionals” than existing personnel. It does not state, however, what the new staffers should be paid.

The plan also says that private equity investment staff to be hired for the expanded co-investment program “would be significantly enhanced by being located in a major financial center.”

It says that while public asset classes are largely research-oriented, private asset classes are more relationship-oriented.

“In major financial centers, investment professionals have more opportunities to interact and form relationships with other investors, lenders, investment bankers, consultants, advisors, regulators, lawyers, and operating company executives,” the plan says. “Such an ecosystem is more efficient and is likely to result in a higher level of knowledge, competitiveness, and overall flow of opportunity.”

The plan says San Francisco is an “obvious choice to consider” for the co-investment expansion because there are many general partners located in the Bay Area, including KKR, TPG, and GI. It also said that other major institutional investors, including Singapore’s GIC sovereign wealth fund and the Queensland Investment Corp., have placed private equity professionals in the Bay Area.

CalSTRS is the second-largest US fund by assets, surpassed only by the $345.6 billion CalPERS, which is No. 1.

CalSTRS just missed its target rate for annual investment returns, recording 6.8 percent for the fiscal year ending June 30, according to a Tuesday news release.

The rate fell short of the $237 billion fund’s annual target of 7 percent, according to the release.

“It was a roller coaster year and a very challenging environment in which to generate returns,” said California State Teachers’ Retirement System Chief Investment Officer Christopher J. Ailman. “Thanks to the in-house expertise of our investment team, we were able to come very close to our assumed rate of return despite the instability of the market.”

The California Public Employees’ Retirement System, which has about $370 billion in assets, recently reported annual returns of 6.7 percent, missing its 7 percent goal.

Returns for both funds suffered amid a stock market slump in late 2018 and then climbed steadily through the first half of this year.

Low returns can cause the pension fund over to increase the amount of money they collect from their other two primary sources of income — payments from employers and from public employees.

But CalSTRS’ longer-term averages are higher. Its three-year average was 9.7 percent, its 5-year average was 6.9 percent and its 10-year return was 10.1 percent, according to CalSTRS figures.

A $5.1 billion cash infusion to the fund from the state budget this year will help limit costs for employers and the state, according to the release.

The fund is about 64 percent funded, according to the release, meaning it has 64 percent of what it would need to pay all current and future obligations to retirees.

The fund has a plan to increase the funded status to 100 percent by 2046. Teachers’ contributions increased from 2014 through 2018, and they now contribute just over 10 percent of their pay toward their pensions. School districts contribute about 18 percent. Districts’ rate will increase to about 19 percent next year and then drop back down to 18.2 percent, according to CalSTRS projections.

Looking forward, Ailman cited President Donald Trump’s tweets along with trade wars, Iran aggression, consumer sentiment and Brexit as “key risks to monitor.”

Jean-Christophe, the emerging markets team has made a sustained effort to analyze ESG factors in recent months. This use of your time is not surprising; we know that a number of emerging countries are marked by corruption and that corporate disclosure practices are often opaque. How do you deal with this lack of transparency that is part of your reality?

When you manage a portfolio of emerging market (EM) equities, nothing is all white or all black. You have to distinguish light grey from dark grey; you have to put things in perspective, encourage best practices, detect inflection points and take the long view rather than follow trends.

We’ve recently met with companies that have suddenly discovered an ESG vocation: is it a step in the right direction, a marketing stratagem or a deceptive description? Even when asking the right questions, it can be difficult to discern the reality of companies on the ground, at least for those operating in countries that don’t promote transparency. It’s clear that some emerging countries are well-known for pollution, corruption, poor working conditions or oppression of minority shareholders, so we can’t give companies the benefit of the doubt.

In our view, the main challenge of investing in emerging markets is the diversity throughout the investment universe in terms of rules depending on (1) the country’s level of economic development, (2) its pace of growth, (3) its main industries and (4) its political regime and regulatory context.

We also note varying levels of investor double-standard depending on the country. For example, Western analysts and media tend to be more lenient toward a democratic country, such as India, that takes a step in the wrong direction. These same people may show an unforgiving attitude toward an undemocratic country, such as China, that would be heading in the same direction. This complacency can skew our reading of ESG risks, so we have to deal with such information in a rational manner and look for objective sources.

Undoubtedly, our top-down approach is useful when it comes to analyzing systemic ESG risks.

And what about the ESG data we’ve been hearing so much about? We know that data quality is a concern for most investors who want to abide by the principles of responsible investing. But, before we even talk about quality, I think we should address availability in the case of emerging markets. Would you say that data availability or quality is an obstacle to including ESG factors in your investment process?

ESG data are available and accessible for the vast majority of companies that make up the MSCI ACWI Index. Even so, there’s still a marked difference between developed and emerging countries. We currently use three ESG data providers, which give us access to data for about 99% of the companies in developed countries. For emerging markets, the coverage falls to 86%.

But, in our opinion, the main obstacle is reliability of the data. For example, MSCI recently added to its indexes many Chinese companies that don’t publish reports in English and have no publication history. Fortunately, the major suppliers are gradually refining their methodologies, but there’s still a lot of work to be done in the case of emerging markets. With time, our level of comfort will increase.

What other emerging market issues deserve special attention?

One area of concern is social issues. Just think of working conditions: in developed markets, an investor who considers ESG factors will focus on employee working conditions. In emerging markets, the context is different: job creation takes precedence over improved employee welfare. In our view, authorities in countries such as China, India and Indonesia seek social peace at all costs, which means the priority is creating jobs to lift the majority of the people out of poverty, not workplace safety.

In the eyes of Westerners, the price to pay is sometimes heavy. For example, the strict control over individual freedoms in China and the harsh working conditions in a new manufacturing country such as Vietnam may seem shocking. But we must bear in mind that a number of emerging countries have built their success on low-cost manufacturing, with low wages, limited investment in automation and safety, and so on. Repeated industrial accidents, such as Vale’s dam failures in Brazil, are symptomatic of this reality.

In terms of governance, our goal is not to label countries as “good” or “bad,” but rather to determine the regulatory framework before we invest. Even though information is available, such as the Transparency International’s Corruption Perceptions Index or the World Bank’s Ease of Doing Business Index, our expertise in macroeconomic analysis and knowledge gained from field research provides us valuable insights. Our understanding of global economics and geopolitics is one of the skills that allow us to step back and develop an informed opinion before we make investment decisions.

As a top-down manager, Hexavest takes an approach that enables it to develop clear views on the major systemic ESG issues. Even though environmental issues are global, your team thinks that emerging markets will continue to be hit harder by global warming. Why is the climate emergency of greater concern for these countries?

Many emerging countries are in areas already affected by global warming. Some places will quickly become too hot for human life under normal conditions as temperatures exceed 50°C for weeks at a time. This problem will materialize well before 2050. Northern India was hit by the second-longest heat wave on record in 2019; it lasted more than a month, with temperatures reaching 48°C in New Delhi last June. In some cities in the state of Rajasthan, the temperature soared to 50°C. These temperatures are comparable to those observed in Saudi Arabia, but India’s population density is nothing like that of a desert country. If the situation continues to worsen, an increase in mortality rates and large waves of migration can be expected in the next few years.

Moreover, because a large proportion of the people in emerging countries live near the coast, some countries are especially vulnerable to severe flooding and more frequent hurricanes. Such events threaten the lives of hundreds of millions of people, especially in Asia. Countries such as China, Vietnam, India, Bangladesh and the Philippines appear to be especially at risk.

The alternation of drought and torrential rain is becoming more pronounced. This phenomenon can reduce harvests, which has a very significant impact on producing countries, such as Brazil, South Africa, China, India and Indonesia. Populations in the poorest countries, where food expenditure far exceeds 30% of household budgets, are especially vulnerable.

Some studies have attempted to quantify the productivity loss due to global warming. The International Labour Organization estimates that, by 2030, heat stress caused by global warming will reduce productivity by about 2.2% of all hours worked worldwide, the equivalent of 80 million full-time jobs. Not surprisingly, Asia and Africa, which are more exposed to extreme heat and where a significant part of the workforce is employed in agriculture, will be most at risk.

Unfortunately, most emerging countries have not taken sufficient measures to guard against drastic changes. In fact, most of these economies are at an energy-intensive stage of development that emphasizes production at the lowest cost. While developed countries are reducing their energy consumption per unit of production, and their populations are becoming aware of global climate issues, emerging countries, particularly China and India, continue to build coal-fired power plants. As a result, China’s coal-fired generation capacity was 972,514 megawatts in 2018, with an additional 128,650 megawatts under construction that same year (source: Carbon Brief).

Why is coal doing more damage in emerging markets?

Coal is a significant contributor to global warming, but that isn’t its only adverse effect: when burned in a power plant, it emits sulphur dioxide (SO2) and nitrogen oxide (NOx), which are toxic to humans and cause premature death. In 2017, Climate Analytics had quantified the number of premature deaths in the European Union at an astounding 23,000 a year. But few studies have analyzed the impact in emerging markets. Given that the European Union produces far less coal-powered energy than China and India, and that the regulation of polluting emissions is generally stricter in Europe, we can reasonably assume that the number of deaths is much higher in the emerging world.

The ESG question then simply becomes: Should coal be banned from our portfolios? For some investors, investing in utilities that use coal is justifiable, provided that a company’s development plan calls for rapidly increasing its proportion of renewable energy. We pretty much agree with that idea, but conversely, we think it’s difficult to justify exposure to coal mines. For that reason, we’ve decided to exclude coal mining companies from our emerging market equity portfolios.

Your team has also decided to exclude tobacco stocks. Emerging markets are clearly the latest growth driver for this industry, and the profit growth outlook is still positive. Why did you decide to exclude this theme from your portfolios?

In developed countries, it has become unacceptable to promote cigarettes and inconceivable to see a child smoking on the street. Tobacco use is steadily declining, and it’s reasonable to assume that everyone is aware of the health risks.

Unfortunately, what’s obvious in developed countries isn’t so clear in many emerging countries. The large populations of China, Indonesia and India are less aware of the health risks. Tobacco advertising is still allowed there. Moreover, cigarettes have a strong appeal for young people because smoking tobacco, instead of chewing it, seems to be a symbol of improved social status in India and Indonesia.

These factors have contributed to strong growth of cigarette consumption. The tobacco industry even considers Indonesia as the last El Dorado: You can still see the Marlboro cowboy in Jakarta, 20 years after he vanished from the streets of the United States. A 2015 study cited by the Guardian showed that nearly 80% of the world’s one billion smokers live in low- or middle-income countries, and that people in low-income countries are almost 10 times more likely to be exposed to some form of tobacco advertising.

Therefore, we have eliminated the tobacco industry from our portfolios for ethical reasons. But because the industry offers good growth potential in emerging markets, we have to reallocate our capital tactically or identify similar and equally promising structural themes. Fortunately, there’s no shortage of growth areas in these markets.

In a Financial Times interview last September, Bill Gates expressed the opinion that disinvestment from fossil fuels has no impact on the climate. Do you think his view is well founded?

I think Mr. Gates was making the point that we should stop wasting time and energy trying to exclude the carbon chain and instead focus our investing in new, disruptive technologies, like those that reduce carbon emissions and help people adapt to global warming.

That said, it seems clear to me that most emerging markets need foreign capital and that the divestment movement could affect EM companies involved in fossil fuel production. Our job is to allocate capital in the best possible way. We think it’s better to invest in the technologies of the future, rather than those of the 19th century, which is not far from Mr. Gates’ statement.

We tend to cite ESG risks more naturally than we do opportunities, especially for emerging markets. But is it possible to find opportunities in these markets?

We must never forget our duty to our clients: Any investment involves risk, and a portfolio manager must be aware of the risks that come with any investment decision, whether it involves a sector, an industry, a country or a currency. In this context, even before the environmental aspects, we place a great deal of importance on corporate governance, especially minority shareholder rights. So yes, I think ESG risks outweigh profiting from ESG opportunities.

Nevertheless, we meet with dozens of companies every year, and during these meetings we discuss ESG aspects. We have often come away disappointed, such as in obvious cases of greenwashing*, but we’ve also encountered companies that have really taken account investor concerns related to transparency, corporate governance, a reduced carbon footprint, etc. We recently decided to keep a company in the portfolio despite its high ESG risk, because we expect that it will improve quickly on that front.

As far as countries are concerned, it’s clear to us that governments have become aware that sustainable economic improvement requires tangible reforms, simplified trade practices, as well as independent regulators and central banks. Perceived by investors as less risky, some countries are now benefitting from structurally lower interest rates and better access to international capital. But experience has taught us that such changes are a long time coming and that rapid progress is rare.

*Note: Greenwashing is the process of conveying a false impression or providing misleading information about how a company’s products are more environmentally sound. Greenwashing is considered an unsubstantiated claim to deceive consumers into believing that a company’s products are environmentally friendly. (Source: Investopedia)

Jean-Christophe Lermusiaux works in collaboration with Jean-Pierre Couture and Jean-Benoit Leblanc in the management of the firm’s Emerging Markets equity portfolios. Before joining Hexavest, he worked as a senior portfolio manager at PSP Investments, where he covered global emerging market equities. Jean-Christophe started his investment career in 1998 as an equity analyst and held increasingly senior roles at various investment banks in Europe. Before moving to Montreal in 2014, he was Head of Research at Visor Capital JSC. Jean-Christophe holds a master’s degree in computer science from ECE Paris and an MBA from ESSEC Business School.

ESG is a fad. We see this every cycle. In 2004-2007 it was “socially responsible investing.” In the next recession, when markets are getting annihilated, everyone will forget about ESG. In bull markets when we feel invincible we start thinking about investing to help the planet.

— GreekFire23 (@GreekFire23) February 5, 2020

The last thing Alberta taxpayers need is another pension Ponzi scheme, but that’s exactly what taxpayers can expect if the provincial government recreates the Canada Pension Plan in Alberta without fundamentally over-hauling it.

The government is currently considering whether the province should withdraw from the CPP and create its own plan. As Premier Jason Kenney has acknowledged,“a compelling case can be made for such a shift (away from the CPP).”

That’s because Alberta taxpayers have contributed more than their fair share to the CPP. Between 2008 and 2017 they paid about $28 billion more into the CPP than they received back in benefits, according to a 2019 Fraser Institute report.

An internal analysis from crown corporation AIMCo, the Alberta Investment Management Corporation, concluded that Albertans could see a 27 per cent tax savings from a provincial plan while still receiving the same benefits as from the CPP. As economist Jack Mintz explained in these pages last November: “The reduction in the payroll tax would encourage employers to hire more workers and provide some tax relief for workers, especially those with lower incomes.”

Although withdrawing from the CPP has some economic merit, Kenney shouldn’t merely recreate the CPP. He should reform and improve it. That’s because the current CPP better resembles a Ponzi scheme more than it does your typical investment fund.

According to Charles Lammam and Hugh MacIntyre of the Fraser Institute,“There’s an assumption that the money (people pay) into the CPP is going to fund their own personal retirement, as is the case with private pension plans. But this is largely not the case because … most of the contributions you make today fund someone else’s retirement.”

Today’s Mr. and Mrs. Taxpayer largely fund today’s retirees while relying on younger generations, the good faith of future politicians and the health of government finances decades from now to fund their pensions. But there is no legal requirement for a future government to provide pension benefits. That will always be the risk when taxpayers are forced to rely on politicians for their retirement benefits instead of their own savings.

The CPP comes with big debt problems. Its unfunded liability as of the end of 2015 was $884 billion. That means it will need to take in hundreds of billions of dollars from new taxpayers to pay the benefits promised to its current members. But isn’t that exactly how a Ponzi scheme operates? New recruits finance existing members? Do Albertans really want to replicate this model?

Albertans — and all Canadians — should be able to pull out of mandatory government pension plans and invest their money how they see fit, instead of handing it over to the taxman. Taxpayers are much better positioned to manage their own money than politicians in Ottawa or Edmonton who couldn’t balance a lemonade stand’s budget.

But if Premier Kenney is dead set on forcing Albertans to fork over their paycheques to a government pension plan, he should take a page from our cousins from down under and implement individual retirement savings accounts.

In Australia, workers must contribute a portion of their salaries to their own retirement savings account, rather than a collective pension plan. This allows workers to: choose an investment strategy that best suits their preferences and circumstances, leave their money to loved ones upon death, and withdraw investment income for health and financial emergencies without being penalized. Under this approach, workers truly own and benefit from their savings.

In Alberta, any government-mandated system should follow what is already established with voluntary RRSPs, TFSAs and other investments. The government can pre-approve investment providers, if it wants to, and set the amount that must be saved, but the bulk of decisions should be made, not by bureaucrats and politicians, but by the workers who are saving for their retirements.

Alberta’s — and all of Canada’s — taxpayers should be afforded the dignity of managing their own money in the way they see fit. But if governments instead insist on mandating pension plans, then workers shouldn’t be forced to save for other people’s golden years. Alberta can do better than recreate another pension Ponzi scheme.

A Ponzi scheme is a fraudulent investing scam promising high rates of return with little risk to investors. A Ponzi scheme generates returns for early investors by acquiring new investors.

The following aims at demonstrating that the CPP is not whatsoever a Ponzi scheme.

The CPP is a federal-provincial legislated pension plan that prescribes a constant partially funded contribution rate of 9.9% of covered employment earnings, which is actuarially projected over at least the next 75 years to provide in a timely manner all pension benefits defined in the CPP Act.

The resulting CPP contributions made by workers and employers are projected to provide an average long term real (i.e. net of inflation/indexation) investment rate of return of 2.06%, as shown in section IV of table 106 in the 30th CPP statutory actuarial report ( https://www.osfi-bsif.gc.ca/Eng/oca-bac/ar-ra/cpp-rpc/Pages/cpp30.aspx#tbl101 ). As the assumed long term inflation/indexation rate is 2%, as shown in table 55 of that report, the average long term nominal (i.e. real plus inflation/indexation) rate of return amount to about 4.06%, that is no current or future generation of CPP contributors is expected to obtain an average lifetime rate of return under 4.06%.

If the CPP were fully funded, its long term average contribution rate would amount to about 6%. This means that the CPP steady state contribution rate of 9.9% includes a constant 3.9% margin that offsets the cost of the portion of not fully funded benefits that were granted to some initial (1966) cohorts of contributors. This measure was originally approved by the federal and provincial finance ministers not to attribute to the CPP any kind of Ponzi scheme nature but rather to at least address as quickly as possible the then Canadian seniors’ poverty levels. The percentage of seniors in receipt of the Guaranteed Income Supplement (GIS) benefit thereby dropped from 56% to 35% gradually from 1973 to 2010, and would essentially stabilize at this level, but will resume decreasing gradually to between 25% and 30% pursuant to the fully funded CPP expansion (i.e. pension benefit rate increased from 25% to 33.33%) that became effective in 2019.

By virtue of the CPP Act, all CPP current and future benefits described therein shall be paid, unless the CPP Act would eventually be adversely amended, which would require the approval of at least 7 provinces covering at least 2/3 of the Canadian population. Until this most improbable eventually occurs, no government is in a position to alter the payment of the legally promised CPP benefits.

In light of the above, because the CPP is a public as opposed to private plan, its large CPP unfunded liability (about 15% to 20% of its total liabilities) is an issue only to the extent that the 9.9% contribution rate includes a margin that well addresses a critical national poverty issue. Nevertheless, all CPP contributors are since 1998, when the contribution rate was increased over 6%, socially assisting those pre-1998 contributors who are now less dependent upon GIS benefits, which benefits all current and future CPP contributors.

Leo, I agree with you and Bernard.

There is, of course, merit in having access to individual accounts – like we do today as one of multiple pillars of Canada’s overall retirement framework. For the vast majority of Canadians, achieving lifetime financial security is arguably the single biggest financial challenge that they face. Individual (or personal/household) long term savings is a critical solution for sure, yet most of those accounts (putting aside annuity contracts), do not solve for the complexity of market risk and longevity risk. For the majority of us, the CPP (only one of the multiple pillars) is the only aspect of the complete picture that helps you solve market risk and longevity risk. We are not all investment experts and no one can predict how long they will live. So, perhaps it is not betting on one pillar over the other – we need them all (the various complementary features they all bring as pieces of the puzzle) to face this big retirement challenge. I find it is more constructive to look at ways to ensure all pillars are performing as they should rather than breaking down any of them.

No Ponzi scheme can be sustained. A pay-go public pension plan is sustainable, albeit at a higher contribution rate than a fully-funded plan, and is therefore not a Ponzi scheme.

The CPP is a contributory social insurance program that pools many types of risk – demographic risks across regions, investment return risks (with the help of CPPIB) across time and longevity risks across individuals.

That’s why the CPP completes other savings programs – and does not seek to replace them.

The head of the financial empowerment program at the non-profit Family Services of Greater Vancouver says retirees or near retirees are increasingly facing debt challenges due to the high cost of living, housing chief among them.

“Certainly a lot of people have leveraged themselves quite heavily, counting on a continuation of low interest rates,” says Murray Baker, who runs the free-of-charge financial literacy program.

“The problem is some studies show if rates rise slightly, there are a lot of people leveraged so much” they may be unable to make their mortgage payments.

He further notes a defined benefit plan is often helpful to avoid financial problems in retirement.

Research does show these plans are helpful to save for retirement. One recent study by the Healthcare of Ontario Pension Plan shows each earned dollar contributed to a plan, for example, is worth more than $5 in retirement compared with individual savings translating into $1.70 of retirement income. The research, however, shows only 25 per cent of employees have a defined benefit pension plan, down from 43 per cent in the mid-70s.

Yet although a good pension plan is a leg up, it can also lead to complacency, Baker cautions.

“We do see people who have defined benefit pensions who assume they don’t need to save a lot of money into an RRSP or TFSA.”

That can leave little wiggle room for extra expenses once retired, which can lead to indebtedness. Others carry debt into retirement, and find they have much less income from their pension and other sources to pay debt and other expenses than did while working.

Baker notes others also may look to their homes as savings plans, which also poses potential problems.

“With a decline in prices, those people could see their retirement funds—in the form of their house—decline too.”

Stocks fell on Friday as worries over the coronavirus’ impact on the Chinese economy outweighed the release of stronger-than-expected U.S. jobs data.

The Dow Jones Industrial Average closed 277.26 points lower, or nearly 1%, to 29,102.51. The S&P 500 dipped 0.5% to 3,327.71. The Nasdaq Composite also slid 0.5% to close at 9,520.51. Those losses snapped a four-day winning streak for the major average. Still, stocks notched strong weekly gains despite Friday’s losses.

China’s National Health Commission on Friday confirmed 31,131 cases of the deadly pneumonia-like virus in the country, with 636 deaths. These numbers have stoked worries about how China’s economy — the second-largest in the world — will be affected. Chinese economic slowed down last year to 6.1% from 6.8% in 2018.

“China is really slowing and that’s worrying people for sure,” said Ed Hyman, chairman of Evercore ISI, on CNBC’s “Squawk on the Street.” “People are not going out. They are not shopping, and that’s what’s hurting particularly China.” Hyman added he sees 0% growth for the Chinese economy this quarter.

Haibin Zhu, a China equity strategist at JPMorgan, also cut his China GDP growth estimate to 1% for the first quarter.

President Donald Trump tweeted Friday that his Chinese counterpart, President Xi Jinping, is “focused on leading the counterattack on the Coronavirus.”

....he will be successful, especially as the weather starts to warm & the virus hopefully becomes weaker, and then gone. Great discipline is taking place in China, as President Xi strongly leads what will be a very successful operation. We are working closely with China to help!

— Donald J. Trump (@realDonaldTrump) February 7, 2020

Caterpillar and Boeing — two bellwether stocks for the global economy — fell 2.8% and 1.6%, respectively. Disney and Goldman Sachs also dropped more than 1% each to pressure the Dow. Materials, tech and health care led the S&P 500 500 lower as each sector declined by at least 0.9%.

The spike in confirmed coronavirus cases and deaths came as investors pored through the latest U.S. jobs report. The U.S. economy added 225,000 jobs in January. Economists polled by Dow Jones expected a print of 158,000 jobs. Wages rose 3.1% on a year-over-year basis, also topping expectations.

“The biggest takeaway for investors is there are no monetary policy implications in this jobs report,” said Jason Thomas, chief economist at AssetMark. “We’re generating enough jobs to keep consumer confidence high and enough wage growth to bring in people from the sidelines.”

But while the report shows a robust labor market, it may not be reflective of the most current economic conditions, Tom Hainlin of Ascent Private Capital Management.

“The challenge for investors is they’re in this foggy place where all the economic data that’s coming in is pre-coronavirus,” he said. “So there’s nothing really materially to grab on to in terms of the data.”

“We won’t get that data probably until the middle of March,” Hainlin said.

The S&P 500 gained more than 3% week to date, and its best weekly performance since early June. The Dow climbed 3% for the week while the Nasdaq gained 4%.

The major averages also reached record highs on Thursday boosted by China’s decision to halve tariffs on a slew of U.S. products. The world’s second-largest economy announced it would halve tariffs on $75 billion worth of U.S. imports on Thursday.

1. The novel coronavirus is spreading, there will be secondary effects and most importantly, if it's spreading in China and not under control, it will have pronounced effects on the Chinese and global economy. That's not good for stocks and other risk assets.
2. But central banks around the world are on guard, pumping hundreds of billions into the global financial system every month, ready to prop up risk assets at all cost.

“The scale of changes and cancellations is unprecedented,” John Grant, senior analyst with flight data firm OAG, told Yahoo Finance. “There has never been such a swift response in terms of cancellation of flights as we've been seeing with this particular event... It’s quite a dramatic change of strategy than was previously applied when SARS was here.”

U.S. markets are “utterly and completely unprepared” for broadly rising consumer prices: Citadel's Ken Griffin. “In the United States there is absolutely no preparedness for an inflationary environment."https://t.co/JEipu9ivA8

— Lisa Abramowicz (@lisaabramowicz1) February 6, 2020

Goodman Group and the Canada Pension Plan Investment Board say they will invest an additional US$2.5 billion in their eight-year-old Goodman North American Partnership (GNAP), increasing their total equity commitment to US$5.5 billion.

The latest expansion of the GNAP will be funded with the partner’s existing 55/45 equity structure; Goodman will allocate US$1.4 billion (all figures US unless specified) and CPP Investments $1.1 billion.

The fund was established in 2012 to invest in high-quality logistics and industrial property in key North American markets. With an initial commitment of US$890 million in 2012, GNAP’s assets have grown to approximately US$3 billion.

The latest commitments bring GNAP’s total investment capacity to about US$7.5 billion, when what the partners call a “moderate” amount of debt is factored in. This provides significant capacity for ongoing property acquisitions and developments.

Focus on major U.S. markets

“The partnership continues to build scale in select U.S. logistics markets, including Los Angeles, Southern California’s Inland Empire and the New Jersey industrial markets, totaling over 16 million square feet of assets under management,” said Anthony Rozic, chief executive officer of Goodman North America, in a release.

“Our portfolio is concentrated in key urban locations close to large consumer populations and allows our customers to meet growing consumer demands for faster last-mile delivery.

“Having acquired over 200 acres in key infill locations in the last six months, the partnership has the momentum, expertise and capital to continue acquiring and developing new properties in our target markets.”

The fund has been steadily acquiring assets, among the recent purchases a 617,000-square-foot logistics warehouse in Northern New Jersey for US$170 million.

“With the rapid growth of e-commerce in the U.S. and ongoing supply-chain modernization, fundamentals in the logistics sector continue to strengthen, particularly in strong urban markets, reflected by record sustained rent growth and occupancy levels,” said Peter Ballon, managing director, global head of real estate, CPP Investments, in the release.

“Through GNAP, CPP Investments is well-positioned to capitalize on these structural shifts.”

CPP Investments and Goodman have several investment partnerships, including the US$5 billion Goodman China Logistics Partnership and the Goodman Brazil Logistics Partnership.

About Goodman

Goodman Group is an integrated property group with operations throughout Australia, New Zealand, Asia, Europe, the United Kingdom, North America and Brazil.

Goodman Group, comprised of Goodman Limited, Goodman Industrial Trust and Goodman Logistics (HK) Limited, is the largest industrial property group listed on the Australian Securities Exchange and one of the largest listed specialist investment managers of industrial property and business space globally.

About CPP Investments

CPP Investments invests the funds not needed by the Canada Pension Plan (CPP) to pay current benefits in the interests of 20 million contributors and beneficiaries.

To build diversified portfolios of assets, investments in public equities, private equities, real estate, infrastructure and fixed income instruments are made by CPP Investments.

Headquartered in Toronto, with offices in Hong Kong, London, Luxembourg, Mumbai, New York City, San Francisco, São Paulo and Sydney, CPP Investments is governed and managed independently of the Canada Pension Plan and at arm’s length from governments.

As of Sept. 30, 2019, the CPP Fund totaled Cdn$409.5 billion.

• GLP creates €2bn European logistics platform with CPPIB and QuadReal
• CPPIB acquires 8% stake in logistics firm Delhivery 
• CPPIB invests $320M to expand footprint in Hong Kong logistics real estate 

Peter Ballon, Managing Director, Global Head of Real Estate, CPP Investments, said, “With the rapid growth of e-commerce in the U.S. and ongoing supply-chain modernization, fundamentals in the logistics sector continue to strengthen,particularly in strong urban markets, reflected by record sustained rent growth and occupancy levels.Through GNAP, CPP Investments is well positioned to capitalize on these structural shifts.”

Goodman is a global property group. We own, develop and manage industrial real estate in 17 countries including logistics and industrial facilities, warehouses and business parks. 

Google has signed a long-term lease for all 18 floors and 400,000 square feet of office space at the new 65 King East Tower in downtown Toronto.

The agreement was announced Thursday afternoon by Carttera and its ownership partners including OPTrust, Manitoba Civil Service Superannuation Board and Investment Management Corporation of Ontario.

It is part of a wider announcement by Google which also includes new offices and expansions of the tech and online giant’s operations in Montreal and Waterloo.

“We are extremely pleased to announce that 100 per cent of the office floors of 65 King East are now leased to Google: one of the most prominent, influential and well-recognized companies in the world,” said Dean Cutting, partner, Carttera, in the release. “Our vision for 65 King East has always been to combine innovative office architecture and an employee-centric workplace design with a dynamic, forward-thinking organization.

“The fact that Google made a long-term commitment to our project is a testament that we are leading the future of innovative office design. We look forward to a long-term collaborative relationship with Google for many years to come.”

Rob Douglas, managing director of real estate investments at OPTrust, echoed those sentiments.

“As one of the world’s leading technology companies, Google is also focused on the future and we are thrilled to have reached a long-term commitment on their new Toronto headquarters,” he said in the release.

Google’s other new offices

While the owners of 65 King East are expressing their delight, it’s also a good day for another office owner. Allied Properties REIT will welcome Google to two of its major holdings in Montreal and Kitchener.

Google said it will establish an office for up to 1,000 employees at 425 Viger West in Montreal. All of its Montreal-based software developers, game developers, sales leaders, AI researchers and Cloud experts will move to the new office.

The new Viger space will span five floors of the building. 425 Viger West is a 200,000-square-foot facility which is being retrofit and expanded by Allied to add another 100,000 square feet of space.

In an interview with RENX a few months ago, CEO Michael Emory said the building was almost fully leased.

Google will also be launching the first Google for Startups Accelerator in Canada at the Breithaupt Block Phase III, a new office building currently under development in Kitchener, east of Toronto.

The 11-storey, 294,054-square-foot Phase III building is adjacent to Google’s current office in the two existing buildings at Breithaupt Block (which has been its largest Canadian location).

The accelerator will be Google’s 12th accelerator globally and facilitate the company’s work with emerging Canadian companies.

The Breithaupt Block Phase III is being developed by a partnership between Allied and Perimeter Developments. Google’s lease will be for 15 years and the $157-million building is expected to be ready for occupancy starting in 2022.

The three new offices will give Google the capacity to expand its Canadian workforce from about 1,500 to 5,000 employees.

65 King East in downtown Toronto

65 King East is currently being built by PCL Construction. The design is a collaboration between world-renowned architects IBI Group and WZMH Architects.

Located in the St. Lawrence neighbourhood, 65 King East is steps from the financial core at King and Yonge and is less than a 10-minute walk to Union Station with seamless connections to the TTC, Go Transit, Via Rail and the UP Express.

65 King East has dedicated approximately 18,000 square feet of terrace space over eight floors, offering expansive views of the city and lake, and is designed with a raised floor HVAC system and exposed concrete ceilings.

It includes 196 bike stalls and 10,675 square feet of retail space.

It also incorporates smart building technologies and sustainability. With Wired Score Gold already accomplished, 65 King East has been designed to achieve LEED Gold certification.

Google’s tenancy is a consolidation and relocation of offices in the Greater Toronto Area, with occupancy expected in 2021. The transaction also consolidates another major technology player in downtown Toronto’s burgeoning, and rapidly expanding, tech sector.

“Carttera built 65 King East with next-generation tenants and an evolving downtown core in mind,” said Jeff Friedman, the executive vice-president office leasing for CBRE, in the release.

CBRE brokered the lease.

“Google’s decision to make 65 King East its new Toronto headquarters underscores the degree to which Toronto’s downtown core continues to expand.

“This is a significant statement of confidence in Toronto’s tech market and talent pool.”

About OPTrust

With net assets of almost $20 billion, OPTrust invests and manages one of Canada’s largest pension funds and administers the OPSEU Pension Plan, a defined benefit plan with almost 95,000 members and retirees.

OPTrust was established to give plan members and the Government of Ontario an equal voice in the administration of the plan and the investment of its assets through joint trusteeship.

OPTrust is governed by a 10-member Board of Trustees, five of whom are appointed by OPSEU and five by the Government of Ontario.

About Carttera

Carttera is a Canadian real estate investment fund manager and developer. The firm invests its capital in innovative urban intensification development projects and is a leader in environmental sustainability in the Canadian development industry.

Carttera has developed projects extending to over $3.3 billion in total value since its inception in 2005, with primary holdings concentrated in the GTA and Montreal.

The firm’s projects include a wide range of product types including office, mixed-use, industrial, condominiums and rental apartments.

About CBRE

CBRE Group, a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2018 revenue).

The company has more than 90,000 employees and serves real estate investors and occupiers through more than 480 offices (excluding affiliates) worldwide.

CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services.

In Canada, CBRE Limited employs 2,200 in 22 locations from coast to coast.

65 King East is owned by Carttera in conjunction with institutional co-investors OPTrust, Manitoba Civil Service Superannuation Board and IMCO, who will collectively be the long-term holders of the asset. The development’s design is a collaboration between world-renowned architects IBI Group and WZMH Architects and is currently being built by PCL Construction. Google’s tenancy is a consolidation and relocation of offices in the Greater Toronto Area, with occupancy expected in 2021.

Carttera Private Equities Inc. (Carttera) announces a major, long-term, downtown Toronto office leasing transaction at 65 King East, which will be home to Google, occupying 400,000 sf of office space across 18 floors in Toronto’s newest, next-generation office development.

”We are extremely pleased to announce that 100% of the office floors of 65 King East are now leased to Google: one of the most prominent, influential and well-recognized companies in the world. Our vision for 65 King East has always been to combine innovative office architecture and an employee-centric workplace design with a dynamic, forward-thinking organization. Google truly recognizes how 65 King East promotes sustainability, employee wellness, collaboration, productivity and health,” said Dean Cutting, Partner, Carttera. “The fact that Google made a long-term commitment to our project is a testament that we are leading the future of innovative office design. We look forward to a long-term collaborative relationship with Google for many years to come.”

65 King East is owned by Carttera in conjunction with institutional co-investors: OPTrust, Manitoba Civil Service Superannuation Board and Investment Management Corporation of Ontario, which will be the long-term holders of the asset. The development’s design is a collaboration between world-renowned architects IBI Group and WZMH Architects. 65 King East is currently being built by PCL Construction. Google’s tenancy is a consolidation and relocation of offices in the Greater Toronto Area, with occupancy expected in 2021.

“Carttera built 65 King East with next-generation tenants and an evolving downtown core in mind,” said Jeff Friedman, Executive Vice President Office Leasing, CBRE. “Google’s decision to make 65 King East its new Toronto headquarters underscores the degree to which Toronto’s downtown core continues to expand. This is a significant statement of confidence in Toronto’s tech market and talent pool.”

Together with the efforts of CBRE, this significant transaction is a great match for the growing downtown core, bringing innovation and tech giants into the fold of Toronto’s tight office real estate market. With proximity to the TTC and Union Station, this office building also features over 18,000 sf of outdoor terraces, 196 bike stalls and 10,675 sf of retail space, while also incorporating smart building technologies and sustainability. With Wired Score Gold already accomplished, 65 King East has been designed to achieve LEED Gold certification.

The award recognizes First Gulf and OPTrust’s commitment to sustainability and the environment both in the construction and the ongoing management of the base building. 

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

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

Canada well-positioned if recession hits

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

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

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

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

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

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

Toronto a “global tech powerhouse”

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

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

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

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

That expansion is occurring across the GTA and surrounding areas.

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

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

Developers backed by Ontario and Alberta pension funds plan to transform a swath of parking lots around a Mississauga mall into a high-density living and working zone in one of Canada’s largest urban redevelopments, apparently drawn by the booming city next to Toronto.

Oxford Properties Group and Alberta Investment Management Corp. said they will develop “the largest mixed-use downtown development in Canadian history.” There’s no cost estimate on the project, Oxford said Wednesday in an emailed reply to questions.

Toronto-based Oxford has $60 billion in global real estate assets and is the real estate arm of the Ontario Municipal Employees Retirement System (OMERS) pension fund, while Edmonton-based Alberta Investment Management Corp. controls about $115 billion in assets and is a Crown corporation of the Western province.

The plan to turn underutilized land into offices, apartments and shops will measure 1.67 million square metres, compared with the 929,000 square metres planned for Toronto’s East Harbour, Oxford said. Its plan will house about 35,000 people across some 53 hectares around the Square One Shopping Centre in downtown Mississauga, the companies said.

The developers are betting on the lack of housing in the Greater Toronto area to drive demand where Mississauga, a city of about 722,000 people in 2016, serves as a bedroom commuter city for the wider region, attracting new immigrants with home prices cheaper than the big city next door, and businesses keen for its highways and proximity to Toronto’s Pearson International Airport.

“The population of downtown Mississauga is expected to double over the next 20 years,” Oxford spokesman Daniel O’Donnell said by email. “That means we need to build more homes for people to live in and provide greater rental options to make renting a long-term option for families.”

Construction by the Daniels Corp. is to start this summer on two residential towers of 36 and 48 storeys, with the full development including office blocks to take place over decades as it ties in with the planned Hurontario Light Rapid Transit system, the developers said.

Mississauga, Canada’s sixth-largest city, according to Statistics Canada, is already backing another large redevelopment, the 72-hectare Lakeview Village where a coal-power generating station used to operate on the Lake Ontario shore.

Rogers Real Estate Development has started building a $1.5-billion project of 10 condo towers a stone’s throw from Square One. The city, Sheridan College and Ryerson University are partnering to create a business innovation hub in the downtown.

More than half of the 18,000 units planned for the Square One development are to be for rent, the developers said. The project will centre on a pedestrian-friendly civic space called The Strand as well as the existing mall, which boasts $500 million in improvements over the past five years including an expanded restaurant and bar area, the builders said.

Condominiums are to go on sale this spring when Oxford will also begin marketing office space, it said. The developer will use its experience building zero-carbon office towers to make Square One’s sustainable, it said.

“With the Hurontario LRT being built and a transit mobility-hub a key part of our plans, it gives us the opportunity to create a transit-connected and walkable downtown for Mississauga,” O’Donnell said. “The entire development will be anchored by Square One Shopping Centre, which is one of the best performing malls in North America.”

As a researcher I have worked with private investments’ data for many years. There is only one data set that is created so that a clear picture is available for private equity and infrastructure, and that is Burgiss. The data is not cheap and they are pretty secretive. But that is the only thing I think can be relied on for definitive conclusions.

A U.S. Republican lawmaker on Wednesday urged California to fire the chief investment officer of its public pension fund, the nation’s largest, citing what he called the CIO’s “long and cozy” relationship with Beijing, and assailed the fund’s investments in Chinese companies.

In a letter to California Governor Gavin Newsom, U.S. Representative Jim Banks of Indiana said Yu Ben Meng, the CIO of California Public Employees’ Retirement System (CalPERS), should at least be investigated.

“Governor Newsom, if it were up to me, I would fire Mr. Meng immediately,” Banks wrote in the letter.

“At the least, I think a thorough investigation of Mr. Meng’s relationship to the Chinese Communist Party and a comparison of CalPERS investments in Chinese companies before and after Mr. Meng’s 2008 hiring are both warranted,” he added.

A U.S. citizen born in China, Meng has twice worked for CalPERS, the first time starting in 2008 and the second time beginning in January 2019 when he became CIO managing $400 billion in investments, according to the CalPERS website.

In between the CalPERS stints, Meng worked for three years as deputy CIO with China’s State Administration of Foreign Exchange (SAFE), which oversees China’s U.S. Treasury security holdings, the website says.

Citing an online article in China’s People’s Daily, Banks asserted that China’s Thousand Talents Program recruited Meng for the job at SAFE. According to the FBI, TTP is a part of “China’s non-traditional espionage against the United States.”

CalPERS CEO Marcie Frost defended Meng in a statement.

“This is a reprehensible attack on a U.S. citizen. We fully stand behind our Chief Investment Officer who came to CalPERS with a stellar international reputation,” she said.

A CalPERS spokeswoman declined to provide a method to contact Meng, saying they had no further comment.

The Trump administration has been urging U.S. states to join the geopolitical battle with China. In a speech to governors on Saturday, U.S. Secretary of State Mike Pompeo urged states to be vigilant against local threats “with consequences for our foreign policy,” specifically pointing to CalPERS.

“California’s pension fund...is invested in companies that supply the People’s Liberation Army that puts our soldiers, sailors, airmen and Marines at risk,” Pompeo said.

Echoing Pompeo’s comments, Banks specifically criticized CalPERS’ investments in China’s Hikvision, whose surveillance equipment is used in detention camps for China’s minority Uighurs.

The Banks letter criticizes the fund for holding shares of China Communications Construction Co, which has helped build naval bases for Beijing in the South China Sea, it said.

CalPERS’ Frost defended the holdings, saying, “We’ve had a globally diversified portfolio for decades. This is a politically opportunistic attempt to force us to divest, undermining our ability to perform our fiduciary duty to provide retirement security to California’s public employees.”

Rep. Jim Banks (R-Ind.) on Thursday said that he has written a letter to California Gov. Gavin Newsom (D) to voice concerns over the state's public pension fund chief and his connections with China.

The Indiana congressman is calling out the California Public Employees' Retirement System (CalPERS), the largest state pension fund in the U.S., for allegedly investing in numerous select blacklisted Chinese companies that manufacture military products.

The California-based fund invested $3.1 billion into 172 different Chinese companies, Banks said in an appearance on Fox Business Network. He said that some of the companies invested in have been blacklisted by the U.S. government.

Banks said that he wrote in the letter to Newsom that Yu Ben Meng, the chief investment officer of CalPERS, should at least be investigated.

"Governor Newsom, if it were up to me, I would fire Mr. Meng immediately," Banks wrote in the letter. "At the least, I think a thorough investigation of Mr. Meng's relationship to the Chinese Communist Party and a comparison of CalPERS investments in Chinese companies before and after Mr. Meng's 2008 hiring are both warranted."

Meng is a U.S. citizen born in China and has worked for CalPERS two times, once starting in 2008 and then beginning in January 2019 when he was appointed to CIO managing $400 billion in investments, according to Reuters.

In the Fox Business interview, Banks said some of the equipment these Chinese companies are responsible for include technology such as Hikvision, which the Chinese use for surveillance on Uighur Muslim populations that the Chinese government has been accused of abusing.

CalPERS CEO Marcie Frost backed Meng in a statement.

"This is a reprehensible attack on a U.S. citizen. We fully stand behind our Chief Investment Officer who came to CalPERS with a stellar international reputation," she said.

A CalPERS spokeswoman declined to provide contact information for Meng, saying they had no further comment, according to Reuters.

Through the years, Banks has been honored with various recognitions for his service. In 2008, he was named to Northeast Indiana’s “Future 40 Leaders under 40” and in 2011, he was recognized as one of the top rising Republican legislators by Governing Magazine. Ivy Tech Community College awarded Banks the Distinguished Public Official Award in 2013 and he received the American Legion’s Distinguished Public Service Award in 2013 and 2014 for his work on behalf of Hoosier veterans. In 2014 he was invited to speak at the American Conservative Union’s CPAC conference in Washington D.C. as a top conservative under 40 years old.

Yu (Ben) Meng rejoined CalPERS in January 2019 as chief investment officer (CIO).

He oversees an Investment Office of nearly 400 employees and manages investment portfolios of roughly $400 billion, including the Public Employees’ Retirement Fund and affiliate funds.

Yu, a U.S. citizen born in China, returned to CalPERS after more than three years as the deputy CIO at the State Administration of Foreign Exchange (SAFE), the largest asset pool in the world with assets under management of over $3 trillion U.S. dollars.

Prior to his time at SAFE, he served at CalPERS for seven years with his last role as the investment director of Asset Allocation. He also was a portfolio manager in fixed income.

Before joining CalPERS in 2008, Yu worked at Barclays Global Investors as a senior portfolio manager, Lehman Brothers as a risk officer, and Morgan Stanley as a fixed-income trader.

He also serves as a member of the Future of Finance Advisory Council (CFA Institute) and is an associate editor for the Journal of Investment Management.

In 2014 Yu was the recipient of the Cheit Award for Excellence in Teaching at the Haas School of Business.

He holds a master's degree in financial engineering from the Haas School of Business at the University of California, Berkeley, and a doctorate in civil engineering from the University of California, Davis.

I'm not saying that US senators aren't right to sound the alarm and demand more transparency on which funds are investing in questionable Chinese companies that can impact US security, especially a fund like the Federal Retirement Thrift Investment Board which invests on behalf of members of the uniformed services, but it sets a dangerous precedent when US politicians get involved in fund investments.

The Federal Retirement Thrift Investment Board (FRTIB) is an independent Federal Agency with a single mission: To administer the Thrift Savings Plan solely in the interest of its participants and beneficiaries.

Ideally, there would be no government interference but I understand that in some cases, especially if it concerns military security, it needs to act accordingly and be a lot more sensitive when it comes to these investments.

My fear is a full-blown trade war with China is already degenerating into a currency war, and if high-profile US senators start demanding large US pensions to divest from certain companies, the Chinese will respond in kind and it might mean they will refuse to invest in some US companies and funds.

It's a slippery slope, one that will not only affect FRTIB but other large asset managers.