The Alberta Investment Management Corp. — which manages pension assets, sovereign wealth, and other public money — lost billions of dollars on wrong-way volatility trades when markets crashed earlier this year, and then shut down the strategies, according to informed sources.

The now-defunct volatility-trading program cost pensioners and Albertans about $3 billion, the sources said. That’s on top of substantial, first-quarter losses to portfolio value that nearly all public funds are dealing with amid the coronavirus crisis.

“It’s not very hard to lose $3 billion selling volatility,” said one quantitative hedge fund manager who frequently trades with the likes of AIMCo. “You’re doing stuff that has a minus-infinity potential outcome.”

Another highly complex strategy — AIMCo’s derivative-based “portable alpha” overlays — may have exacerbated the bleeding, according to one of the sources.

AIMCo wouldn’t comment on these or any other strategies, but pointed to extraordinary challenges in markets this year.

“The level of volatility that markets experienced in March 2020, the result of the Covid-19 pandemic, during which volatility rose faster, and on a more sustained basis that at any other time in history, is exceptional,” communications director Dénes Németh told Institutional Investor in an emailed statement this week. “AIMCo acknowledges that it is not immune to the challenges, unique as they may be, that institutional investors around the world have experienced.”

Indeed, many retirement systems and nonprofits reaped years of steady returns by investing in asset managers that sold options or other forms of short-term risk insurance. But when markets blew out, a number of these funds blew up.

Only a handful of institutions run their own volatility-trading strategies in-house, and the vast majority of them are Canadian. AIMCo provides virtually no public details about the program, which a portfolio manager named David Triska takes credit for building at least in part, according to his LinkedIn profile.

Triska claims that he managed and developed “three equity volatility strategies across global developed and emerging markets” at AIMCo, using historical options data, volatility surface estimation, and methodology inspired by at least three types of stochastic volatility (Gatheral, Heston, and Bates), among many other items.

Canada boasts some of the world’s most sophisticated and best performing public investment funds, which essentially operate like Wall Street firms but siphon profits to ex-bus drivers and retired nurses.

AIMCo is not among that top tier, experts and data suggest.

For example, the Ontario Teachers’ Pension Plan delivered 9.8 percent annualized over the last decade, whereas AIMCo gained 8.2 percent — a gap of more than 1.5 percentage points per year.

Even within its own province, AIMCo has trailed the smaller Alberta Teachers’ Retirement Fund. AIMCo is slated to vacuum up ATRF’s C$18 billion (about $13 billion) or so in assets, despite teachers’ and fund leaders’ protracted opposition. Had this already happened, AIMCo’s wayward volatility trades would likely have hit educators’ pensions. 

The Alberta Finance Minister’s office did not directly answer when asked if it would push ahead with the ATRF fold-in or consider pausing until the chaos clears.

“The transition of ATRF’s assets has not yet occurred and AIMCo operates with full operational and investment independence from the Government of Alberta,” a spokesperson for the provincial Treasury Board and Finance told II Tuesday. “AIMCo has a long track record of outperforming market benchmarks and providing great value to Albertans. We are facing unprecedented times and these are challenging market conditions for all investors. We are confident AIMCo will continue to meet the long-term investment objectives of their clients.”

The full extent of the first-quarter damage will come out in AIMCo’s annual public reporting. But in announcing its 2019 returns, the organization seemed set on controlling expectations.

“Our team is responding decisively in an effort to protect our clients’ liquidity and assets in the near- and medium-term, while still identifying longer-term investment opportunities that will come out of these challenging market circumstances,” said Kevin Uebelein, AIMCo’s chief executive officer, in an April 8 statement. “We know the impacts to their portfolios during these times of market uncertainty will be significant, and we are committed to accountability and full transparency to our clients as we navigate these conditions together.”

The Alberta Investment Management Corporation — the province's government-owned pension management fund — has reportedly taken a major hit due to the impacts of COVID-19 and the drastic drop to oil prices.

The Globe and Mail reported Tuesday evening that sources familiar with the situation say AIMCo has lost more than $4 billion through a volatility-based investment strategy. The story was first reported by Institutional Investor, a trade publication based in New York that follows pension funds.

AIMCo has a portfolio of about $119 billion, which represents hundreds of thousands of Albertans' pensions and accounts like the province's Heritage Savings Trust Fund.

Dénes Németh, AIMCo's director of corporate communication, said the pension manager does not comment on the performance of active investment strategies other than to its clients.

"The level of volatility that markets experienced in March 2020, the result of the COVID-19 pandemic, during which volatility rose faster, and on a more sustained basis than at any other time in history, is exceptional," he said.

"AIMCo acknowledges that it is not immune to the challenges, unique as they may be, that institutional investors around the world have experienced."

AIMCo's portfolio is broadly diversified, he said, adding that it's well positioned in the long-term.

Németh said AIMCo has been in frequent contact with investors to discuss the impact to portfolios relating to the current market conditions.

Teachers pensions not affected, yet

In fall 2019, public sector employees voiced concerns about the future of their pension plans after the Alberta government introduced legislation to lock in pension assets from all public sector plans under AIMCo's management.

Protests erupted, as it was announced roughly $18 billion in assets from the Alberta Teachers' Retirement Fund (ATRF) would be moved to AIMCo, and the new legislation prohibited any public sector plan from withdrawing. That transition has not yet been completed.

In February of this year, the Alberta Federation of Labour voiced concerns that the pension manager was being used to prop up the province's struggling fossil fuels industry at a time when many large investment funds have moved away from the sector.

Matt Wolf, the premier's executive director of issues management, tweeted Tuesday evening that AIMCo operates independently of government.

"From what I understand, 'volatility-based investment program' began well before the UCP (not that it was politically directed in any event),'" he wrote.

AIMCo announced its 2019 results earlier this month, and said its $11.5-billion net investment income hadn't met client expectations for the year, as the return was 0.5 per cent below its benchmark.

It also cautioned of the harder times ahead.

"While 2019 held its own challenges, 2020 is unparalleled with the global economic impact of COVID-19 and an oil price war causing virtually all asset values to be significantly repriced and investment markets to enter a period of sudden and unprecedented volatility," the April 8 press release read.

"Our team is responding decisively in an effort to protect our clients' liquidity and assets in the near- and medium-term, while still identifying longer-term investment opportunities that will come out of these challenging market circumstances." CEO Kevin Uebelein said in the release.

"We know the impacts to their portfolios during these times of market uncertainty will be significant, and we are committed to accountability and full transparency to our clients as we navigate these conditions together."

• AIMCo’s sole commitment is to its clients, in terms of managing their investments and in providing full transparency with respect to the performance of those investments. Accordingly, AIMCo does not comment on the performance of any active investment strategy other than to its clients or as part of its regular public disclosure processes.
• The level of volatility that markets experienced in March 2020, the result of the COVID-19 pandemic, during which volatility rose faster, and on a more sustained basis than at any other time in history, is exceptional. AIMCo acknowledges that it is not immune to the challenges, unique as they may be, that institutional investors around the world have experienced. Since the beginning of the year, management has maintained a high-degree of contact with each of AIMCo’s clients to discuss the investment performance impacts related to current market conditions.
• AIMCo is invested across a broadly diversified portfolio of asset classes and strategies – so far in 2020 some have performed well, while others have not. As a long-term investor, AIMCo is well-positioned to withstand, and not overreact to, short-term market fluctuations, further mitigating against having to crystalize underperformance when it does occur.
• Over longer-term, four- and ten- year time horizons, we continue to add value to client portfolios. AIMCo has a long track record of outperforming market benchmarks on behalf of our clients, including through challenging market conditions.

"Initially it looked like SARS, we thought it would be a V-shaped recovery, and then as it got a lot worse, the bottom in equities fell out, stocks collapsed, the VIX spiked to levels not seen since 1929 or 1987, and even bond volatility exploded. Hedge funds, ETFs, mutual funds, risk parity funds all exacerbated volatility."

Wow.

“The sources said that AIMCo now acknowledges its executives were not fully aware of the risks they were taking.”

Alberta pension manager loses $4-billion on investment bet gone wrong - #ableg#abpolihttps://t.co/90m4EwxsN9

— David Khan (@Dave_Khan) April 22, 2020

Some of the world’s biggest pension funds are preparing to plough more money into logistics assets in South Korea, seeing them as winners, as the coronavirus pandemic spurs the next wave of e-commerce transactions.

The Canada Pension Plan Investment Board, Dutch pension administrator APG and Hong Kong-listed ESR Cayman are putting US$1 billion into a joint venture called ESR-KS II, according to an email statement on Thursday. The vehicle, on a 45:35:20 equity participation basis, can grow up to US$2 billion.

The new venture is a successor to their US$1.15 billion South Korean investment from late 2015, and a bet on rising demand industrial and warehouse properties to process online transactions. Total e-commerce revenue in South Korea grew to US$92.4 billion in 2018 from US$16.2 billion in 2009, according to data compiled by Statista.

Coupang, a leading Korean e-commerce retailer, recorded about 64 per cent jump in revenue in 2019, the second time annual revenues climbed more than 60 per cent, according to media reports. Daily deliveries had risen to 3 million since mid-February, compared to 2.2 million in February last year, the company has said.

“Asia’s consumer sector has been one of our key investment themes,” said Jimmy Phua, head of Asia Real Estate at CPPIB, which managed C$420.4 billion (US$297 billion) at the end of 2019. The rapid growth in South Korea’s e-commerce market is driving demand for high quality logistics facilities in the country, he added.

ESR-KS II aims to invest in logistics properties in Seoul and Busan, the two cities with the highest consumer spending in the nation. Asia’s fourth-largest economy shrank by 1.4 per cent last quarter, the most since the final three months of 2008, with exports slumping because of the pandemic.

Yet, the logistics sector is showing resilience in these uncertain times, said Graeme Torre, head of real estate at APG Asset Management Asia, a unit of Dutch pension administrator APG that manages about €533 billion (US$577 billion). That will allow the venture to capture the next wave of growth and opportunity, he added.

ESR, which listed on the Hong Kong exchange last year amid social unrest, is the largest Asia-Pacific-focused logistics real estate platform by gross floor area and by value of the assets owned directly and by the funds and investment vehicles it manages.

ESR has set up a joint venture with longstanding investors Canada Pension Plan Investment Board (CPPIB) and Dutch pension manager APG to plough at least $1 billion into industrial real estate project in South Korea, as the Hong Kong-listed logistics developer and fund manager continues to corner institutional interest for the booming shed sector.

The JV, known as ESR-KS II, will develop a portfolio of institutional-grade warehouse assets in Seoul and Busan, tapping into the consumer spending power of South Korea’s two largest population centres, according to a joint announcement by the three partners.

The joint venture has been seeded with a site located between Seoul and the Incheon International Airport which will be developed into a logistics facility with a gross floor area of up to 154,422 square metres (1.7 million square feet) and a value of KRW 240B ($190 million) on completion.

ESR-KS II is the successor to ESR’s 2015 maiden South Korea JV with APG and CPPIB, which initially targeted $1 billion in total investments but was later upsized to $1.15 billion.

Supersizing to $2B

“Riding on the robust fundamentals of the APAC logistics sector, we will continue our strategy to expand our fund management platform across the region to grow our AUM while delivering solid returns for our capital partners and stakeholders,” ESR’s co-founders and co-CEOs, Jeffrey Shen and Stuart Gibson, said in a joint statement.

With allocation expansion options that could boost the total investment capacity to $2 billion, APG is making an initial investment of $350 million in return for a 35 percent stake in the JV, with CPPIB contributing $450 million for a 45 percent ownership interest.

ESR, which manages $22.1 billion in assets across Asia, will inject $200 million in cash in return for a 20 percent stake.

Should the partners choose to fully exercise the up-size options, each party to the deal could double their initial equity investments to bring cash contributions to the joint venture to $2 billion, according to ESR’s bourse filing.

Following Up on Shed Success

ESR is renewing its partnership with APG and CPPIB in Korea after being able to grow their 2015 deal to more than double its original $500 million target. That earlier venture invested in 17 projects totalling 2.2 million square metres across South Korea through ESR’s Seoul-based subsidiary Kendall Square Logistics Properties, with some of the projects still being developed.

“Following the success of our first joint venture with ESR and CPP Investments in Korean logistics, we are delighted to be able to repeat the partnership,” said Graeme Torre, head of real estate for APG Asset Management Asia.

Torre added that the latest JV intends to “capture the next wave of growth and opportunity in a sector that even in these uncertain times, is demonstrating resilience”.

Jimmy Phua, head of Asia real estate at CPP Investments, which manages investments on behalf of CPPIB, said that Asia’s consumer sector is one of the C$420 billion ($296 billion) Canadian pension fund’s key investment themes,

Phua noted that the growth of South Korea’s e-commerce market, which is among the demand drivers for logistics facilities in the country, underpins the latest joint venture with ESR.

South Korea’s e-commerce market ranked as the sixth largest in the world last year, after growing by 6 percent to reach $66 billion in value by the end of 2019, according to online statistics provider ecommerceDB.

Pulling in Capital From Big Players

The latest tie-up with APG and CPPIB follows a wave of fund raising announcements by ESR this year, as it continues to pull in capital from global investors to fuel its growth across Asia.

Less than a month ago, the Hong Kong-listed logistics specialist announced a A$1 billion ($610 million) JV with an institutional partner to develop logistics and industrial facilities in Australia, with that investment ally reported to be Singapore sovereign wealth fund GIC.

Two months before announcing that Aussie deal, ESR had unveiled that it had teamed up with the $360 billion Singapore government vehicle for a $500 million joint venture to develop institutional grade logistics facilities in key cities across China.

APG, Canada Pension Plan Investment Board (“CPP Investments”) and ESR Cayman Limited (“ESR”; SEHK Stock Code: 1821) announced today they have entered into a strategic agreement to establish a new development joint venture, ESR-KS II (“ESR-KS II” or the “Joint Venture”), with a total equity allocation of US$1 billion, representing an investment capacity to deliver as much as US$2 billion of new development projects.

ESR-KS II is a new development joint venture which will invest in and develop a best-in-class industrial and warehouse logistics portfolio in the Seoul and Busan metropolitan areas, the two markets with the largest populations and highest consumer spending in South Korea. APG, CPP Investments and ESR have agreed to initial investments in the Joint Venture in the amounts of US$350 million, US$450 million and US$200 million, respectively. The partners have allocation expansion options that could bring the total equity investment capacity to as much as US$2 billion over time. APG, CPP Investments and ESR will hold 35%, 45% and 20%, respectively, of the total issued shares of the Joint Venture.

The Joint Venture marks APG’s fourth development collaboration with ESR, and CPP Investments’ third joint venture with ESR. It is a successor vehicle to a US$1 billion joint venture – which was later upsized to US$1.15 billion – between the three parties that has led to the development of 17 projects totalling 2.2 million sqm of GFA in South Korea.

Graeme Torre, Head of Real Estate, APG Asset Management Asia commented: “Following the success of our first joint venture with ESR and CPP Investments in Korean logistics, we are delighted to be able to repeat the partnership. This will allow us to capture the next wave of growth and opportunity in a sector that even in these uncertain times, is demonstrating resilience. Throughout our global portfolio we look for investment opportunities that allow us to meet the long-term return and sustainability objectives of our pension fund clients. With like-minded partners such as CPP Investments and the local execution expertise of ESR, this new venture is perfectly placed to do just that.”

Jimmy Phua, Head of Asia Real Estate at CPP Investments, said, “Asia’s consumer sector has been one of our key investment themes. The continued growth of South Korea’s e-commerce market is driving the demand for quality logistics facilities. This new joint venture deepens our longstanding relationship with ESR and APG. It will be key to our growth strategy in the logistics sector globally.”

ESR’s integrated fund management platform has provided its capital partners with access to some of the world’s best secular growth opportunities propelled by the positive trends of e-commerce, urbanization and domestic consumption in the region.

Jeffrey Shen and Stuart Gibson, Co-founders and Co-CEOs of ESR, said, “This extension of our partnership with APG and CPP Investments is a testament to our best-in-class local management team led by Thomas Nam and Jihun Kang and our market leading position in South Korea. Riding on the robust fundamentals of the APAC logistics sector, we will continue our strategy to expand our fund management platform across the region to grow our AUM while delivering solid returns for our capital partners and stakeholders.”

ESR-Kendall Square, ESR’s South Korean platform, has not only built a strong track record in funds management, its modern logistics facilities have gained industry-wide recognition for their advanced architectural designs and their sustainability-focused approach. ESR-Kendall Square’s properties have earned numerous awards and certifications, including APAC’s first WELL Gold Certification for logistics real estate and a number of LEED Gold Certifications.

The transaction is expected to close before July 2020, subject to relevant regulatory approvals.

Headquartered in Hong Kong, ESR is a leading logistics real estate platform with a network spanning across the People’s Republic of China (“PRC”), Japan, South Korea, Singapore, Australia and India. This extensive geographical reach enables our tenants to expand throughout the region as their businesses grow, and provides investment opportunities for our capital partners to tap into the region’s strong growth momentum.

“Asia’s consumer sector has been one of our key investment themes. The continued growth of South Korea’s e-commerce market is driving the demand for quality logistics facilities. This new joint venture deepens our longstanding relationship with ESR and APG. It will be key to our growth strategy in the logistics sector globally.”

James Maydew, AMP Capital’s global property securities manager, says that, when looking at new markets in Asia, he thinks of Germany. “Eight years ago, listed real estate was a nascent sector in Germany,” he says.

“Today, Germany is a significant part of global investment opportunity. You have got to look at newer countries and less-established sectors and be entrepreneurial in thinking about your options.”

Today, the choice for global REIT investors is limited to Australia, Japan, Singapore and Hong Kong. And that is ironic, given Asia-Pacific represents such a sizeable chunk of the global real estate market. “There is a disconnect between what is happening in the property market and listed space,” Zialcita says. “The performance of the property market in Asia over the past several years has been spectacular. We have seen tremendous economic growth in our region, relative to the rest of the world. But there isn’t the trading volume in REITs.”

Maydew, who manages A$5.8bn in property securities, describes the listed real estate market as a proxy for direct real estate. “It’s the same bricks and mortar, driving long-term returns,” he says. “Globally, we are seeing a significant appetite for real estate because it plays a diversification role in balanced portfolios. In a low-growth and low-rate environment, underlying demand for real estate becomes more prevalent.”

Investors are hungry for yields, particularly since many central banks are cutting interest rates, he says. “We have seen a precipitous fall in global risk-free rates.”

The upshot is that demand for listed real estate has turned property securities into increasingly expensive assets, raising the question of how long property’s good times might last.

Gross domestic product shrank 1.4% in the three months through March from the prior quarter, slightly above economists’ forecast of a 1.5% contraction, according to the Bank of Korea. Falling consumption was the biggest drag as the coronavirus weighed on sentiment and kept people homebound.

From this quarter, the main risk to South Korea’s growth is global trade as markets in the U.S., Europe and Japan grind to a halt. Chip exports, the country’s biggest source of income, appear to be losing momentum again as the pandemic hurts demand.

As bad as South Korea’s economy performed last quarter, it’s still likely to have fared far better than other major economies, a testament to the country’s success in containing the virus without having to resort to lockdowns. The outlook now depends largely on how strongly consumption rebounds, the speed of stimulus efforts and the depth of the global trade slump.

"Korea was in control of its Covid-19 outbreak much earlier than anywhere else apart from China,” wrote Robert Carnell, chief economist for Asia Pacific at ING Groep NV in Singapore. “Most of the weakness in 2Q will relate to the global backdrop rather than domestic weakness.”

Shocks to South Korea’s trade-reliant economy could widen this quarter as the global recession deepens, the finance ministry warned in a separate statement Thursday.

Another wave of virus cases could also complicate efforts to offset trade headwinds with consumer spending. South Korea is considering relaxing its social distancing rules and reopening schools in May, but disease control officials have warned that the odds of a second outbreak are high.

Bank of Korea GovernorLee Ju-yeol this month said the economy will probably eke out growth this year, but at a rate of less than 1%.

A BOK statistics official, speaking after the GDP report, said growth this year would require semiconductor exports gathering momentum and the virus being brought under control at home and abroad.

“If all of these factors combine to serve as a positive factor, it wouldn’t be a very bad growth figure,” said the official, Park Yang-su.

Government’s stimulus kept the first quarter contraction from being worse and is likely to continue to play a significant role.

So far, the government has pledged at least 245 trillion won ($199 billion) in spending, loans, and guarantees to shore up the economy. President Moon Jae-in called Wednesday for a third emergency budget and a “Korean-style New Deal” to create jobs longer term.

That came after South Korea last week unveiled a second extra budget worth 7.6 trillion won to pay for cash handouts to millions of mid-to-lower income families. The ruling party has since called for expanding the payments to all households, although the government and the opposition party oppose the idea as too expensive.

“South Korea got its outbreak over with faster than other advanced economies did,” said strategist Moon Hong-cheol at DB Financial Investment. “What happens in the second-quarter depends a lot on how quickly stimulus measures can be passed.”

A total of 141 people who had apparently recovered from Covid-19 have tested positive again, South Korea's Centers for Disease Control and Prevention (KCDC) says https://t.co/gD7mDYoh8e

— CNN (@CNN) April 16, 2020

🚨 “By Friday, Korean health authorities had identified 163 patients who tested positive again after a full recovery. The number more than doubled in about a week, up from 74 cases on April 9.” https://t.co/rWaJUOhT5s

— Katie Phang (@KatiePhang) April 18, 2020

Neiman Marcus could file for bankruptcy as soon as Sunday and is in talks with its current lenders about raising roughly $600 million in emergency financing to fund operations through the restructuring, people familiar with the situation tell CNBC.

In bankruptcy, the retailer will work to flush its more than $4 billion of debt leftover from its sale to Ares Management and the Canada Pension Plan Investment Board in 2013. Even before the coronavirus pandemic struck, that debt acted as an albatross, limiting its ability to invest in technology as new competitors like Yoox’s Net-A-Porter encroached on its once untouchable position in luxury retail.

Neiman Marcus is hoping its status as a luxury brand will help it emerge from the crisis a leaner and stronger company. The department store chain also owns high-end Bergdorf Goodman in New York’s midtown.

It does not plan to close any of its 43 Neiman Marcus stores as part of its planned Sunday bankruptcy filing, the people said. Still, retailers sometimes whittle down their store footprint while in bankruptcy.

Neiman Marcus previously announced plans to wind down its off-price chain, Last Call, and shutter the majority of its 24 stores by the first quarter of its fiscal 2021, to focus on luxury.

All of Neiman Marcus’ stores have been shut since March 17 due to the coronavirus. Most of its 14,000 workers have also been furloughed.

Hudson’s Bay Co., which owns Neiman Marcus competitor Saks, has been considered a logical suitor for Neiman Marcus, once it filed for a long-anticipated bankruptcy and shed itself of onerous debt. But with revenue for all retailers drastically reduced and markets rattled by the coronavirus, financing a large deal may be difficult.

Meantime, in bankruptcy, Neiman Marcus and its owners may need to deal with ongoing litigation with one of its bondholders, Marble Ridge Capital. The distressed debt fund has alleged that Neiman Marcus’ decision to carve out its MyTheresa website in a prior debt restructuring deprived the company’s creditors of a valuable asset. The firm, run by Daniel Kamensky, has said “it will take all necessary actions to protect its rights.” Neiman Marcus has dismissed the allegations, according to previous reports.

The people requested anonymity because the information is confidential. Neiman Marcus and Ares declined to comment. Hudson’s Bay Co. and CPPIB did not immediately respond to a request for comment.

Neiman Marcus will mark the first major retail bankruptcy of the coronavirus pandemic, which has jolted the economy and crippled the already struggling retail industry. It has also made the prospect of managing a bankruptcy a difficult one: it is hard to plan liquidation sales of select stores, or entire store bases, with nonessential retailers ordered shut. As various states make plans to begin lifting their coronavirus restrictions, retailers must decide how to handle varying mandates. 

Landlords, meantime, will be forced to assess the value of a retailer on its property with little insight as to how easily they can replace them.

A Neiman Marcus bankruptcy could deal a massive blow to Related Cos.′ glitzy Hudson Yards shopping mall in Manhattan, where the high-end department store is an anchor tenant, spanning multiple levels with a number of restaurant options. Should Neiman Marcus ever shut its store there, it could trigger requests for rent reductions from other retailers there or even an exodus of tenants.

A representative from Related did not immediately respond to CNBC’s request for comment.

Retail pain has acceleratedthroughout the industry. Gap warned in a filing this week that it may not have enough cash flow to sufficiently fund its operations and said that it is looking to renegotiate or defer the terms of its leases. The company also said it could provide “no assurances” it will be “able to recommence” business at existing leases at all. 

And while malls had in recent years sought to bring “experiential” options into properties, like gyms, those too have fallen under pressure as the government has recommended “social distancing” to manage the pandemic.

Similar questions may confront J.C. Penney, which is considering its own bankruptcy filing, people familiar with the matter told CNBC. Any potential bankruptcy filing for the department store, though, is at least a few weeks away. It has yet to finalize the detail of any bankruptcy plans and determine how much in bankruptcy financing it would need, people familiar with the matter tell CNBC.

“If you look at where we are in the cycle, it’s a good time to buy this business,” said Andre Bourbonnais, senior vice president of private investments at CPPIB, one of Canada’s largest public pension funds and a global dealmaker whose assets including shopping malls, real estate and infrastructure.

“People feel more and more confident about the recovery in the U.S. and the sustainability of that recovery.” 

Bourbonnais praised Neiman’s management team and said the retailer would continue on a “business as usual” track, focused on strengthening its online retail business and looking for opportunities to expand the brand geographically.

“There are no immediate plans” to expand in Canada, he said. But Neiman would keep studying “when it’s advisable to come to Canada.” 

Red flag in the Umich sentiment index: "prob of losing a job in the next 5 years" hit a record high of 18.9%. Expected biz conditions for next 5 yrs at a 6-yr low. Points to a rising savings rate/calls into question the narrative of future "normalized" profits not being dented. pic.twitter.com/DfKliyuMZJ

— David Rosenberg (@EconguyRosie) April 24, 2020

Neiman Marcus' looming bankruptcy is set to be a huge challenge for the ritzy new mall at Hudson Yards, potentially causing a domino effect of departures or lease renegotiations.

The luxury department store reportedly is on the verge of filing for bankruptcy protection, and that could be a mean a new lease deal with Related Cos. and Oxford Properties, which own the Hudson Yards mall where Neiman is the anchor tenant, Business Insider reports.

Related and Oxford cut a sweetheart deal with Neiman, paying for a pricey build-out and agreeing to take a cut of the department store's sales in lieu of rent, BI reports. But the wider issue is that some retailers have clauses in their own leases that give them the option to renegotiate or leave if Neiman packs up, according to the publication.

The Shops & Restaurants at Hudson Yards, which opened in March 2019, is closed because of the coronavirus pandemic. Retailers across the country are taking a massive hit from lockdown measures, and landlords say many of their retail tenants have not paid rent, a situation only set to get worse as April melts into May. Related CEO Jeff Blau, who has previously said that tenants who can pay their rent have an obligation to do so, told Bloomberg this week that he foresees a wave of defaults coming.

 “Once that ecosystem of rent to expenses to interest to the banks gets broken at one part of the chain, that’s going to become a problem," he told Bloomberg.

The anticipated bankruptcy of Neiman Marcus could throw Related and Oxford Properties’ Hudson Yards mall into peril. The move would put the developers in the precarious position of possibly having to renegotiate the retailer’s lease and enter into conversations with other retailers whose lease agreements are tied to Neiman’s presence, BI first reported.

• Dig Deeper: The developers provided extremely favorable lease terms as they paid for the majority of the costs for building the store’s interior. They also reached an agreement to take 5 percent of sales instead of rent in the initial three years, and 8 percent in the following two years. The parties were reportedly planning to enter into a traditional rent arrangement starting in the sixth year of the lease.
• E-commerce was already threatening: The brand was considered such a significant selling point that several other stores in the mall reached agreements in their leases that allowed for rent discounts or lease exits if Neiman were to go. Landlords were already losing leverage before the pandemic.

Tom Barrack said the U.S. property market is in “chaos” because authorities are allowing renters and homeowners to skip payments https://t.co/eaaE0qFHN8

— Bloomberg Australia (@BloombergAU) April 24, 2020

Private real estate debt and mortgage market in even worse trouble up here in Canada and yet getting little to no coverage. Meanwhile funds are gated, NAVs flat and still being marketed as outperforming public markets. https://t.co/8gIy0pxOUc

— Martin Pelletier (@MPelletierCIO) April 24, 2020

Private markets investors face a major challenge these days: How to evaluate the impact of coronavirus-driven economic disruptions on their holdings.

A pair of indexes suggest that private equity portfolios may be suffering more than those held by venture capital firms.

The Thomson Reuters Private Equity Buyout Index, which tracks the performance of private equity funds, as of Thursday had lost 24% so far this year.

By comparison, the Thomson Reuters Venture Capital Index had dropped 4.1% in the same period. The latter index serves as a proxy for venture capital fund returns.

“The indices are designed to provide an indication of what the general valuation change is for the private equity or venture capital space,” said Arthur Bushonville, co-founder and chief executive of DSC Quantitative Group, a Chicago-based investment firm that helped develop the indexes. "We think they’re very indicative of the change in valuation overall for those two asset classes."

The private equity index is derived from a selection of publicly traded securities used to replicate the returns of thousands of portfolio companies backed by sponsor funds, based on a DSC model. The companies in that model are picked from databases maintained by Refinitiv, a Thomson Reuters financial unit. The venture capital index tracks the performance of VC-backed companies, also using a selection of publicly traded assets.

DSC constructed the indexes working with the Thomson Reuters unit and began marketing them in 2014.

The diverging performance of the proprietary indexes reflects the differing overall composition of holdings by the two types of private market investment vehicles, with venture funds often backing comparatively more companies that are less affected by the pandemic, Bushonville said.

He said the venture capital index “is highly concentrated on technology and health care, and those are two of the best performing sectors…we’ve seen in the market over the last month or so”.

For example, technology investments accounted for 78% of the venture capital index when the year began, compared with 32% of the private equity index. On the other hand, the utilities and energy sector, where oil-related companies have been hammered as lockdowns erase demand for fuel, made up 7% of the private equity index and 0.3% of the venture capital barometer.

Venture capital’s focus on innovation could also help shore up portfolio value during the pandemic, as businesses developing new products have a better chance of remaining attractive to investors, said Jeff Knupp, DSC’s president. He cited the $600m in funding received earlier this month by payment processor Stripe, as one example.

“We’ve seen the private equity side pull back as we would have anticipated,” Knupp said. “We would have thought maybe VC would go down similarly, but it’s really held up very well.”

All of this brings me to the current crisis in the industry. Last week, I went into why doctor staffing companies, owned by Blackstone and KKR, are cutting pay in a pandemic. But there’s more pain that private equity is dishing out; Axios reported that Staples, the private equity-owned office retailing chain, is stiffing landlords and refusing to pay rent on its stores, as is private equity-owned Petco (by CVC Capital Partners). Meanwhile a different private equity owned pet chain, Petsmart, is refusing to close its dog grooming salons and giving talking points to its employees misconstruing the law.

What’s interesting here is not just the use of power to extract concessions, but something else. Desperation. Petsmart is basically telling its employees to mislead law enforcement, and Staples is stiffing landlords (though one wonders if Staples is still paying rent to Sycamore for its headquarters). This isn’t normal. Indeed, something is wrong in private equity land. One of the biggest, and oldest, private equity firms, Kohlberg Kravis Roberts, or KKR, with hundreds of billions of dollars under management just warned investors that its business is in trouble.

Part of the risk here is what every company is experiencing, which is a depression. KKR told investors that its asset values “are generally correlated to the performance of the relevant equity and debt markets.” Some portfolio companies, the Wall Street Journal reported, “in sectors such as health care, travel, entertainment, senior living and retail could become insolvent if the disruptions from the pandemic and measures taken to stem them such as business shutdowns it aren’t ended.”

This is obviously true throughout the space, with a host of private equity companies whose investments have obviously evaporated; Vista Equity Partners paid $1.9 billion for yoga studio software company MindBody, and Bain Capital bought cheerleading monopoly Varsity in 2018 for $2.5 billion. Both companies are engaged in layoffs, and are in trouble.

And this gets to the much more serious problem that PE is having with this coronavirus crisis, which is potential trouble with the engine that makes the whole thing run, or borrowers. As KKR put it to investors recently, “We and our funds may experience similar difficulties, and certain funds have been subject to margin calls when the value of securities that collateralize their margin loan decreased substantially.”

Many of their portfolio companies were leveraged up with debt to increase returns, but the downside of leverage is that it magnifies losses. Envision, the KKR-owned doctor staffing firm, just hired an investment bank to find a way to renegotiating its massive $7.5 billion debt load; portions of its loans are trading are trading at 60 cents on the dollar. A company that can’t pay back its loans is bankrupt. And while Staples hasn’t defaulted on its debt, it is defaulting to creditors when it stopped paying rent. (I asked Sycamore if they have revalued Staples, but I didn’t get an answer.)

Between the 2008 financial crisis and the pandemic, it had been smooth sailing for private equity firms, who had in turn gotten more and more aggressive. Pension fund investors have thrown more money at PE firms, and debt investors, hungry for anything with a return, have also gotten more hungry for higher yields. PE firms have even launched their own debt funds, meaning that they are both borrowing money to buy firms and lending money to support takeovers. Basically, there’s now an entire shadow banking system of private equity giants and their various captive institutions lending and borrowing from each other, and buying and selling each others’ companies.

As they passed firms to one another, took them public and bring them private, loaded them up with debt and then more debt, it meant that the price of firms had been steadily going up. As a result, as Daniel Rasmussen & Greg Obenshain reported in their excellent article published just before the crisis in Institutional Investor magazine, PE funds are paying higher prices for firms with less cash flow, even as loan quality has deteriorated.

Private equity is undergoing what the great theorist Hyman Minsky pointed out is the Ponzi stage of the credit cycle in capitalist financial systems. This is the final stage before a blow-up. As Minsky observed, a period of placidity starts with firms borrowing money but being able to cover their borrowing with cash flow. Eventually, there’s more risk-taking until there’s a speculative frenzy, and firms can’t cover their debts with cash flow. They keep rolling over loans, and just hope that their assets keep going up in value so that they can sell assets to cover loans if necessary. To give an analogy, in 2006, when people in Las Vegas were flipping homes with no income, assuming that home values always went up, that was the Ponzi stage.

Now, what happens with Ponzi financing is that at some point, nicknamed a “Minsky Moment,” the bubble pops, and there’s mass distress as asset values fall and credit is withdrawn. Selling assets isn’t enough to pay back loans, because asset prices have collapsed and there’s not enough cash flow to service the debt. Mass bankruptcies or bailouts, which are really both a restructuring of capital structures, are the result.

I think you can see where I’m going with this. PE portfolio companies are heavily indebted, and they aren’t generating enough cash to service debts. The steady increase in asset values since 2009 has enabled funds to make tremendous gains because of the use of borrowed money. But now they are exposed to tremendous losses should there be any sort of disruption. And oh has this ever been a disruption. The coronavirus has exposed the entire sector.

 "I don't know if it's $500 million or $750 million or more, but that will be wiped once Neiman files for bankruptcy and creditors get first liens on assets. CPPIB can absorb these losses and might have already taken a writedown on Nieman as it was in trouble for a long time. However, they did another deal with Ares back in 2013 acquiring 99 Cents Only stores that was valued at US $1.6 billion. Not sure how well that is going."

China experienced a rapid decline in cases after their epidemic peaked, Spain and Italy were much more gradual descents. The U.S. experience will likely mirror Europe; and while we're showing signs of peaking, we're still recording 30K+ infections and about 2,000 deaths daily. pic.twitter.com/YkECkQQGdd

— Scott Gottlieb, MD (@ScottGottliebMD) April 27, 2020

Bill Gates told French newspaper Figaro that it will take two years to return to normal — “Bill Gates: «Nous n’allons pas revenir à la normale avant un à deux ans»” : https://t.co/aGgjFlQjSX

— Edward Harrison (@edwardnh) April 27, 2020

The title should read: “The market is rebounding on hope”. Sell in May and stay AWAY! https://t.co/SHHE5PhcIM

— Leo Kolivakis (@PensionPulse) April 27, 2020

The ‘Great Repression’ is here and it will make past downturns look tame, economist says https://t.co/IcBK7mol75

— Leo Kolivakis (@PensionPulse) April 27, 2020

A Flood of Business Bankruptcies Likely in Coming Months - The New York Times https://t.co/ceIAOqB6dc

— Leo Kolivakis (@PensionPulse) April 26, 2020

IMCO has started a new section on its website providing some very valuable insights on the economy and asset class strategies.

IMCO Insights feature in-depth interviews with their experts and I think it's worth going over them.

First, Tanya Lai, IMCO’s Managing Director of Public Equities, discusses how IMCO is building its public equity portfolio and keeping a long-term perspective during this unprecedented time:

How do you navigate an environment like this one, with the coronavirus pandemic causing daily significant swings in major global equity markets?

With any market dislocation, we have to view it as an opportunity. If you look at it only from the risk and loss perspective, you miss the opportunity to capitalize on what’s happening.

So, for example, we examine whether the selloffs mean we should be rotating out of certain sectors and into others. We are also looking to see if we should slow the implementation of some of our strategies because doing so might allow us to hold on to a certain exposure we find appealing.

It’s also not just the coronavirus. We’ve also got the recent volatility in global energy markets, which obviously impacts equities and creates new potential opportunities for us as well.

How would you describe your fundamental goal as a public equities investor?

We have a two-pronged goal. First, like everyone else, we want to beat the benchmark over the long term. Second – and this is what sets IMCO apart in our view – we are striving to deliver a Sharpe ratio net of cost that is better than the benchmark (at its most basic, the Sharpe ratio measures how much excess return an investor earns in exchange for holding a riskier asset). We’re trying to pull down cost and become efficient with how we take on risk, all to deliver better returns for our clients.

Tell us more about the portfolio your team is building at IMCO. How do you balance cost while pursuing above-market returns?

We’re working to create a portfolio that encompasses a number of complementary strategies that give us and our clients diverse global equities exposure on a cost-efficient basis.

One way we’re managing expenses is by allocating a part of our portfolio to low-cost, factor-based investing. We believe exposure to factors like momentum, value, quality and size will generate outperformance over a generic benchmark index in the long run.

We’re also building an internal fundamentals team that will focus on relationship-style investing, taking more of a private-equity approach to public investing. They’ll take chunky, minority ownership in small and mid-cap firms in North America or Europe; they will be expected to sit on boards and constructively work with management to grow the business and make it stronger. We’re looking for high-quality companies with predictable cash flows. Each year, we will grow this portfolio slowly by three or four stocks at most, because it’s an intensive, in-depth process.

We also work with external managers who offer high-conviction strategies focused on portfolios of 25 or 35 stocks globally and who take smart active risk that helps drive returns. We are looking for those who are doing something really targeted and different that we cannot easily replicate ourselves.

And then last but not least, there’s the index completion piece that rounds out the portfolio.

Is it difficult to make real-time decisions in the moment while being mindful of the fact that your clients’ investment horizon is much more long-term?

I think the biggest risk is trying to be too clever and trying to time things too precisely. Our key is to keep the long-term perspective in mind. We’ve stayed away from making trades on a day-by-day or even week-by-week basis because we measure success over years, not days.

Ultimately, our clients are attracted by our people, our performance and our process, combined with excellent risk management and governance. That’s what we’re focused on building at IMCO.

How has the coronavirus pandemic impacted your view of the private and public markets? How is it shaping conversations with clients?

Jennifer: From a credit perspective, the current market volatility represents a great opportunity for capital like ours, that can take advantage of both structural complexity and illiquidity in the market. It creates the potential for us to structure some favourable deals that will look good over a five-year horizon.

It also lets us take advantage of IMCO’s “one-stop shop” approach and collaborative culture to think across asset classes. For example, one of our infrastructure colleagues recently came to us to discuss a co-investment. The transaction involved access to capital markets, which of course has been impacted by the pandemic, which in turn created a potential opportunity for us to lend money. So being part of an integrated team free of silos is a benefit in surfacing these sorts of situations.

Christian: The pandemic has brought significant disruption to the financial markets, and that volatility is driving very different outcomes for companies with different liquidity and fundamental profiles. As a potential provider of liquidity, we’re poised to capture some really interesting market opportunities. Even high-quality names have sold off significantly, which presents an opening for us.

So far, I think our clients are pleased we’re quickly adapting to market conditions, exploiting our liquidity and going after some interesting investments.

How else does IMCO differentiate itself from other asset managers? What’s unique about your offering?

Christian: We differentiate ourselves on speed, quality and cost. In terms of speed, we can help our clients get to opportunities and asset classes more quickly and cleanly than they might otherwise. When it comes to quality, we’re always going to be a friendly, constructive and strategic investor in the companies we support. We have a long-term point of view, certainty of capital, and perspective and insight. And lastly, we have a very effective cost of capital, which lets us be competitive in the markets that we’re addressing.

Our product offering is also definitely a part of our secret sauce. We have a flexible, adaptive and really compelling menu of products, which means we don’t force our clients into a “one size fits all solution.” Instead, we’re able to match almost any risk and liability profile and adjust as the client’s needs evolve.

Why is it so important to think about the long term in an environment like this one?

Jennifer: Simply put, it’s impossible to call a top or a bottom in the market. Instead, we believe it’s important to have an investment process with a long-term horizon that permits averaging into investments and being positioned to react to opportunities when the market presents them.

Being able to deliver scalable, risk-managed, long-term oriented products that can take advantage of these dislocations is a central feature of what we offer. We’ve got a really strong team focused on executing on the market insights we’ve developed, enabling us to deliver attractive exposures our clients might not be able to access themselves.

What segments of the credit universe are attractive at present?

Jennifer: We see both immediate public market dislocation opportunities and longer-term private market situations. We have the opportunity to capture an illiquidity and complexity premium in private credit, and there are also private deals that don’t come to the public market for a variety of reasons like size or flexibility of borrower requirements.

Christian: I would add that we’ve also been cautious for some time of cyclical and commodity-driven parts of the market. We generally prefer to find a great business and a great management team to invest in over a number of cycles, and to patiently build value over time by supplying them with capital. It just fits much better with our culture and our long-term horizon.

How are you thinking about portfolio design given the COVID-19 pandemic and the current period of extreme volatility?

It’s clear that diversification is key right now. This volatile period hasn’t changed the way we start discussions with clients or how we’re working with them to design their portfolios, but it’s certainly reinforcing that message in a big way.

One way we’re helping clients diversify is through our products. For example, we separated government fixed income strategies from the credit strategy. Typically, you see these asset classes together in a combined bond portfolio. To us, that’s not optimal. So instead we are offering a fully dedicated credit product and a fully dedicated government fixed income offering in a more “purified” way to clients diversify more effectively.

We’re seeking to build an “all-weather” portfolio at IMCO. We know that the macro environment will be challenging from time to time, that recessions will happen, and so on, but our portfolios are built to withstand those cycles while staying true to our clients’ risk appetite and long-term objectives.

Rebalancing client portfolios in an environment like this one takes significant discipline. What is your approach?

First of all, we’re focused on maintaining liquidity, and our decision to separate government fixed income from the rest of credit was driven in part by that focus. That’s because government fixed income really acts as the liquidity pool that we use for rebalancing.

We believe that rebalancing overall is extremely important. Every month, we rebalance to our clients’ agreed target because we have a long-term investment horizon, as I mentioned. In a down market like this one, it might feel like trying to catch a falling knife at times, but we think in decades, not weeks or months. We strongly believe that over the long run, this creates value for our clients.

Can this approach to rebalancing constrain your ability to seize on emerging opportunities you see in the market?

Not at all – we’re always looking for value-add opportunities across every asset class and have access to the liquidity required to pursue these potential opportunities. In a market like this one, with lots of noise and new distractions on an almost hourly basis, our clients rightly ask us many questions about this topic. While our baseline is to rebalance at month-end, if we decide to deviate from that, it’s because we’ve got an active view on a particular asset class. Importantly, from a governance standpoint, my team also has clear accountability for every active decision we make at the total portfolio level.

IMCO has streamlined the number of investment solutions to clients. What drove that decision?

We decided to offer fewer strategies, but to ensure that they have compelling breadth and that they don’t place a heavy implementation burden on our clients.

That’s different from the traditional approach. Let’s say you’ve got separate large cap and small cap equities products. Typically, the client then has to decide how much money to allocate to each. We believe that that allocation should actually be the job of the investment management company, not the client. This allows clients to leverage our full investing expertise, and I think it has resonated very well with them.

The IMCO team individually has an extremely impressive track record of success, but because we’re a relatively new organization, we don’t have a collective track record just yet. That will of course change over time, but right now we’re being humble, working hard, leveraging our past expertise and building for the future

How are you thinking about infrastructure as the year unfolds? Where do you see the opportunities for this asset class?

There’s no question that investor appetite for infrastructure remains strong. We’ve got up to a $10-billion allocation to this asset class and we are well underway in deploying this capital. We’re being prudent, methodical and responsible, and are doing this both directly and through funds.

Our strategy is global, and we’re seeing a lot of activity across the asset class. When assets are fully valued, there are many willing sellers and that has been the case for the last two years, especially in North America and Europe. There are significant amounts of capital chasing deals in those markets, which has driven this trend.

What we’re trying to do right now is two-fold. First, we’ve been looking at our existing portfolio to determine which assets we’d like to keep and own more of, and which ones we’d like to sell. And then second, we’re looking at assets that offer clients improved diversification, opportunities that are strategic in nature for IMCO and, given the current market environment, value-oriented opportunities.

Wherever you look in the private markets, there’s talk of significant amounts of “dry powder” capital – money that large institutions are waiting to deploy. Does that make infrastructure investing more challenging for IMCO?

There certainly is a lot of dry powder in the infrastructure world, but generally I would describe most of the market as appropriately pricing risk. It’s forcing everyone to be more disciplined, and that’s really where we excel. We believe there’s still good value to be found among the largest transactions in the world, as well as select regions in the world such as Latin America, pockets of Europe and a number of emerging markets. The pandemic has created challenges for some sectors that ultimately translates into potential investment opportunities at valuations that were not available a few months ago.

What’s guiding your investment decisions in this sort of environment? Are there sectors or industries you’re focused on?

We are trying to deliver absolute returns to our clients and offer portfolio diversity in doing so. Our portfolio view does not change from a fully valued environment to a dislocated environment.

In terms of sectors, we’ve been generally cautious on transportation assets over the last year, as we have been on the back end of a long bull run. We think other private investors view the world in a similar way. This cooling off could end up translating into some interesting transport opportunities in the next year or two.

There is also significant opportunity in what I’d call defensive or neutral transactions. This includes technology – fibre buildouts, data centres, cell towers and so on. We believe that investment is going to happen regardless of whether or not the economy is going to grow or flatten over the next couple of years.

We’re also looking closely at renewable energy. We believe the transition to renewables or low-carbon energy will be much faster than what some anticipate.

IMCO has a long-term investment horizon. When you look ahead five or 10 years out, what do you think will be your areas of focus thematically speaking?

I think again that the change in the power and energy industry will be a big theme. My view is that any systemic alpha in renewable development is gone, with the exception of select opportunities in developed markets and certain emerging markets. At the same time, the influx of intermittent renewable energy assets such as wind and solar have created system stability challenges that regulators have begun to address. We’re spending a lot of time studying what an energy business will have to look like to be successful in five or 10 years.

Next is the unfolding telecommunications buildout. In our view, the fiber buildout in particular is happening now in scale and potentially will only be required once. In 10 years, we’d like to look back and see a portfolio that has thoughtfully and constructively invested in the space.

And the third theme would be greater exposure to greenfield development. The current dislocation will not last and when markets revalue, the option to invest at cost as opposed to multiples of cash flow would be extremely valuable to our clients.

Let’s start at a high level – what are some of the driving forces in real estate today?

Real estate is the oldest class in the world. At its core, it’s quite simple: it’s land, and what you do with it. What drives it all is demographics – where and how people want to live and work. Today, that means global urbanization. That has created enormous support and growth for markets like New York, Vancouver, London and other global urban centres. The living and working preferences of Millennials and Gen X are setting the tone, with industrial and retail following along wherever the people go.

What happens to the appeal of real estate in a highly volatile environment like the one created by COVID-19?

I think real estate becomes more appealing in this sort of market. It’s a hard asset backed typically by long-term contracts, so I’d say it will be the least affected for the longest period of time. Everything gets affected eventually, especially if the economy is under exceptional strain and in uncharted territory.As governments order the closure of most businesses, we are seeing many of our retail tenants struggling to pay rent and asking for deferrals or abatements.

The retail industry has undergone a dramatic disruption in recent years. What is your view on what that means for real estate in this sector over the long term?

E-commerce, driven by shifting customer expectations and the desire to satisfy shopping needs immediately, has upended the status quo. There’s still a place for brick-and-mortar retail – but it’s clear at present that there’s too much of it. The nice thing about big regional shopping centres is that they’re in excellent locations. We think that at first, those locations will be intensified with residential development, and over time the market will dictate what else goes there. The underlying land is excellent, so it’s a shift in use more than anything else.

How does industrial real estate fit into the retail shift?

There is a big demand for industrial right now – warehouses, specifically – which is obviously being driven by e-commerce and its distribution needs. It’s quite interesting because while it’s typically not enjoyed top-of-mind attention from investors, many are rushing to it now. It’s very quick and inexpensive to build and in some ways it’s actually replacing retail.

What about the office real estate market? How sensitive is it to factors energy prices or crisis like this year’s COVID-19 pandemic?

Office real estate is sensitive to short-term shocks and longer-term structural issues as well, but impact varies from market to market. So, for example, in New York or Toronto, you have high barriers to entry where it’s relatively difficult to build new product, job growth has been strong and rents have trended upward. That’s a stark contrast to markets like Calgary, where the energy crisis has led to a dramatic oversupply.

It’s too early to tell how the pandemic will affect the office environment. We’ll likely see more social distancing and working from home, but whether this leads to tenants taking less space overall is unknown.

How are you thinking about residential real estate and housing demand when considering investing in this asset class?

There are compelling opportunities in residential, perhaps more so than even five years ago. People have become more accepting of renting for life or living in a multifamily residential building like a condo. We’re evolving away from the desire of having a single-family home, so I think you’ll continue to see more multifamily residential development globally.

How do you see the real estate asset class evolving over the coming decade? What considerations are you factoring into your long-term investing strategy?

I think the trends we’re seeing today will continue, and that we will see more urbanization. People want to live in the city; that’s where the growth is. People are seeking cosmopolitan convenience and the ability to satisfy their work- and personal-life needs without having to commute.

I also think the retail transformation is far from over. Ultimately, there will be a balance between e-commerce and physical retail, but I think unfortunately we’re still a number of years from away from finding that balance.

The Alberta Investment Management Corporation is conducting a review of a volatility-based investment program, which news reports indicate cost the pension manager $3-billion amid market upheavals triggered by the coronavirus pandemic.

Jerrica Goodwin, spokesperson for the Treasury Board and Finance Alberta, told the Financial Post on Thursday that AIMCo will be doing a review and providing updates to the minister.

The “volatility-based investment program” isn’t a recent strategy and “began well before the current UPC government,” Goodwin told the Post, noting that the pension manager operates independently and at arm’s-length from government.

“We are facing unprecedented times and these are challenging market conditions for all investors,” she said. “It’s anticipated that all institutional investors will have some tough quarters due to the economic effects of the pandemic.”

She added that AIMCo, which had assets under management of almost $119 billion at the end of December, has a long track record of outperforming market benchmarks and is expected to continue to meet the long-term objectives of pension and endowment clients.

Dénes Németh, AIMCo’s director of corporate communications, said he could not comment on the volatility-based investment program or the suggested losses. But he called circumstances in March 2020 “exceptional,” as the “level of volatility that markets experienced … rose faster, and on a more sustained basis, than at any other time in history.”

Németh said the pension giant is invested across a diversified portfolio of asset classes and strategies and that, so far in 2020, “some have performed well, while others have not.”

He added that, as a long-term investor, AIMCo can “withstand, and not over-react to, short-term market fluctuations.” This, he said, can mitigate against having to “crystallize” losses or “underperformance” when it occurs.

Jim Keohane, who retired this month as chief executive of the Healthcare of Ontario Pension Plan, said AIMCo’s losses from stock market declines in the first quarter were probably far greater than the suggested $3 billion losses from the volatility strategy.

“The difference is that that is an unrealized loss and a lot of that would have come back in the recent market rally,” he said. “The loss on this volatility strategy is money gone that is never coming back. It is a permanent loss of capital.”

Keohane said he suspects AIMCo had a short position in volatility taken via swaps.

If this were the case, the pension fund would collect each day that volatility stayed below the level at which the transaction was made and pay out when volatility moved higher.

“The calculation is quite complicated, but an important aspect is that it is non linear — in other words as volatility goes up the loss per point increases,” Keohane said.

“Prior to the recent market decline volatility was trading around 10, and in the crisis it spiked to almost 90 which is the second-highest reading in history. It is still in the mid 40s so you will still be paying away significant amounts every day unless you close out the strategy.”

Keohane said the “opened-ended” risk of such a strategy has been described to him as “picking up dimes in front of a steamroller — most of the time you get your dime but occasionally you get run over.”

The slightly higher levels of volatility reached in 2008 should have been used as a “stress test,” Keohane said, but he added that what transpired was probably well outside risk models that would have been used as worst-case scenarios.

“The event that just occurred is the absolute worst outcome for a strategy like this,” he said. “The issue is that the loss is very high relative to what they could have ever made on the strategy.”

With few, if any, predicting the global economic hit from the pandemic, AIMCo is probably not alone in having investment strategies that aimed to profit from bets on volatility, according to another pension executive who spoke to the Post.

“I would say that most of the large Canadian pension plans have similar programs, of varying size and approach,” said Don Raymond, who was chief investment strategist the Canada Pension Plan Investment Board until 2014 and now has a similar role at the Qatar Investment Authority.

“Selling volatility is like selling home insurance,” he explained. “You take in premiums and every once in a while the house burns down, causing a loss.”

He said such strategies are “sensible for a long-term investor as they have a positive expected payoff, though the ride can be rough and they need to be sized appropriately so you are not forced out of the position early.”

Given recent market conditions, Raymond said a more apt analogy for market volatility might be “brushfires that caused many homes to burn down.”

Aside from the fact that AIMCo takes risk, and sometimes those risks don’t work out, there are still some aspects of the situation worth knowing more about.

The most obvious is the limitation on risk. The most effective risk management tool is position sizing. Were the positions in keeping with the trading limits set out in the investment policy?

It’s possible that there was a calculation issue in reporting the risk of the program, and even remotely possible that trades went unreported or unrecorded (I am not saying that is the case here, but needs to be reviewed under the circumstances).

With negatively convex strategies, their exposure increases as they lose money. Was there a stop loss and/or a planned exit strategy if things went wrong? Was it executed?

Exiting negatively convex strategies can be difficult to impossible when markets get very volatile, and this should have been known to the people involved. Both the scale and design of such strategies needs to be contemplated very seriously in advance, with strict limits put into place, as they are dangerous by nature.

Often the reasoning for and projected profitability of this type of program eliminates the possibility of this one’s (and many others) apparent end, namely, the distressed stop-out. When one factors in the possibility (likelihood) that the program will end by buying back (closing out) volatility at a massive loss, the apparent gains before that event seem small by comparison.

It’s worth looking at what levels of volatility were being sold. The VIX index, a measure of 1-month volatility on the S&P 500 Index, traded at approximately 14 in the months preceding the COVID crisis, in comparison to its long-term “forever” average of 16. If it was equity volatility that was sold, did it make sense to sell it in presumably large size at a level below its long-term average? Was the thinking that volatility would remain abnormally depressed?

It’s true that many people lost money selling vol in March. It’s also true that money management can be very difficult at times.

However, the reason people are paid millions of dollars annually to manage investments is to not lose money like everyone else does.

As I understand it, AIMCo is a taxpayer-supported entity, at least indirectly. I think they owe all of their stakeholders an explanation regarding the genesis, operation and conclusion of their volatility program. It’s important for stakeholders to understand who is accountable and how such losses were generated. Only after such an accounting is undertaken can one have confidence that this episode was an isolated incident and, perhaps more importantly, that the right corrective measures have been implemented.

Why did they not pull the plug? We may never know the complete answer but let me lay out a possible scenario for you.

Equity volatility is commonly sold using the standard product for doing so, the variance swap. As you recall, variance is the square of standard deviation. Volatility is a standard deviation. Selling the variance swap means selling the square of volatility.

When volatility spikes, losses to the variance swap seller mount with the square of volatility. Every time vol doubles, losses quadruple. The risk of the variance swap also rises very quickly. Indeed, it is very possible to get to the point that you cannot practically “pull the plug”.

Pulling the plug means finding a counterparty to offload your position to, almost always a derivatives dealer. Because they have certain risk limits and tolerance, they may be unable to offer you an unwind price on your variance swap position. If this happens, you are trapped and have to figure out what, if anything, to do until things calm down enough to get out.

This is why such instruments need to be used with care. Risks can escalate so quickly that they can eliminate the ability to manage them.

Jason Kenney’s UCP government transferred control of teacher pension plans to AIMCo last year, a move labour groups criticized as an attempt to prop up unviable oil companies. AIMCo reportedly lost $4 billion in the first quarter of 2020, but the report argues the problems at AIMCo go back much further.

The report accuses AIMCo of “mismanagement” and suggests public sector pensions were used for a “failed oil and gas bailout,” something that benefitted the same junior and intermediate oil companies who “invest heavily in conservative politics.”

“The petro fundamentalism of the right is largely funded by these companies,” Progress Alberta Executive Director Duncan Kinney told PressProgress.

“It’s interesting how the right rails against public services, then when times get tough, they expect public servants to rescue them with their pension money.”

For example, the report notes Calfrac Well Services, a company in which AIMCo invested more than $228 million, donated $50,000 to Shaping Alberta’s Future, a right-wing PAC that explicitly stated on its website: “We support Jason Kenney.”

The report also notes Calfrac founder and chair Ron Mathison donated a combined $235,000 to theUCP, Kenney’s leadership bid and pro-Kenney PACs, including the Alberta Advantage Fund, Balanced Alberta Fund and Shaping Alberta’s Future.

AIMCo has also invested in Western Energy Services— which, the report notes, is also chaired by Mathison.

As another example, the report points out AIMCo invested $45 million in Whitecap Resources. The report notes Whitecap CEO Grant Fagerheim donated $4,000 to the UCP in 2018. Last year, Fagerheim sent a memo to employees warning Alberta could separate from Canada if Andrew Scheer’s Conservatives lost the election.

AIMCo also invested $49 million in Perpetual Energy, which lost 99% of its value following the investment. Its CEO, Sue Riddell Rose, was appointed to Alberta’s “Red Tape Reduction” panel by the UCP government.

Rose is a prominent conservative donor, reportedly giving $41,000 to conservative parties and leadership races over the past decade. Her late father, Clayton, founded Perpetual Energy and funded a $15 million political school that was set-up with help from the right-wing Manning Centre.

While AIMCo operates at arm’s-length from the government and flatly denies its investments are influenced by politics, Kinney says it does help illustrate how “the modern conservative movement” has been built on the backs of Alberta’s public sector workers.

“Never underestimate the power of the rich to inveigh against working class people while simultaneously benefitting from the power of the state to get even richer,” Kinney said.

Criticism aimed at AIMCo is also being echoed by those in finance.

“This is a total disaster and it brings into question the competence of the managers,” Robert Ascah, a pension expert formerly with ATB Financial told PressProgress.

While the exact cause of the loss is unknown, the report notes AIMCo had a less-than-stellar track record before its control over pensions was expanded by the UCP government.

The Local Authorities Pension Plan (LAPP) even noted: “As measured by quarter ends, AIMCo has been short of LAPP’s SIPP-specified value added expectations for 45 consecutive quarters, or 11 years and 3 months.” According to the report, that partly owes to AIMCo opting to invest in junior oil and gas producers with low returns even before the 2015 oil price crash.

Of the 32 investments made under the Alberta Growth Mandate, the report found 24 were in oil and gas and spread across 14 companies.

Of those, the report points out:

“Every single publicly traded oil and gas company that AIMCO has invested in under the Alberta Growth Mandate has seen its share price go down since AIMCo’s investment, even before the COVID-19 pandemic.”

Bill 22, introduced by the UCP last fall, transferred several pension funds to AIMCo, including the Alberta Teachers’ Retirement Fund (ATRF).

“The ATRF and the Alberta Teacher’s Association had reservations before about being forced to invest in AIMCo, and recent events have only heightened those concerns,” former ATRF board member Greg Meeker told PressProgress.

“As a teacher, I have concerns about AIMCo’s governance arrangement,” he added. “From what’s being reported, AIMCO did not understand the multi-billion dollar investment strategies they embarked upon.”

“That’s beyond the pale.”

Having kids or undertaking a home renovation has a lot in common with setting up a multi-client investment manager, according to Bert Clark, who has done at least two of the things on that list.

“You underestimate the amount of work,” the chief executive of Investment Management Corp. of Ontario (IMCO), and a father of four kids under the age of 10, said during a recent interview.

That assessment of the three-plus years he has spent building IMCO — which manages $70.3-billion worth of assets for the pensions of Ontario judges and government employees as well as the Workplace Safety and Insurance Board (WSIB), making it one of the country’s top 10 pension managers — also now applies to responding to the global coronavirus pandemic that has shut down economies and ground business-as-usual to a halt.

“Anyone who says ‘I know what you do in this scenario’ is making it up,” Clark said, pointing to a never-before-seen combination of events, including negative oil prices, the shutdown on widespread swathes of the economy and significant fiscal and monetary intervention by governments around the world.

On the investment front for IMCO, the crisis has meant taking stock and embarking on a slow, measured approach to new investments. Clark said he’s also looking for partners to take advantage of the disruption. Again, he’s biding his time.

“Balance-sheet restructuring doesn’t happen in three weeks” with private assets such as infrastructure, real estate and credit, he said. “We’re waiting patiently.”

For a taste of what Clark is looking for in partnerships to propel growth in these areas, he points to IMCO’s participation in a consortium that in 2018 bought 25 per cent of a portfolio of hydro-electric assets from Brookfield Renewable Partners LP.

But before any pandemic-related deal-making gets done, he said, IMCO is likely to focus on rebalancing portfolios where market declines have pushed weightings out of whack, even if that means buying stocks when others are steering clear out of fear.

“It’s a pretty understandable psychological response, but it’s a poor investment strategy,” Clark said, adding that devising and sticking to a sound asset mix is one of the three value proposition pillars that IMCO can offer. “Whether the mix is 60/40 or 40/60 matters more than if you outperform on an asset class.”

Clark, a lawyer by training who was CEO of Infrastructure Ontario before taking on IMCO’s launch, said another pre-pandemic priority was developing a liquidity management regime that would ensure there was enough available cash to weather “an intense storm” for the duration.

“You don’t want to be a forced seller … (It’s better) to be the one with dry powder,” he said. “You never want to have to sell … in a downturn.”

Despite the challenges presented by the global health and economic crisis, IMCO was able to add the judge’s pension to the funds it manages in mid-April, fulfilling its key role as an investment management consolidator for small public-sector funds and pensions across Ontario.

Participation in IMCO is voluntary, unlike consolidated pension managers in other provinces, such as the Alberta Investment Management Corp. (AIMCo).

Clark’s hope is that smaller funds will choose to join in order to benefit from the manager’s scale, which reduces investing costs, as well as its size and expertise, allowing it to diversify into alternative asset classes such as real estate, private equity and infrastructure.

His sales pitch touches on a theme that’s prevalent in the pension world: companies and organizations that run large retirement plans can become distracted and pull time and resources from their primary business.

“(It’s the) same logic here,” Clark said.

At the end of December, IMCO had $11.6 billion invested in real estate, $5.7 billion in infrastructure and $2 billion in global credit, though the bulk of its funds — about $40 billion — was invested in a combination of public equities, fixed income and government bonds.

Clark said IMCO should be able to further scale up investments if other pools of money come under its umbrella.

“There are pools of public capital spread across the province,” he said, adding that his targets include 90 or so funds and pensions at universities, municipalities and Crown corporations. Together, they represent nearly $100 billion in assets under management.

Wellington Management Company LLP (“Wellington”), one of the world’s largest independent investment management firms, and Ontario Teachers’ Pension Plan (“Ontario Teachers’”), the largest single-profession pension plan in Canada, today announced they have expanded their strategic relationship to further integrate leading climate science research into the pension plan’s investments.

This new project builds on the long-standing strategic relationship between Wellington and Ontario Teachers’. The partnership is based on a common investment philosophy and long-term perspective. The focus on climate risk is an example of forward-looking initiatives the two organizations are exploring together that focus on far-reaching changes in the investment landscape.

Wellington and Ontario Teachers’ will collaborate with Woods Hole Research Center, the world’s top-ranked climate change think tank, and draw on its scientific expertise. Ontario Teachers’ will seek to apply findings from leading-edge climate research to the execution of Ontario Teachers’ investment strategies, which span a diverse set of geographies, sectors, and asset classes, and include long-term assets such as private equity, real estate, and infrastructure. This initiative will provide deep insights for Ontario Teachers’ investment teams on the medium- and long-term financial implications of physical climate-related risks.

“Our investments, particularly those in real assets, require careful consideration of the physical risks posed by climate change. With access to top-quality climate science data, we can build on our own expertise in this area and use the research provided to develop deeper insights,” said Ziad Hindo, chief investment officer at Ontario Teachers’. “The world will not be the same after COVID-19, but our commitment to responsible investing will not change. Strong, mutually beneficial relationships, such as ours with Wellington and Woods Hole, will continue to be a key component of delivering on our commitment.”

Wendy Cromwell, vice chair and director of Sustainable Investment at Wellington, noted, “We are excited to work with Ontario Teachers’ to bridge the gap between finance and climate science. Physical climate risks are unfolding and will impact companies, economies, and society. It is a privilege to work on behalf of the teachers of Ontario to understand and navigate these risks and opportunities.”

“If humanity is to meet the grand challenge of climate change, all sectors of society will need to participate. This partnership is a powerful step, because it helps business and financial communities understand the physical risks of climate change and how they affect livelihoods,” said Dr. Philip B. Duffy, president and executive director of the Woods Hole Research Center.

About Wellington Management

Tracing our history to 1928, Wellington Management is one of the world’s largest independent investment management firms, serving as a trusted investment adviser to more than 2,200 institutional clients and mutual fund sponsors in 60 countries. Wellington had over US$1 trillion of client assets under management as of 30 December 2019. To learn more, please visit our sustainable investing site and/or our Canadian client site.

About Ontario Teachers’

The Ontario Teachers’ Pension Plan Board (Ontario Teachers’) is the administrator of Canada’s largest single-profession pension plan, with $207.4 billion in net assets (all figures at December 31, 2019). It holds a diverse global portfolio of assets, approximately 80% of which is managed in-house, and has earned an annual total-fund net return of 9.7% since the plan’s founding in 1990. Ontario Teachers’ is an independent organization headquartered in Toronto. Its Asia-Pacific region office is located in Hong Kong and its Europe, Middle East & Africa region office is in London. The defined-benefit plan, which is fully funded, invests and administers the pensions of the province of Ontario’s 329,000 active and retired teachers. For more information, visit otpp.com and follow us on Twitter @OtppInfo.

About Woods Hole Research Center

The Woods Hole Resesarch Center [whrc.org] (WHRC) has been studying climate change and developing solutions since 1985. WHRC works with an international network of partners in the private and public sectors to ensure that science is put to use in climate policy and decision-making. Recent major science and policy projects have taken place in Alaska, Brazil, Mexico, Nepal, the Democratic Republic of the Congo, and others, with collaborators such as the World Bank, NASA, USAID, and The Nature Conservancy. WHRC has earned Charity Navigator [charitynavigator.org]’s highest rating of 4 stars, as well as a Gold Seal of Transparency from GuideStar [guidestar.org]. Follow WHRC on Facebook [facebook.com], Twitter [twitter.com], and Instagram [instagram.com] or subscribe to our monthly newsletter [whrc.org].

The Woods Hole Research Center studies climate change impacts around the world, and works with partners—from national governments to corporations—to identify and implement opportunities to reduce levels of atmospheric greenhouse gases.

WHRC was founded in 1985 by renowned ecologist George Woodwell to take the insights of science beyond the walls of academia to where they can effect real change. For the last four years, WHRC was named the top climate change think tank in the world by the International Center for Climate Governance.

WHRC scientists have contributed to every IPCC Assessment Report, and helped to launch the United Nations Framework Convention on Climate Change. In 2007, WHRC Senior Scientist Dr. Richard Houghton was part of the IPCC team awarded the Nobel Prize.

WHRC researchers continue to work around the world to understand the rapidly changing climate and how we can address it. The Center is currently led by Dr. Philip Duffy, and has about 60 employees, including 46 scientists.

“Our investments, particularly those in real assets, require careful consideration of the physical risks posed by climate change. With access to top-quality climate science data, we can build on our own expertise in this area and use the research provided to develop deeper insights,” said Ziad Hindo, chief investment officer at Ontario Teachers’. “The world will not be the same after COVID-19, but our commitment to responsible investing will not change. Strong, mutually beneficial relationships, such as ours with Wellington and Woods Hole, will continue to be a key component of delivering on our commitment.”

Climateer Investing: "Commercial Real Estate Already Gets Hit in Europe: Prices for Retail Properties Plunge, Office Prices Sink"https://t.co/K2Py4ZSirL

— Leo Kolivakis (@PensionPulse) May 5, 2020

Canadian Real Estate Prices Could Drop Up To 30%, Moody’s Advises Institutions | Better Dwelling https://t.co/tr54246b05

— Leo Kolivakis (@PensionPulse) May 5, 2020

Apollo Plans to Raise $20 Billion, Shift to Distressed Strategies - WSJ https://t.co/wP0LnGwIoB

— Leo Kolivakis (@PensionPulse) May 2, 2020

At Ontario Teachers’, being responsible investors is important and at the core of what we do; it’s something that we consider in every one of the investments that we make.

Read more about our responsible investing approach: https://t.co/tGunc5xZip#EarthDaypic.twitter.com/NiZSdYiLyA

— OTPP (@OtppInfo) April 22, 2020

Copenhagen Airport is the largest in Denmark and in 2019, 30.3 million people passed through the airport. In 2019, Copenhagen Airport launched an ambitious climate strategy. In addition to achieving carbon neutral status during the year, its long-term climate strategy aims for Copenhagen to be an emission-free airport with emission-free transport to and from the airport by 2030, and for the entire airport, including air traffic, to be emission-free by 2050.

Towards the end of the year, London City Airport had its operations rated as carbon neutral. The airport received this recognition for its exceptional work in managing, reducing and offsetting all the CO2 emissions under its control.

Both airports received their rating from the Airport Carbon Accreditation program, joining Brussels Airport, which achieved this goal in 2018.

Also in 2019, Birmingham Airport announced its commitment to become a net-zero carbon airport by 2033, prioritizing zero carbon airport operations and minimizing carbon offsets. The airport has already cut its carbon emissions by 33% since 2013, and emissions per passenger by more than 50%, despite growing passenger numbers by 40%.

In an important step towards reducing its carbon footprint, Bristol Airport has switched to a 100% renewable electricity supply. This is aligned with the airport’s plans to become carbon neutral by 2025.

When will travel resume after coronavirus? https://t.co/iYChsm3GUh

— Leo Kolivakis (@PensionPulse) May 5, 2020

Public pension funds helped power the U.S. economy during 2018, generating $179.4 billion more in state and local government revenues than taxpayers put in, according to a biennial study by the National Conference on Public Employee Retirement Systems.

Public pensions’ positive financial impact rose 30.6 percent from the $137.3 billion level notched in 2016, according to the study, “Unintended Consequences: How Scaling Back Public Pensions Puts Government Revenues at Risk.” The 2020 edition of the study builds on NCPERS’ 2018 landmark analysis of how investment and spending connected to pension funds impact state and local economies and revenues.

The analysis of how investment and spending connected to pension funds impact state and local economies and revenues draws on historical data from public sources including the U.S. Census Bureau, Bureau of Economic Analysis, and Bureau of Labor Statistics. While pension fund assets are invested globally, the economic impact of these investments can be traced down to individual states based on the NCPERS study methodology.

“The positive economic effects of public pensions increased significantly over the course of two years,” said Michael Kahn, NCPERS’s research director and the study’s architect. “This means that if public pensions didn’t exist, policy makers would need to increase taxes on their constituents to sustain the current level of public services.” Kahn noted that the study also found that in 40 states, pensions were net contributors to revenue in 2018, an increase from 38 states in 2016.

The original Unintended Consequences study in 2018 broke ground by examining how state economies and tax revenues are affected when pension funds invest their assets and retirees spend their pension checks, and how taxpayer contributions compare to revenues, said Hank H. Kim, executive director and counsel of NCPERS.

“Decade after decade, public pension funds have worked by accumulating assets over a worker’s lifetime,” Kim said. “Steady contributions by employers and employees plus investment returns over the long haul have consistently produced results that provide career public servants with a modest but reliable income stream in retirement.”

“Pensions are the quintessential long-term investment, yet they are often cast as a pawn in political dramas over short-term spending,” Kim added. “This study underscores that breaking faith with public pensions is actually a costly strategy for state and local government. In the long-term, diminishing public pensions will backfire.”

NCPERS’s analysis of the data also showed:

• The economy grows by $1,372 for each $1,000 of pension fund assets. While the figure sounds small on the surface, the size of pension fund assets—$4.3 trillion in 2018—means that the impact of this growth is greatly magnified, the study found.
• Investment of public pension fund assets and spending of pension checks by retirees in their local communities contributed $1.7 trillion to the U.S. economy.
• Economic growth attributable to public pensions in turn generated approximately $341.4 billion in state and local revenues. Adjusting this figure for taxpayer contribution $162 billion yields pensions’ net positive impact of $179.4 billion.

About NCPERS

The National Conference on Public Employee Retirement Systems (NCPERS) is the largest trade association for public sector pension funds, representing more than 500 funds throughout the United States and Canada. It is a unique non-profit network of public trustees, administrators, public officials and investment professionals who collectively manage more than $4 trillion in pension assets. Founded in 1941, NCPERS is the principal trade association working to promote and protect pensions by focusing on advocacy, research and education including e-learning for the benefit of public sector pension stakeholders.

• In 2011, these pension plans collected more than $70 billion in contributions and in that same year, paid out $74 billion in retirement benefits to Canadians, or 49% of all non-OAS retirement benefits, and invested approximately 35 per cent - or $714 billion - of Canada's total retirement assets
• The Top Ten pension funds have invested roughly $400 billion in Canada, including $100 billion in real estate, infrastructure and private equity;
• They comprise four of the top 20 global commercial real estate investors and four of the top 20 global investors in infrastructure assets;
• They directly employ 5,000 professionals in the Canadian financial sector and an additional 5,000 employees in their real estate subsidiaries.

And remember what I keep telling you, pension bailouts are all about bailing out Wall Street which includes big banks and their big private equity and hedge fund clients that need perpetual funding.

It has nothing to do with bailing out pensioners but politicians will make it look that way.

Again, it may not be right away, but mark my words, Congress will eventually bail out many chronically underfunded pensions and the Fed and Treasury will just monetize this debt.

The problem? Just like keeping zombie companies alive, they will keep zombie pensions alive to make sure the elite on Wall Street are able to keep tapping them in perpetuity for their next fund.

And then we wonder why after every major crisis, inequality keeps soaring to unprecedented levels.

George Carlin was right: "It's a big club, and you ain't in it. You and I are not part of the big club."

Treasury launches 20-year bond to help fund the record borrowing needed this quarter https://t.co/C3aaanGanM

— Leo Kolivakis (@PensionPulse) May 6, 2020

The U.S. Treasury announced the terms of its first sale of 20-year bonds since the 1980s, increasing its offerings of longer-term debt beyond the traditional 30-year maturity. https://t.co/m4keatKArb

— Barron's (@barronsonline) May 6, 2020

"Economists agree that the United States must continue to rack up debt to prevent a full-blown depression. Otherwise, there won't be much of an economy left to repay the debt once the health crisis is over," writes CNN's Matt Egan https://t.co/zbDBu3cspV

— CNN International (@cnni) May 6, 2020

1. States need to make contribution holidays constitutionally illegal and always top out their public pensions no matter what.
2. Get the governance right to get governments out of the decision-making and increase compensation to attract and retain talent which can manage more money across public and private assets internally (do a lot more co-investments with their private equity partners).
3. Lower their discount rate to 6% or lower to reflect the reality of what they can expect in terms of assumed returns on their assets over the long run. If this means hiking the contribution rate, so be it. 
4. Adopt some form of risk sharing like conditional inflation protection so when plans are underfunded retired and active members share the burden of making the plan fully funded again (this ensure intergenerational equity).

Pippa Stevens of CNBC reports on why the stock market is up even with historic job losses:

A record number of Americans just lost their job, and yet stocks are moving higher. This seems paradoxical given the economic toll — to say nothing of the emotional toll — on millions of people across the country without a job.

While some say this is further indication that the stock market has become decoupled from reality, others say there are clear reasons why stocks have rebounded, and can continue to move higher.

For one, the jobs data in and of itself is backward-looking. The April figures — which saw a record 20.5 million Americans lose their job— is from the height of the crisis. Since then, economies have begun to reopen. There is still a long way to go, of course, but the market is discounting what’s going to happen six months from now, when most states will be getting back to business.

Strategists also point out that the losses have been somewhat concentrated in the leisure and hospitality sector, whose underperformance has overshadowed strength in other areas of the market. And with the government and federal reserve providing record stimulus measures, some argue that once businesses do get back up and running, the recovery will be swift.

The S&P 500, Dow Jones Industrial Average and Nasdaq Composite all opened higher on Friday, with the Dow surging more than 300 points. Since the March 23 low, all three averages have bounced more than 30%.

Worst over?

While the debate among health experts about how and when economies should reopen is ongoing, some states have already started easing shelter-in-place measures. A number of states including Florida began phase one reopenings on Monday. California became the latest state to lift some of its precautionary measures, with certain low-risk retailers allowed to open beginning Friday.

“The market knows that the job losses are self-inflicted due to the widespread shutdowns,” Bleakley Advisory Group chief investment officer Peter Boockvar told CNBC. “Thus, now that we are beginning the reopening process the market assumes many of these people will hopefully get hired back over the coming months and quarters.”

Additionally, 78% of those who lost their job in April said they were furloughed, meaning the unemployment in theory will be temporary. Goldman strategist Jan Hatzius said this is an important distinction to make, given that it suggests the recovery will be swifter.

“If job losses are concentrated in this segment [furlough], it would increase the scope for a more rapid labor market recovery when the economy eventually rebounds (because employees can be recalled to their previous jobs, as in several past recessions),” he wrote in a note to clients ahead of the report.

Pockets of strength?

At first the market sell-off was broad in nature as the uncertainty surrounding the coronavirus sent the major averages tumbling into a bear market at the fastest pace on record.

But since then, the divide between the winners and losers widened. Unsurprisingly stocks most exposed to the coronavirus threat — including hotels and airlines — have continued to trade lower. But other names are showing strength. On Thursday the Nasdaq went positive for the year, as names like Netflix and Amazon surged to all-time highs.

“Large companies have fallen much less than smaller companies. It is likely that as a result of this crisis the strong will get stronger ... and so the stock market is reflecting that in its relative valuation,” Peter Orszag, Financial Advisory CEO at Lazard and former OMB director under Obama, said on CNBC’s “Squawk Box.”

“The US consumer has proven to be the economic engine over the last decade, and investors who are buying heavily into this market believe that behavioral changes are unlikely to create a dislocation in demand longer than a couple of quarters,” added Shannon Saccocia, chief investment officer at Boston Private Wealth.

That said, Saccocia said a more cautious tone is warranted, since she believes it’s a “misconception” that demand for consumer services will return quickly once government edicts lift.

Ongoing stimulus?

As the coronavirus wreaked havoc on markets, governments and central banks around the world stepped in in an effort to prop up prices.

In March, President Donald Trump signed into law a record $2 trillion federal stimulus package known as the CARES Act, while the Federal Reserve announced that it would engage in unlimited asset purchases.

“While the collapse in economic activity is historic, so too is the global policy response to cushion the impact and support a recovery as containment measures are relaxed,” JPMorgan strategist Marko Kolanovic said in a recent note to clients.

“We estimate the impact of Fed easing in both rates and credit more than compensate for the temporary hit to corporate earnings when valuing the US market via discounted earnings,” he added.

Zero rates?

As part of its stimulus measures, the Federal Reserve in March slashed interest rates to near zero. At the central bank’s most recent meeting at the end of April, it pledged to keep rates at historic lows until the economy recovers. This supports economic activity since it makes borrowing money cheaper.

“Interest rates are going to be extremely low -- barely positive -- for a very long period of time, so that does provide some support to equity prices,” noted Orszag.

Looking forward

Amid the ongoing uncertainty, Kate Moore, head of thematic strategy for BlackRock’s Global Allocation Team, said it’s important for investors to look beyond the noise and determine who the winners on the other side will be.

She believes the market is moving higher due to three reasons: the slowing rate of infection, the gradual reopening of states’ economies, and the improving relations between the U.S. and China.

“We need to continue to get government and policy support in order for the market to move forward, and for us to not just be reacting to some slightly incremental better newsflow, but to something that’s more fundamentally driven,” she said.

While many unknowns remain and the path forward is far from certain, famed investors are quick to note that the U.S. has bounced back before.

“Nothing can basically stop America,” said Warren Buffett, chairman and CEO of Berkshire Hathaway, at the conglomerate’s first virtual shareholder’s meeting on Saturday. “The American miracle, the American magic has always prevailed and it will do so again.”

Worst Jobs Report In History: 20.5 Million Jobs Lost As Unemployment Rate Hits Record 14.7% | Zero Hedge https://t.co/CI0I69lMRF

— Leo Kolivakis (@PensionPulse) May 8, 2020

Jobs report April 2020: Record 20.5 million jobs lost, unemployment rate jumps to 14.7% https://t.co/iPf0JdKr68

— Leo Kolivakis (@PensionPulse) May 8, 2020

78% of workers say their layoff is temporary https://t.co/gNJEZZzDZC

— Leo Kolivakis (@PensionPulse) May 8, 2020

The Dow closes up over 450 points despite the worst unemployment rate since the Great Depression.https://t.co/6TG2jdsLE4pic.twitter.com/hk9VBg7cbO

— MarketWatch (@MarketWatch) May 8, 2020

"Dow rises more than 400 points despite record job losses, posts first weekly gain in three"https://t.co/qyv8aiWxey

— Leo Kolivakis (@PensionPulse) May 8, 2020

1. The Fed injecting massive liquidity into the financial system, buying up risk assets like corporate bonds and 
2. Global pensions (and sovereign wealth funds) rebalancing their portfolio to buy more stocks at the end of March following the sharpest monthly selloff in decades.

As Markets Crashed, The Swiss National Bank Went On A FAAMG Buying Spree | Zero Hedge https://t.co/AQus9CBzEm

— Leo Kolivakis (@PensionPulse) May 8, 2020

Norway's $1 Trillion Wealth Fund Doubled Down On US Stocks During March Market Rout | Zero Hedge https://t.co/8Z7d6r6tdG

— Leo Kolivakis (@PensionPulse) May 3, 2020

Market is too optimistic about a post-coronavirus world: Stephen Roach https://t.co/kDrmRcQmOh

— Leo Kolivakis (@PensionPulse) May 7, 2020

I don't think we're going to retest the lows, says Ed Yardeni https://t.co/vZq5vv5QYD

— Leo Kolivakis (@PensionPulse) May 7, 2020

‘We’ve seen the lows in March’ for the stock market, says man who called Dow 20,000 in 2015, ‘and we will never see those lows again https://t.co/lWv3qNDqBQ

— Leo Kolivakis (@PensionPulse) May 8, 2020

April’s market bounce is likely to fade back into a bear market as investors face months of dire earnings and economic data, according to a report from Richardson GMP.

After markets cratered in March in response to the Covid-19 pandemic and economies shutting down, April saw a significant reverse. The S&P/TSX composite index rose 10.8% last month, and the S&P 500 posted a 12.8% gain.

Markets responded to massive stimulus from governments and central banks as policy-makers effectively closed large sections of the global economy.

Now that data around Covid-19 infection rates are improving and economies tentatively reopen, the policy response will be less substantial, the Richardson GMP report stated.

“So as the policy ‘market boost’ fades, the market will have to absorb economic data that will get worse and worse in the coming months,” the report said.

“Q2 earnings released in July and the economic data between now and then will continue to paint a dire picture.”

The report’s authors recommend taking advantage of April’s rally and reducing equities exposure in favour of fixed-income. The firm increased its underweight position on Canadian equities due to energy sector woes and large household debt.

It recommended increased exposure to Canadian corporate credit.

“The repricing of risk in the corporate bond market has tilted the medium- to long-term risk/reward profile back in favour of investors, making it a more attractive place to be,” the report said.

While the worst of the health crisis and the risk of a liquidity crisis appear to be over, investors are now facing a recession whose end largely depends on the virus’s path. The authors predict “a material hit to confidence” leading to conservative behaviour, potentially slowing economic recovery.

A note from Purpose Investments pointed to how difficult the recovery is to predict because this kind of reopening is basically unprecedented. With little guidance from companies, investors are relying on balance sheets to see which names can outlast the competition, chief investment officer Greg Taylor wrote.

The next big market risk, he said, will come in late summer or fall if the recovery doesn’t take the shape markets have priced in. Taylor quoted Yogi Berra: “If the people don’t want to come out to the ballpark, nobody is going to stop them.”

Investors should brace themselves for a bear market that could last for some time, Richardson GMP said.

“Remember, bears usually last a year or longer and this one started two months ago,” the report said. “While there is nothing average about this bear, we don’t believe it is over. It could be a long summer.”

Beware, the stock market’s being supported by ‘nothing more than an ideological dream,’ economist warns https://t.co/1zlF0TD2We

— MarketWatch (@MarketWatch) May 7, 2020

For Albert Edwards This Is The One Chart Proving Just How Insane The Market Has Become | Zero Hedge https://t.co/D2ugtY13Dy

— Leo Kolivakis (@PensionPulse) May 8, 2020

Hagler vs. Hearns, Round 1. If you’ve seen it, you’re welcome. If you haven’t, the next three minutes may change your goddamn life. pic.twitter.com/3NY78qwtPO

— Super 70s Sports (@Super70sSports) May 2, 2020

Private-equity backed companies dominate lowest depths of junk https://t.co/ASqJfdh5we

— Leo Kolivakis (@PensionPulse) May 8, 2020

My latest Bloomberg columnhttps://t.co/C9tK0cmAil

— Jim Bianco (@biancoresearch) May 6, 2020

No, the Fed can’t save the junk bond market, Goldman cautions - MarketWatch https://t.co/Q7YkokAy4M

— Leo Kolivakis (@PensionPulse) May 7, 2020

Historically, when my US macro composite peaks in the 90th percentile & turns lower, things start to get ugly for equities around 4M later on avg. The latest signal triggered in July which therefore targets November for a major correction. The clock is ticking for this old bull. pic.twitter.com/tWFTJKR4N6

— Julien Bittel, CFA (@BittelJulien) September 19, 2019

Covering the last 8 US yield curve inversions (‘66-‘06), the S&P 500 peaks 42W after inversion & bottoms 95W later at 137W on average. Today we’re just 49W post inversion, 11W post the peak in equities & now just 4% off the most extreme valuations in US history. #BearMarketpic.twitter.com/YDARVr85ft

— Julien Bittel, CFA (@BittelJulien) May 7, 2020

Falling again.

The delta in 2-yr yield truly reflects the state of the economy.

An unprecedented dysfunctional macro environment impelling the Fed to suppress rates due to extreme debt levels.

Meanwhile:

Stocks near record valuations are absurdly disconnected from reality. pic.twitter.com/VYbckFLQFp

— Otavio (Tavi) Costa (@TaviCosta) May 7, 2020

Big business is doing better than Main Street. A backlash is likely https://t.co/FieeGA7ko1

— The Economist (@TheEconomist) May 7, 2020

Grisly video shows praying mantis eating brain of a murder hornet https://t.co/sxtDrKy1K6pic.twitter.com/hsoO14WNe4

— New York Post (@nypost) May 7, 2020

The stock market may get cut in half, but this ‘most undervalued’ asset is about to surge, billionaire investor says https://t.co/dJZ2TragQR

— Leo Kolivakis (@PensionPulse) May 6, 2020

Paul Tudor Jones is buying Bitcoin as a hedge against the inflation he sees coming from central bank money-printing. https://t.co/7wqFr8IPKX

— Lisa Abramowicz (@lisaabramowicz1) May 7, 2020

US public pension plan sponsors and administrators are likely entering a period of fiscal stress, and rising pension obligations caused by the sudden pandemic-induced recession are expected to be felt for years by US state and local governments, according to a report from S&P Global Ratings.

S&P said US public pension funds in aggregate lost approximately $850 billion during the first quarter of the year, and that they would need to rebound sharply during the second quarter to maintain the average funded ratio from a year ago.

“In the public sector, market returns are built into the funding model and thus make up a large part of pension plan inflows,” the report said. “Should market returns remain below past peaks, the effect of poor returns will result in an increase in employer contributions.”

The report looks at how the recession is likely to impact public pensions during three periods—immediately, over the near-to-mid-term, and over the long term.

The immediate concern for US public pensions is their liquidity position, according to the report, as a pension plan’s liquidity position mitigates near-term shocks. Pension asset portfolios without enough cash to cover benefits could be forced to sell return-seeking assets at inopportune times.

A pension plan’s liquidity-to-assets ratio can help determine how much liquidity risk it is carrying. A plan with a negative liquidity-to-assets ratio needs additional money to maintain operations and make benefit payments. And the further below zero the ratio is, the more assets that may have to be converted to cash.

During the near-to-mid-term, a plan’s funded level indicates the range of impact the recession will have. “Many public sector pension plans measure their assets in June and are recognized on employer financial statements the following year,” the report said. “Though markets have seen some gains in April, funded ratios are likely to decline in the near future.”

According to estimates from the Federal Reserve, US public sector pension assets were $4.8 trillion as of the end of last year and were allocated between market risk-mitigating investments—such as cash, fixed costs, and hedge funds—and return-seeking investments, which includes all other investments.

During the fourth quarter of 2019, the approximate aggregate return for return-seeking investments was 9.9%; however, during the first quarter of this year, those investments lost 23.5%. Meanwhile risk-mitigating investments returned 0.6% during the fourth quarter of 2019 and lost only 4.6% during the first quarter of 2020. The average target allocation for risk-mitigating investments for US pensions is 31%, while their average target allocation for return-seeking investments is 69%.

In its most recent surveys of states and the 15 largest cities, S&P Global Ratings found the average funded ratio to be 73%. For the plans to maintain that funded ratio, they would have to return nearly 30%, the report said. This would bring the annual return back from its current -12% up to the average assumed rate of 7.25%.

However, “if returns stagnate, we estimate the funded ratio for the average state and local government pension plan could decrease to 60% from 73%,” S&P said.

Over the long term, plans will likely have to consider adjustments to reduce plan costs and contribution increases to alleviate budgetary pressures, the report said.

“Though employer audits may not show the impact of the sudden-stop recession for months,” S&P said, “experience from the Great Recession of 2008 gives a sense of what’s to come.”

This includes methods such as five-year asset smoothing or “collars” that limit rapid contribution increases. While this doesn’t reduce losses, S&P said, it delays contributions and budgetary adjustments to make up for market losses.

Additionally, benefit tiers, employee contribution increases, and cost of living reductions are all options that are likely to be used to reduce contributions. However, additional actions may be limited since many of these actions have already been used, said S&P, citing a report by the National Association of State Retirement Administrators.

“Plans that have either taken actions in the past to reduce contributions or lacked action when actuarial recommendations increased are seeing increased stress now,” S&P said. “With tightening budgets and operating cost pressures, pension contributions may be an outlet for temporary budget relief at the risk of plan funding.”

The report warns that while deferring costs in the near term may provide budgetary flexibility and could be a liquidity management tool, it will increase long-term pension costs.

Fed officials push back on the market's view that interest rates may go negative https://t.co/exZIBaT9Ts

— Bloomberg Australia (@BloombergAU) May 11, 2020

It’s one of the hottest ETFs in the coronavirus era this year—and the woman who nailed the 2018 stock-market shock created it a year ago https://t.co/RKfYoBicAi

— MarketWatch (@MarketWatch) May 8, 2020

Defying forecasts of another grim month due to global market volatility, the funded status of the 100 largest US corporate pension funds surprisingly increased $93 billion in March despite deteriorating economic conditions amid the COVID-19 pandemic.

Just a month after hitting its lowest level in more than three years the Milliman 100 Pension Funding Index (PFI), which tracks the funded ratio for the 100 largest corporate pension plans in the US, rose to 85.6% from 82.1% at the end of February. Consulting firm Milliman said the funding improvement was the direct result of a strong surge in the monthly discount rate to 3.39% from 2.69%.

“It’s a stunning twist of fate that a month so turbulent as March—given the market conditions and the ongoing global pandemic—actually resulted in positive funding news for corporate pensions,” Zorast Wadia, author of the Milliman 100 PFI, said in a statement. A month ago, Wadia predicted that “March will likely be another dismal month for corporate pension funding.”

During March, the tumbling stock markets led to an $85 billion decline in the market value of the pension funds’ assets to $1.516 trillion from $1.601 trillion at the end of February. This is based on a monthly loss of 5.08%. Milliman said there were only five other months during the last two decades when there has been larger investment losses, and the last one was October 2008 during the Great Recession.

At the same time, the projected benefit obligation (PBO), or pension liabilities, decreased to $1.771 trillion at the end of March.

While February’s discount rate was the lowest discount recorded in the 20-year history of the Milliman 100 PFI, March’s discount rate increase was the fifth largest ever recorded in the study. The last time the discount rate posted a comparable increase was in December 2009.

For the first quarter of 2020, a 5.7% investment loss caused the assets of the pension funds to fall by $103 billion compared to plan liabilities, which increased $48 billion. Discount rates increased 19 basis points (bps) during the quarter and helped limit the funded status erosion. The net result was a funded status worsening of $55 billion as the funded ratio of the Milliman 100 companies decreased to 85.6% at the end of March from 89% at the beginning of the year.

Over the last 12 months through March, the cumulative asset return for the pensions was 2.6%, and their funded status deficit has widened by $81 billion. The funded status loss is the combined result of declines in discount rates during most of 2019 and investment losses experienced during the first quarter. Discount rates fell 39 basis points over the past year to 3.39% as of March 31.

Milliman said if the companies in its index earn the expected 6.6% median asset return per the 2019 pension funding study, and if the discount rate stays at 3.39% through 2021, the funded status of the surveyed plans would increase to 88.1% by the end of 2020 and 91.6% by the end of 2021. For purposes of the forecast, the firm assumed 2020 and 2021 aggregate annual contributions of $50 billion.

It also said that under an optimistic forecast that has interest rates rising to 3.84% by the end of 2020 and 4.44% by the end of 2021, with annual asset gains of 10.6%, the funded ratio would climb to 96% by the end of 2020 and 112% by the end of 2021. However, under a pessimistic forecast that assumes a discount rate of 2.94% at the end of 2020 and 2.34% by the end of 2021, with 2.6% annual returns, the funded ratio would decline to 81% by the end of 2020 and 74% by the end of 2021.

AT&T boss retires with $274,000 a month for life https://t.co/fe5P77a8cD via @YahooFinance

— Leo Kolivakis (@PensionPulse) May 11, 2020

James Davis, CIO of the C$22 billion OPTrust started his career in October 1987 and within the first month experienced the “real world of investing” with the crash of 1987. But that experience is nothing compared to the conditions of today, he says.

“In more than 30 years in the industry there is nothing even comparable to the current environment we are operating in now.”

The difference, he says, is that in addition to the market volatility there is the extra challenge of limited visibility into the virus itself, the impact on the economy as well as the individual companies, and the associated policy changes.

“Then add on to that the challenge of everyone working from home. This is an incredible environment and something unlike we have ever experienced. That being said we are holding up really well.”

But more than anything, OPTrust’s portfolio can be described as resilient due to its member-driven investment strategy which is designed to withstand all environments and meet the sole purpose of staying fully funded.

“From an investment perspective we are meeting this challenge head on,” Davis says. “The team is working very well together and we have a very long-term focus so we don’t get too stressed out when we have big drawdown days. We are in a pretty good place as an organisation. When we translate the MDI into investment decision making, our goal is not to earn outsized returns or outperform peers. The sole focus is to keep fully funded,” he says. “Our investment objective is to be able to pay pensions, and we do it by taking as little risk as possible.”

He says this has meant that the portfolio is very risk-centric.

“We stress tested the portfolio under thousands of different macro scenarios and chose the investment mix that reduced the probability that members would have to experience a contribution increase,” he says. “We see periods in those scenarios that show up very sharp drawdowns in equity markets and where correlations go to one. We try to take those things into account in the overall portfolio construction and it has allowed us to weather this environment very well.”

OPTrust has been fully funded for the past 11 years and continues to be fully funded, with “an abundance of liquidity.”

Resilience

From a macro perspective Davis believes there is a paradigm shift underway and the response from governments and central banks dealing with the challenges of the crisis is a game changer.

“We have embarked on a new policy paradigm where innovation is being explored from an economic perspective. The challenges we might face going forward will be different than those from the past,” he adds. “The risk of a policy mistake is greater. The risk of inflation and stagflation is bigger now than two months ago. To assume the type of investment strategy we have had in the past will work is a mistake.”

With regard to resilience, Davis wants to position the fund for whatever is around the corner.

“We don’t know what could cause inflation but it could happen so we need to be prepared,” he says. “In this case we are seeing things unfolding faster than I would have expected. Policy makers are throwing everything at this challenge, we wonder how they will feel about it once it has passed, will they retract some of the measures – that’s a big risk.”

In terms of the shifting global economic environment, Davis is also sharply focussed on the emerging social pressures associated with the crisis.

“Since the 1980s there has been rising income and wealth disparity causing big social risks and the environment is ripe for some big political changes as a result of that. How will policy makers respond? We are coming into the US election, imagine if we have equity markets at new highs and unemployment at 15 per cent, how will people feel about that and vote. We are trying to make sense of the risks associated with the policy perspective and make sure we are positioned accordingly,” he says. “We feel confident our portfolio is resilient. For everyone managing a pension plan, stagflation will be a hard position to manage. We are well funded but for others it could be devastating.”

Portfolio construction in four components

The OPTrust portfolio is divided into four separate components: return seeking; risk mitigating; liability hedging; and a funding portfolio.

Return seeking and liability hedging are the two largest components, with the latter aimed at mitigating interest rate sensitivity.

A lot of the emphasis of the portfolio construction is in the risk mitigation portfolio which Davis describes as “performing spectacularly” with a return of above 30 per cent year to date.

“This is a very diversified portfolio of assets we believe will help in deflationary times and somewhat in inflationary and stagflationary environments,” he says. It’s made up of real return bonds, TIPS, US Treasuries, and longer duration assets as well as trend following strategies, such as CTAs, that do well in a tail risk environment. It’s also got allocations to foreign currency including Yen, Swiss Francs as well as gold. But Davis is quick to point out this portfolio is not trying to time the market.

“We don’t try to manage it in a market timing sense. We see it as a critical part of the overall portfolio that allows for cost effective risk mitigation – we can cut off the left-hand tail without impacting longer-term expected returns,” he says. “In that sense we want to have some core exposure to each of those strategies.”

The team is working on some further systematic strategies that will add to the dynamic nature of this portion of the portfolio.

“Strategies like trend following are systematic so will naturally move you when equity markets are under duress. We are building more systematic strategies,” he says. “We will adjust allocations to these when we think it is appropriate, there is an element of discretion around that. We are not trying to add returns, just cut off the left tail.”

Return seeking portfolio

The fund’s approach to return seeking is different to many other investors. In building the MDI program, diversification according to risk factor exposures was a priority, which meant reducing the exposure to listed equities.

“When I came on board about 80 per cent of the portfolio risk was from equity risk factor,” Davis, who was appointed CIO in 2016. says. “This is not uncommon but we made a deliberate decision to try to reduce that and it is around 40-50 per cent now.”

Equities, including both private and public exposures, now only make up about 20-25 per cent.

“This was a deliberate decision, not made on valuations, but to right side our factor risk exposures,” he says.

In place of equities the fund invested in alternative risk premia, added to its overall hedge fund exposure and increased its allocation to direct investing in real estate and infrastructure. The fund has an internal direct team and has also built up the trend following capability inhouse, and it runs all the bonds, some credit and passive equities inhouse.

“Our asset class teams are thinking a lot about the changing global economy. In real estate we are always thinking about how the world is evolving and how people’s preferences are changing in the retail and office space. We had a relatively low allocation to retail, because we saw the trend that it wouldn’t be positive for shopping malls as an example. That’s not new for us. We have also been thinking about what this current environment means for challenges in real estate in years to come. Davis argues that it is not clear cut there will be less demand for commercial real estate and just because everyone is working from home now doesn’t mean they will continue to. “We have experienced it ourselves, people like to be social. After this people might need more space not less, it’s not clear cut there will be less demand for commercial real estate.”

Rebalancing

While Davis says the fund is disciplined around rebalancing he is also mindful there are opportunities in dislocated markets.

“The current environment necessitates a degree of discretion in rebalancing. Opportunities present themselves in this type of environment. We don’t want to be forced sellers or buyers, and want to take advantage of the ample liquidity we have. We tend to stand back and say we have rebalancing guidelines telling us what to do, and then we have a conversation about the opportunities.”

The CIO has taken advantage of the market turmoil to add to credit and equity exposures, but is really earmarking the ample liquidity it has for private market activity.

“Great opportunities are going to emerge there. We don’t have the visibility we’d like to have, there are not a lot of transactions going on in that space now. But we know when you come out of these types of environments that’s where the opportunities will show themselves. We can prepare ourselves to take advantage of those once they present themselves, we don’t fill buckets, it has to be where the best opportunities are.”

Climate change

Davis says a few months ago climate change was front and centre in all investment conversations. While he says that won’t change over the long run, right now the focus is dealing with the immediate challenge.

“This type of environment shows you how vulnerable the world is and the necessity of trying to take those types of risks into account. We are very long-term investors so we are interested in looking at the future and what types of risks we might be exposed to. Climate change continues to be important to us and a centre point of our overall investment strategy.”

Davis acknowledges there are a lot of risks and opportunities in the current environment and wants to take advantage of that.

“Humanity can use ingenuity to solve problems. We think there will be great opportunities investing in those areas that are trying to solve big major problems.”

OPTrust has created a small team focused on investments at the intersection of innovation and sustainability and has hired Alison Loat, formerly of FCLTGlobal, to look at that.

“We are already big investors in renewables and that will always be part of the investment strategy. Here we are looking at things beyond that, that have the potential through technology to significantly change the landscape. Our members want to retire into a safe world, that is how we view our overall mandate.”

• OPTrust allocates more into Private Equity (12.9%) than Public Equity (11.3%)
• There is a significant allocation to "market neutral and multi-asset strategies" (20%)
• The weightings in Real Estate (14.3%) and Infrastructure (11.1%) are also significant
• Taken together the weighting in Private Markets and Hedge Fund Strategies make up roughly 56% of total assets, which is significant, and Fixed Income makes up 37% to hedge liabilities.
• In other words, there isn't much public market beta in OPTrust's portfolio, at least not when I look at the overall asset mix.
• While public equity exposure delivered a net return of 23.2% last year, the private equity portfolio generated a net return of 24.7% in 2019.
• The real estate portfolio generated a net return of 5.2% last year while the infrastructure portfolio generated a net return of 12.8% in 2019.
• Credit strategies earned net returns of 13.4% while market neutral strategies generated a net return of 2.2% in 2019.
• The Risk Mitigation Portfolio holds US Treasuries, safe-haven currencies and gold and earned a net return of 5.4% last year.
• The Funding Portfolio includes exposures such as bond repurchase agreements, implied funding from our derivative positions, and liquidity reserves. The -16.9% weight of the Funding Portfolio reflects OPTrust’s overall balance sheet leverage.

Cdn. malls collect just 15 per cent of May rent: JLL, Globe and Mail (Sub. required): New data from Chicago-based real estate services firm Jones Lang LaSalle shows the dire state of business during the coronavirus pandemic. https://t.co/9MARRR8j7e#CRE#realestate

— RENX (@RENXca) May 13, 2020

"Scientists race to find a cure or vaccine for the coronavirus. Here are the top drugs in development"https://t.co/OAuZ5iQ6Li

— Leo Kolivakis (@PensionPulse) May 13, 2020

Fed Chair Powell just said 40% of households making less than $40,000 a year lost a job in March https://t.co/ZLVhVPu6sV via @businessinsider

— Leo Kolivakis (@PensionPulse) May 13, 2020

Will coronavirus lead to fairer societies? Thomas Piketty explores the prospect https://t.co/4T5Maw2sKI

— The Guardian (@guardian) May 12, 2020

#Fed continues balance sheet expansion. Total assets rose another $65.5bn to a fresh record $6,721.4bn. Balance sheet now equates to 31.21% of US GDP. BofA expects Fed's balance sheet to rise to nearly $10tn by year-end. pic.twitter.com/lsey4vSmt8

— Holger Zschaepitz (@Schuldensuehner) May 8, 2020

We wrote this blog as a quick starter guide because, for some companies, this is going to be a daunting task and we wanted to give everyone some practical tips.

But here's what I find really interesting about this:

We've heard suggestions from many around the world that economic recovery from Covid is an opportunity for governments to build in climate considerations (and they should do so). However, I think this is the first time I've seen economic RELIEF being linked to climate change. And I have to give kudos to the Canadian government in taking this step. It was a recommendation from the Expert Panel on Sustainable Development and to be honest, the effort to develop an initial climate disclosure is a small ask compared to the work that actual comes after. Despite this, the government has gotten blowback on this LEEFF principle.

If you step back and think about this, the "ask" is for large companies to disclosure their approach to an issue that they should have already been looking at before Covid because it's not a new issue. Also, as my colleague said in his op-ed on the Bank of Canada appointment of Tiff Macklem "The economic impact of COVID-19 may be the immediate priority, but climate change won’t go away just because we are standing six feet apart." The problem is that while the focus has been on large fossil fuel companies (who arguably have already spent time and effort thinking about climate change), other large companies like airlines and retailers have not spent the time and effort needed.

However, the devil really will be in the details. TCFD (the voluntary climate disclosure framework) allows for quite a bit of flexibility in their reporting recommendations - so what type of disclosure will satisfy the Canadian government? How does a company know they have fulfilled this LEEFF principle? We completed a review of Canadian climate disclosures not that long ago for CPA Canada and found that there is no standard format or content yet. Climate disclosure happens over multiple documents and the details vary widely over the 11 TCFD recommendations. Despite the fact that it's early days for climate reporting, I would urge the government to not set a low bar. (And I would gladly speak to them about this!) Noone is going to get this right the first time, and that isn't the expectation. You have to just start.

Basically, this is a significant step forward and could result in really consolidating a national climate response if the government focusses on substance and if companies respond and follow the spirit of this principle.

Thank you, Bill and Mitch. And welcome to everyone participating by WebEx today.

IMCO

Let me start with a quick overview of IMCO.

IMCO was created in 2016 to manage public funds in Ontario.

We currently manage approximately $70B on behalf of 4 clients: the Ontario Pension Board; the WSIB, the WSIB Pension and the Provincial Judges Pension.

We are in effect Ontario’s version of BCI, AIMCO or CDPQ with one important difference, membership is voluntary. 

We need to convince public funds to join IMCO. Our value proposition for members has three legs:

(1) strong asset mix advice and total portfolio management (which we believe have more impact on overall risk and returns than almost all decisions within asset classes).

(2) better access to investments than members could achieve on their own (which our scale allows us to do by lowering costs and through internalization); and

 (3) strong risk management and reporting (again things that are difficult to do without scale).

When we began to manage funds on behalf of the WSIB and OPB in 2017 we could not credibly say we were able to offer clients this value proposition.

Today we can, and we are beginning to add clients.

The current environment

To state the obvious, we are living in unprecedented times.

While corona viruses are not new, this strain is still very poorly understood and extremely virulent.

We still do not know:

• how many people it has affected because there appear to be many asymptomatic carriers.
• why people seem to have such significantly different responses; or
• whether people who have recovered are immune forever or only for a short while. 

It is now present on all continents.

And currently, there is no cure or vaccine.

This has elicited unprecedented public health responses by most countries.

The borders of the largest economies of the world are effectively closed.

Billions of people have been living with significant restrictions on their freedom.

But unlike other recent crisis – like the GFC - there is not really a short term or long-term plan. And there is not anywhere near the American global leadership.

The Economy

The public health response to COVID-19 has triggered one of the quickest and deepest recessions ever.

In the fourth quarter of 2019, all major economies were growing.

In December of 2019, the IMF was predicting global growth in 2020 of 3.4%.

The US economy had been growing for more than 10 years and unemployment was at 3.5%.

Since then the decline in economic growth of the largest economies has been startling:

The IMF is now predicting:

• negative 6% GDP growth this year in Canada and the US; and
• negative 7.5% growth in Europe. 
• Chinese growth in 2020 is expected to be about 1%, which is a 5% drop from what was expected late last year.

In the US 20 million people lost their jobs in April bringing in the unemployment rate to 15%.

Today, we do not expect global GDP to recover to 2019 levels until late in 2021, at the earliest.

It is simply not possible to turn off an economy and expect there to be no residual damage when you turn it back on. 

Marginal companies are likely to be very damaged.

Healthy companies will have added debt.

Ongoing restrictions will limit overall growth and severely impact some industries more than others. 

And the “animal spirits” that are so critical to economic growth and vibrant markets are likely to be subdued for some time.

This will be a serious recession.

The Markets

The change in the capital market environment has also been quick.

At the end of 2019, the US stock market had been in the longest bull run in history.

The S&P reached an all time high in February.

It had been a glorious decade for investors.

The annualized return on the S&P over the last 10 years was 13%.

And the annualized returns to holders of US 30-year Treasuries over that same period was 8%.

It was hard to go wrong.

In fact, in 2019, you made double digit returns whether you were an owner of long-term government bonds or equities.

But, year to date the S&P is down 11%.

And, this masks the 34% decline from its high this year to its low so far this year. 

And oil has traded at negative values.

Central bank and government intervention

Governments have been very quick to act, likely because the lessons of the GFC were not that far off.

The breadth and extent of the fiscal and monetary intervention has been enormous. Governments have launched stimulus programs that are likely to result in deficits unlike anything before. 

The Government of Canada is set to run a $250B deficit or 12% of annual GDP. And the US Government is set to run a $4 Trillion deficit or 18% of annual GDP. 

Central banks are also intervening in the capital markets to an unprecedented extent.

The Federal Reserve is projected to expand its balance sheet to somewhere in the range of $9 Trillion. 

Because of this massive intervention, we do not think there is anything inconsistent with thinking that asset prices may fair better over the near term than the economy overall. 

While lower government bond rates may not get people back on to planes or into restaurants, they can drive up the value of financial assets.

One has only to look to the last 10 years to see the effects of sustained central bank involvement in the capital markets.

The total market capitalization of US stocks has grown significantly quicker than the economy as governments ran deficits, central banks expanded their balance sheets and interest rates were driven lower. Ten years-ago the value of all stocks was about 62% of the economy. 

Today it is more than double that – at about 132%.

So, what is an investor to do

So, what are investors to do today? At IMCO we do not pretend to have a crystal ball.

But that does not mean you cannot have a strategy.

Your strategy just needs to consider how unpredictable things are. 

 And there are certain strategies we follow, in good times and bad.

Diversification

The most important strategy for us is asset class diversification.

Asset class diversification – which at its core consists of owning a balanced portfolio of both government bonds and risk assets - can seem prudish when times are good (like at the end of the long bull late last year) or risky when times are scary (like right now). 

But, over the long run it leads to better risk adjusted returns. You do not get too far out on the limb when markets are up, and you do not miss buying opportunities when markets are driven by fear.

Over the last 20 years this strategy has also been powerful on account of the incredibly strong performance of government bonds.

They have provided diversification and healthy returns.

Today, we are still rebalancing into equities to the extent that these have declined but not becoming overly defensive by going significantly overweight bonds or cash.

We maintain a balanced portfolio through times of exuberance and times of fear.

Liquidity

The second most important strategy for us is ensuring adequate liquidity.

You cannot be a long-term investor if you put yourself in a position where you are forced to sell risker assets in times of market strain. 

This may seem like common sense, but every time there is a crisis there is at least one big well-known investor who is forced to sell at the worst time and they hard-wire in losses.

It's easy to fall into these kind of situations when you combine leverage and illiquid assets.

As I mentioned earlier, we do not believe this recession will be quick. 

And it is unlikely that we have seen the last bout of volatility. 

So, today we continue to watch our liquidity very closely and we have entered several arrangements with specialist managers to be buyers of high-quality publicly traded assets like credit and real estate during bouts of volatility, which we expect.

Targeted Pursuit of NVA 

The third principle for us is being very targeted in our pursuit of net value add.

Some public market segments have proven very difficult to outperform. 

And, in some cases, it is not worth devoting significant resources to trying to do so. And private markets no longer offer the automatic illiquidity premium that was available when it is was less common for institutional investors to invest in private markets.

Today, to be a successful private market investor requires lower costs and real operational expertise.

Today, we believe there will be real opportunities for investors who are skilled at helping companies rework their balance sheets in a stressed economic environment. We expect these opportunities to emerge over time and we are exploring partnerships now to be ready to pursue these opportunities.

Costs

The fourth principle for us is cost efficiency. Costs are one of the few things you can control as an investor. And costs matter even more when you are operating in an environment of potentially lower returns. 

We always have our eye on costs and that is especially true now.Today the so-called 2 and 20 fee structure would result in annual base fees that are more than 3 times the yield on 10-year government bonds. This common cost structure was developed in an investment environment where returns were much higher than we expect them to be going forward.

But the fee structure has not evolved.

So, we are continuing to rationalize our manager roster, eliminate managers of managers and funds of funds, and focusing on investing both directly and alongside a core set of strategic managers. We are also continuing to expand our asset base by adding members to spread costs over a larger base. We are always cost conscious.

Navigating big trends

Finally, we believe that it is important to have the discipline to act on the big trends.

These trends are generally obvious. For instance, on-line shopping was not a secret, but not many large organizations had the discipline to adjust their portfolios to deal with this risk before it was too late.

The challenge for large institutional investors is often the same as the challenge for any large organization – having the discipline to evolve to reflect a changing world.

Better run asset managers are no different from better run companies in other sectors. 

The best ones are not necessarily the ones with unique insights who are way ahead of the pack. The best run large organizations are the ones that leverage their natural advantages (for example economies of scale and a long investment time horizon) but also have the discipline to adapt their large diverse and often illiquid portfolios to reflect big powerful trends. 

In other words, it is just as much – maybe more – about hard work than it is about unique insights. So, we are spending lots of time these days thinking about how we evolve to adapt to powerful trends.

What else are we doing today? 

Let me say a thing or two about big trends.

There are several trends that we believe were underway before the COVID 19 crisis that have been accelerated or given more force by the crisis.

Our thinking is still at a relatively early stage, but for each them we are asking ourselves “so what does this mean for us as an investor”.

Lower for longer

To give a few examples...Before the crisis we were of the view that we were in a lower for longer return environment.

We expected returns to be lower over the next ten years than they were over the last ten years as a result of several forces including demographic trends in the largest economies and overall debt levels. We believe this trend has not changed. In fact, it has been reinforced by COVID 19.

We do not believe investors can outrun this broad return environment. And therefore, we believe that more than ever it is important to be diversified at the asset class level – because you cannot afford to get it wrong on a big asset class bet. More than ever it is important to not get caught in a liquidity squeeze, because you will not be able to make up for hard-wired losses. 

More than ever you need to avoid wasting time and resources pursuing NVA where it is unlikely. And, now more than ever, costs ought to be an area of focus.

Government intervention in the economy

Before the crisis we were also of the view that markets were being driven more than anything else by central bank intervention.

Some might argue that this goes back as far as the so-called “Greenspan Put”.

Whether it goes back that far or not, there is no doubt that since the GFC central banks in Canada, Japan, Europe and the US have been very active and significant and ongoing participants in the capital markets.

Investors have come to rely on central banks to not only maintain but increase the value of financial assets.The Federal Reserve had a balance sheet of about $1 Trillion before the GFC. It grew to about 4.5 Trillion before the COVID 19 crisis.

And it is now projected to grow to at least $9 Trillion as a result of the extraordinary measures it is taking, including buying investment grade and high yield credit.

To put $9 Trillion in perspective, that is about twice the size of either Vanguard or Blackrock and represents about 40% of US GDP. It is about 40% of the US national debt. And it is equivalent to about 1/3 of the value of all listed stocks in the US. In some ways we are already living in the era of big government. Not big government meaning direct ownership of big companies.

But big government in the sense of ongoing significant government intervention in the capital markets.

We do not see that changing, especially as consumers, businesses and governments themselves adjust to lower rates, and governments seek to maintain lower rates to cushion the impact of their own large debts. We are beginning to consider the implications of this.

But at a high level we believe it reinforces our lower for longer expectation in the near to medium term.

It is hard to imagine how governments continue to “prime the pump” to the same extent that they did over the last 10 years when the 10-year bond yield is below 1%, governments are already running deficits and central banks are already the largest institutional investors.

So, we come back to our core investment strategies.

Other trends that we believe have been accelerated include slowed or altered globalization, remote working, on-line shopping and the dominance of larger companies.

Conclusion

To wrap up....We believe that we will be in a stressed economic environment for some time, that there will also be unpredictable public health responses and significant and ongoing fiscal and monetary intervention.

All of this makes for a complicated investment environment.

We don’t have a crystal ball, but we believe the best overall strategy is to stick to the big things that generate value over the long term, like diversification, liquidity management, very targeted investment strategies, cost efficiency and navigating the big trends. And we are investing based on those beliefs today.

Thank you.

More than 36 million Americans have now filed unemployment claims over the past 8 weeks. https://t.co/59ZR6fPEwypic.twitter.com/Bd3dbDXnLn

— CNBC (@CNBC) May 14, 2020

Nearly 40% of those with a household income below $40,000 reported a job loss in March, a report finds https://t.co/uaZ6l0HakE

— CNN (@CNN) May 14, 2020

A V-shaped economic recovery is 'off the table,' Fed's Kashkari says https://t.co/mWQIMxxFJn

— MarketWatch (@MarketWatch) May 14, 2020

The Fed's balance sheet will likely climb to $12 trillion in the near term: TD Securities' Priya Misra @bsurveillance@ferrotv@tomkeene Powell's job today is to explain how the Fed will use other tools - ie, asset purchases & yield curve control - to avoid taking rates negative.

— Lisa Abramowicz (@lisaabramowicz1) May 13, 2020

The Fed isn’t likely to set a negative policy rate, but such a move could be helpful if done right, say JPMorgan analysts. https://t.co/4vcMXOz4h8

— Lisa Abramowicz (@lisaabramowicz1) May 13, 2020

Coronavirus: Goldman Sachs on Federal Reserve, negative interest rates https://t.co/H4vSVc5ioW

— Leo Kolivakis (@PensionPulse) May 14, 2020

This year we have lost all the jobs we had created since 1994 and the market is excited about the fact that the pace of job loss has slowed to 3 million per week from 6 million. If the jobs don’t come back as quickly as we lost them the market will collapse. Easy trades over.

— GreekFire23 (@GreekFire23) May 14, 2020

Economic Policy Uncertainty Index for United States
New record high.
Last time it spike to similar levels was in September 2008.
Markets bottomed in March 2009. pic.twitter.com/c59kJWv3hu

— Sven Henrich (@NorthmanTrader) May 14, 2020

Citigroup's "US equity strategists’ panic/euphoria model is approaching euphoria, which, historically, has led to negative returns over the next 12 months."pic.twitter.com/y4AaS3dEJE

— Lisa Abramowicz (@lisaabramowicz1) May 14, 2020

"The truth is found when men are free to pursue it." - FDR

Retail traders are likely finding that the truth of trading is hard, now that they're free to pursue it.

And pursue it they have, setting activity records every month. pic.twitter.com/VgmQpScb8o

— SentimenTrader (@sentimentrader) May 14, 2020

What the smart money is saying:

David Tepper: this is the 2nd most overvalued stock market ever
Buffett: hasn't made any big investments
Druckenmiller: risk-reward in stocks is the worst he's seen

Meanwhile, S&P 500 forward P/E ratio is at its highest since the late-1990s pic.twitter.com/DGIM91PDxy

— SentimenTrader (@sentimentrader) May 14, 2020

Fred Imbert and Thomas Franck of CNBC report the Dow rises slightly, but loses more than 2% on week:

Stocks finished Friday with slight gains but the major indexes capped the week with significant losses between a slew of somber economic reports and increasing tensions between China and the U.S.

The Dow Jones Industrial Average advanced on Friday by 60.08 points, or 0.25%, to 23,685.42, but ended the week lower by 2.65%. Earlier in the day, the 30-stock average dropped more than 270 points.

The S&P 500 finished Friday’s session up 0.39% at 2,863.70 while the Nasdaq Composite added 0.79% to close at 9,014.56.

The major averages clawed back their losses throughout the afternoon as retail stocks turned around despite a record decline in monthly retail sales. The SPDR S&P Retail ETF (XRT) rose 2% after sliding more than 1.4% earlier in the session. Best Buy, Kohl’s and Nordstrom rose. Walmart and Home Depot each advanced 2%.

Friday’s turnaround also followed better-than-expected data on U.S. consumer sentiment. The University of Michigan’s consumer sentiment index unexpectedly rose in early May as U.S. fiscal stimulus measures “improved consumers’ finances and widespread price discounting boosted their buying attitudes.”

For the week, however, the Nasdaq Composite and S&P 500 were down 1.1% and 2.2%, respectively, with the latter notching its worst week since March.

“Given the amount of uncertainty about this crisis that still looms, we should not be surprised by the setbacks we’ve seen in markets this week,” said Scott Knapp, chief market strategist at CUNA Mutual Group.

U.S. monthly retail sales fell by 16.4% in April, a record. Economists polled by Dow Jones expected a decline of 12.3%. So-called core retail sales —which exclude auto, gas, food and building materials sales — dropped 15.3%.

“I guess you could say we knew it was weak,” said John Briggs, head of strategy at NatWest Markets. “The problem is you can’t dismiss all this bad news for April. If you have a deeper hole, you’re starting point is lower.”

Stocks initially tumbled on the retail data. Market sentiment also took a hit amid rising trade tensions between China and the U.S.

The Trump administration moved to block semiconductor shipments to Chinese company Huawei. The Commerce Department said it would “strategically target Huawei’s acquisition of semiconductors that are the direct product of certain U.S. software and technology.”

Meanwhile, Hu Xijin, editor-in-chief of Chinese state-run publication Global Times, tweeted on Friday that China would “restrict or investigate” U.S. companies including Qualcomm, Cisco Systems and Apple if the U.S. takes further action to block Huawei’s supply chain. Hu’s Twitter account was closely followed last year by traders looking for insight on the U.S.-China trade war.

Based on what I know, if the US further blocks key technology supply to Huawei, China will activate the "unreliable entity list", restrict or investigate US companies such as Qualcomm, Cisco and Apple, and suspend the purchase of Boeing airplanes.

— Hu Xijin 胡锡进 (@HuXijin_GT) May 15, 2020

Shares of semiconductor makers Applied Materials and Skyworks Solutions both declined. Apple shares slid 0.5% while Qualcomm fell 5.1%.

“This is not an ideal time to be ratcheting up the trade war with China,” said Randy Frederick, vice president of trading and derivatives at Charles Schwab. “I don’t really quite understand what the rationale is there.”

“Clearly, the administration wants to see the market do better, but the things they’re doing with China right now are making it worse,” he said.

• These stocks swing like crazy, even the biotech ETFs swing like crazy
• If you play individual names, you can get stinking rich but most people get their head handed to them
• The sector does well when the Fed is on the sidelines and cranking up its balance sheet, like now

What’s the most shorted sector? The answer might surprise you https://t.co/NhyMniUjrD

— MarketWatch (@MarketWatch) May 15, 2020

Fed issued a stark warning that stock and other asset prices could suffer significant declines should the coronavirus pandemic deepen, w/commercial real estate market being among the hardest-hit industries. https://t.co/YwECfV7wwUpic.twitter.com/bfs3Z92CzP

— Holger Zschaepitz (@Schuldensuehner) May 15, 2020

"Why Dow may be safer bet than the Nasdaq right now, according to recent market history"https://t.co/NrYq2omdSH

— Leo Kolivakis (@PensionPulse) May 15, 2020

Justice Department, State Attorneys General Likely to Bring Antitrust Lawsuits Against Google
Officials at Justice Department are focused on Google’s ad business, how it has used its search dominance
https://t.co/u7rsUQySAv via @WSJ

— Stare Decisis (@MsResJudicata) May 15, 2020

With Nobody Having Any Idea What's Going On, One Bank Says SPX Fair Value Is From 1,900 To 3,000 | Zero Hedge https://t.co/chwx8Aikmf

— Leo Kolivakis (@PensionPulse) May 15, 2020

Risk-reward for stocks is 'maybe as bad as I've seen it,' Stanley Druckenmiller says https://t.co/qqtW50vEpz

— CNBC (@CNBC) May 12, 2020

"The market is by anybody’s standard pretty full." David Tepper said yesterday this is the second-most overvalued stock market he's ever seen, behind only '99. https://t.co/nen0cuC04H

— CNBC (@CNBC) May 14, 2020

The recovery will be slow, painful, halting & up and down.”

Even with a cure, how long will it take to vaccinate 7.7 billion people? @HowardMarksBook& @raoulGMIpic.twitter.com/4Mi94bnAxk

— Real Vision (@RealVision) May 15, 2020

What does the chairman of the Federal Reserve think is next for the American economy? Jerome Powell speaks to Scott Pelley, Sunday on 60 Minutes. https://t.co/fefktV4aPrpic.twitter.com/bM9n9Zy2br

— 60 Minutes (@60Minutes) May 15, 2020

🇺🇸 While money supply has increased, money velocity has COLLAPSED.

Deflation risks are much more imminent than hyperinflation risks --> https://t.co/7YGiKbSsDQpic.twitter.com/EZPfcK5Opa

— Morten Lund (@meremortenlund) May 14, 2020

Economic Policy Uncertainty Index for United States
New record high.
Last time it spike to similar levels was in September 2008.
Markets bottomed in March 2009. pic.twitter.com/c59kJWv3hu

— Sven Henrich (@NorthmanTrader) May 14, 2020

Citigroup's "US equity strategists’ panic/euphoria model is approaching euphoria, which, historically, has led to negative returns over the next 12 months."pic.twitter.com/y4AaS3dEJE

— Lisa Abramowicz (@lisaabramowicz1) May 14, 2020

Alberta’s government-owned money manager is launching a formal investigation into a recent $2.1-billion loss and promising to fix what ails a fund plagued by poor performance.

The board of directors at Alberta Investment Management Corp., known as AIMCo, announced that accounting firm KPMG LLP and former Ontario Teachers’ Pension Plan chief risk officer Barbara Zvan were brought in to “to identify lessons learned and corresponding enhancements to AIMCo’s investment and risk management processes.”

In its first public comment on the loss, which came to light in early April, the board said a report is expected by the middle of June and will be shared with AIMCo’s clients and the provincial  government.

Edmonton-based AIMCo oversees $119-billion on behalf of 31 clients, including pension plans for health care workers and police officers and the $18-billion Alberta Heritage Savings Trust Fund, the province’s war chest fund derived from oil royalties.

In late March, stock markets plummeted and then soared in reaction to the COVID-19 outbreak. AIMCo posted outsized losses when an investment strategy linked to volatility “performed particularly poorly,” the board said last Thursday in a press release. In the derivative-based strategy, now discontinued, AIMCo earned small returns when markets were calm, but suffered heavy losses when the economic collapse wrought by COVID-19 sent the S&P 500 and other stock benchmarks on a roller-coaster ride, putting it on the losing end of the trades.

In early April, AIMCo clients said the fund manager faced losses of up to $4-billion but AIMCo has subsequently revised the estimate.

After learning of the loss, many of AIMCo clients met with the fund’s executives and subsequently said they were frustrated with a lack of disclosure on who was responsible for the volatility-linked strategy and what, if anything, went wrong with risk management.

AIMCo’s board took ownership of the trading losses last week and committed to improving performance at the fund manager. “Oversight of AIMCo’s investment strategies and risk management is the responsibility of the board,” the directors said in a press release. “We deeply regret this result and are determined that the lessons from this experience will improve the corporation’s management processes and prevent any similar occurrences.”

AIMCo’s board is led by former Enbridge Inc. chief financial officer Richard Bird and includes retired executives from a number of financial institutions, including BlackRock Inc., Sun Life Financial Inc. and Manulife Financial Corp. The board said it hired senior partners from KMPG’s financial risk management team to conduct "an independent review,” in additional to an internal audit by the fund’s executives. Ms. Zvan, an actuary by training, volunteered to help the Alberta fund’s board after spending 24 years at the $201-billion Ontario teachers’ fund before leaving in January. She is known as one the country’s top risk management experts.

Last month, AIMCo executives also said the fund manager planned to change its approach. “Let me be clear, the performance of this investment is wholly unsatisfactory,” chief executive Kevin Uebelein said in an open letter to clients. “Please know I am fully focused on one thing: making any and all changes to ensure AIMCo is stronger and that we avoid a repeat of this outcome.”

AIMCo incurred its high-profile loss at a time when Alberta’s economy is reeling from the combined impact of the global pandemic and oil price war. The fund manager is a central player in the ruling United Conservative Party’s plans to revive the province.

Last year, Alberta Premier Jason Kenney announced the previously independent pension plan for the province’s teachers is moving into AIMCo next year, a plan the teachers’ union opposes. Mr. Kenney has also been considering moving the province’s contributions to the Canada Pension Plan into AIMCo.

Investment performance is a continuing issue at AIMCo. The firm’s biggest client is the $50-billion Local Authorities Pension Plan, known as LAPP, which oversees retirement savings for the province’s health care workers. Alberta regulations require LAPP to use AIMCo as its fund manager. The pension plan has flagged poor performance as a problem for many years, noting in its most recent annual report that “AIMCo has been short of LAPP’s value-added expectations for 46 consecutive quarters, or 11 years and six months.”

AIMCo is expected to release financial results for the first three months of the year by the end of May, and clients who have been briefed on performance say the fund manager lagged comparable funds across most sectors, in addition to taking a significant hit on the volatility-linked strategy.

The median pension plan return was a 7.1-per-cent loss in the quarter, according to data compiled by a division of Royal Bank of Canada. However, there was a wide range of results, with top fund managers down just 2.9 per cent and the poorest-performing pension plans off by 12.7 per cent, according to RBC Investor and Treasury Services.

“It has been an exceptionally difficult period for Canadian pension plans to navigate, as the markets have been experiencing an unprecedented amount of volatility across asset classes,” RBC executive David Linds said in a release. Canada’s stock benchmark, which is heavily weighted to energy companies, was one of the worst performing markets in the world, with the S&P/TSX Composite Index declining 21 per cent in the first three months of the year.

Outside reviewers will study how the Alberta Investment Management Corporation (AIMCo) lost $2.1 billion this year on a single investment strategy.

The government-owned investment corporation has called in accounting firm KPMG to conduct an independent review, AIMCo said in a statement published last week.

Barbara Zvan, a past chief risk manager at the Ontario Teachers' Pension Plan, will voluntarily provide advice to the board, the statement said.

"We deeply regret this result and are determined that the lessons from this experience will improve the corporation's management processes and prevent any similar occurrences," it said.

Among AIMCo's $119-billion portfolio is the $18-billion Alberta Heritage Savings Trust Fund and public sector pension plans holding the retirement savings of hundreds of thousands of Albertans.

The Alberta government has decreed that by the end of 2021, AIMCo must also manage investments for the $18-billion Alberta Teachers' Retirement Fund, which has more than 80,000 members.

The Alberta Teachers' Association has called that move a "hijacking" done without consultation.

Objective look at a costly decision

David Long, a past chief investment officer at the Healthcare of Ontario Pension Plan, said on Monday the value of large pension plans can often fluctuate by several billion dollars.

Less common is to lose more than one per cent of a portfolio's value to a single investment strategy, said Long, who is now managing partner of Alignvest Investment Management in Toronto.

AIMCo lost about two per cent of the value of its assets with a volatility-based strategy when the coronavirus pandemic began to pummel the global economy.

A board has the responsibility to arrange an impartial and objective look at decisions made by a management team, traders, and portfolio managers in cases where top managers could have culpability for an error, Long said.

External reviewers will likely study whether AIMCo followed written investment policies and client direction, he said. How straightforward were internal communications? And why did people make decisions at certain times?

"When this amount of money gets lost, presumably unexpectedly, there has to be some level of accountability," he said.

The loss could also affect some of the bonuses AIMCo executives pocket for investment success.

AIMCo's 2018 annual report shows CEO Kevin Ueblein earned $3.4 million that year, nearly $2.9 million of which came from meeting short- and long-term performance objectives.

Teacher renews call for pause

Edmonton school principal Greg Meeker, who spent 12 years on the Alberta Teachers' Retirement Fund (ATRF) board and a decade as board chair, has watched AIMCo's performance closely.

He opposes the government's move to require AIMCo to invest teachers' pension money and said the recent losses should prompt the government to hit pause.

Calling in external consultants to discuss risk strategies should happen before investment decisions are made, not as an "autopsy," Meeker said on Monday.

"This might be the biggest case of shutting the door after the horse has departed," he said.

He said the results of the review should be released publicly and to pension fund managers, which include the Local Authorities Pension Plan, Management Employees Pension Plan and Public Service Pension Plan.

He wants to know how much top executives at AIMCo knew about front-line investment decisions and how those choices aligned with managers' instructions on risk tolerance.

Zvan is "tremendously qualified" and should have good insight for AIMCo, Meeker said. However, he's concerned that her voluntary role may limit the weight AIMCo gives to her advice.

AIMCo declined an interview request on Monday.

The board's statement said the review and any "resulting process enhancements" will be shared with clients and its shareholder — the provincial government — by mid June.

During the current COVID-19-induced economic downturn one of AIMCo’s investment strategies has performed particularly poorly. This volatility trading strategy incurred a loss of $2.1 billion or about 2% of AIMCo’s portfolio. Oversight of AIMCo’s investment strategies and risk management is the responsibility of the Board of Directors. We deeply regret this result and are determined that the lessons from this experience will improve the Corporation’s management processes and prevent any similar occurrences.

Accordingly, the Board identified three immediate priorities. The first was to limit the damage from the volatility trading strategy.

Second, the Board has confirmed that no other investment strategies could generate substantial losses in very unusual circumstances.

Third, the Board is undertaking a comprehensive review of the volatility trading strategy to identify lessons learned and corresponding enhancements to AIMCo’s investment and risk management processes and has enlisted the assistance of Senior Partners in KPMG’s Financial Risk Management team to provide an independent review. Additionally, Barbara Zvan, former Chief Risk & Strategy Officer of the Ontario Teachers’ Pension Plan has agreed to share her considerable expertise and insights in this regard to support the Board through this process.

The review and resulting process enhancements will be shared with AIMCo’s clients and shareholder with a target completion of mid-June.

• AIMCo's $3 billion volatility blowup?
• AIMCo to conduct review of volatility blowup
• AIMCo CEO responds to volatility blowup

A great risk exposure is the extreme scenario which often investors assume has zero probability when in fact they have low but positive probability. Investors are frequently unprepared for interest rate, currency or stock price changes so large and so fast that they are considered to be impossible to occur. The move of some bond interest rate spreads from 3% a year earlier to 17% in August/September 1998 led even savvy investors and very sophisticated Long Term Capital Management researchers and traders down this road. They had done extensive stress testing with a VaR risk model which failed as the extreme events such as the August 1998 Russian default had both the extreme low probability event plus changing correlations. Several scenario dependent correlation matrices rather then simulations around the past correlations from one correlation matrix is suggested. This is implemented, for example, in the Innovest pension plan model which does not involve levered derivative positions (see Ziemba and Ziemba (2013, Chapter 14) . The key for staying out of trouble especially with highly levered positions is to fully consider the possible futures and have enough capital or access to capital to weather bad scenario storms so that any required liquidation can be done orderly.

• AIMCo is not the only Canadian pension plan selling volatility. Most of the sophisticated ones like HOOPP, OTPP and CPPIB have the exact same strategy and when done properly, it makes sense for a large pension with solid balance sheets and a long investment horizon to sell volatility as long as the risks are managed properly.
• AIMCo did not manage the risks of this vol strategy properly. There is no way they didn't conceive that if this blew up, they'd be facing massive and unacceptable losses.  
• Dale MacMaster, AIMCo's CIO, isn't stupid. Far from it, he is extremely knowledgeable as are other AIMCo officers who worked on this strategy.
• The bottom line is they didn't manage the risks properly. They didn't size their positions accordingly, failed to prepare for the unforeseeable and succumbed to heavy losses when market volatility reached levels we haven't seen since the Great Depression.
• Yes, this pandemic is a once in a century event (let's hope) but saying you "deeply regret the losses" after the fact is totally unacceptable when senior managers are being paid millions and the Board is supposedly overseeing their activities and is suppose to understand the risks they were taking.
• Despite this massive vol blowup, I still think AIMCo should manage ATRF's assets and think this is in the best interests of Alberta's teachers and taxpayers over the long run. 

Mohamed Mokhtari is the national lead partner in charge of the Risk Consulting Advisory Services practice of KPMG in Canada. Mohamed is also our global leader for investment & risk management service offerings initiatives within the context of large public pension funds and sovereign funds. He has 16 years of experience advising financial institutions, pension funds and corporations in sound treasury and risk management practices. Mohamed has worked extensively with large pension funds providing advisory services in the areas of investment management and Investment risk management at the aggregate portfolio level and across the main asset classes and supporting functions. He advises clients on market risk quantification and hedging strategies, and has led projects related to market and credit risk modeling, stress testing and counterparty risk. He also teaches risk management as part as the Executive Education program at HEC Montréal. 

I saw in the news yesterday that AIMCo hired KPMG to do the audit. Not surprising, Boards usually go for a Big 4 under such circumstances for their name and reputation (that is, unless their very survival is on the line -- in that case, they bring in those who really know what to do). The Big 4 then brings in an outside specialist, which is where Barbara Zvan comes in.

Thinking about it, and not to kick a dead horse, the investors still have a problem: the AIMCo Board might be conflicted. Without knowing the full details, and just based on the past 20+ risk reviews I've completed, I'm willing to bet that AIMCo was selling vol because they were under pressure to goose returns to justify their takeover of other teachers' funds. They justified it as "selling insurance" or something low risk like that but that's just a cover -- it seemed like a free 50 bps, worked like a charm for the last few years, and made them seem very clever. I'm also willing to bet that the pressure was coming from the Board itself. Hence, the conflict. It's the classic problem: either they knew about it and did nothing or didn't know about it and should have. Either way, it's bad. KPMG would be nuts to blame the Board that pays them and they will downplay their role in this, burying it in policies and procedures or something bland like that that no one will ever read.

Similar to a workout where each creditor committee brings in their own people, If I were Alberta Teachers or similar pissed off investor, I would be demanding our own reps participate or at least consult in the review to find out what really happened (and to see if there is anything else in the portfolio that is a ticking time bomb). I know that could be very contentious, and I'm not sure they (or you) want to open that can, but is it worth suggesting? With a referral, I would be happy to make the suggestion.

Again, apologies if I'm kicking a very dead horse!

Monday's market short squeeze was well orchestrated and telegraphed. Fed Chair Powell on 60 Minutes last night saying the Fed ‘stands ready to do more’ and the Moderna phase I news this morning before the open (to get people all excited over nothing). Here is my short term call, the S&P 500 ETF (SPY) will briefly pop above its 200-day and strategists will tell you the bull is back and then we slowly head back down as traders sell the good news of the economy reopening. Either way, this market is so rigged, it’s laughable:

The private equity giant that rode Cirque du Soleil to the brink of bankruptcy now wants to share in the spoils, The Post has learned.

Texas-based TPG Capital has positioned itself to make money from a highly anticipated Cirque du Soleil bankruptcy by turning itself into a lender in a last-minute maneuvering that has the company’s existing lenders crying foul, sources said.

On March 30, the entertainment company, which boasts TPG as its controlling shareholder, moved the majority of its worldwide trademarks to a brand-new entity, a senior lender told The Post. The next day, the Montreal-based company — known globally for its flashy acrobatic and aerial acts — missed an interest payment on its $900 million senior debt, setting the stage for its bankruptcy, according to reports and sources.

What happened next is key: TPG and other Cirque shareholders — including Caisse de Depot et Placement du Quebec, Canada’s second-largest pension fund, and Shanghai-based Fosun International Ltd. — provided Cirque with $50 million in emergency financing.

Instead of issuing the loan to the company at large, they directed it to the new trademark unit, a move that instantly bolstered their status in bankruptcy, sources said.

As mere shareholders, TPG would have been forced to stand behind existing lenders in a bankruptcy. Likewise, if it had loaned the larger company millions, it would have been forced to take a backseat in a bankruptcy, experts said.

While there’s no indication that TPG’s aggressive maneuvering is illegal, lenders say they could contest the transaction in court because it was done at a time when the company knew it was going to default on its existing debt.

“TPG will use the interim financing to advantage themselves” in bankruptcy, the peeved senior lender told The Post. “It’s very aggressive.”

“Greed is what it is,” said a restructuring lawyer familiar with the issues but not working on the case, who questioned the shareholders’ “right to transfer an asset away from lenders right on the verge of bankruptcy.”

TPG, run by billionaires David Bonderman and James Coulter, bought Cirque in a 2015 deal that valued the entertainment giant at $1.5 billion. TPG walked away with a 60-percent stake, Caisse and Fosun took smaller stakes, while Cirque’s accordion-playing, fire-eating co-founder, Guy La Laliberte, grabbed 10 percent, which he later sold to Caisse.

The entertainment company, which got its start with a ragtag team of street performers, was loaded down with a towering $1.2 billion in debt in the deal. And while it was profitable before coronavirus lockdowns crushed ticket sales, it only had $20 million of cash on its balance sheet and access to an $85 million credit line, according to Moody’s Investors Service.

By early March, after closing its show at the MGM Grand in Las Vegas among others, Cirque announced temporary layoffs for 95 percent of its 4,679 workforce — and that was before the pandemic drained the money it needed to keep the lights on and pay off its debt

After failing to make its interest payment at the end of March, the company officially defaulted on its debts, the company told The Post.

In a statement, TPG defended its actions by saying the creation of the subsidiary was “recommended by the independent transaction committee” of the company’s board “to establish a structure that would ensure Cirque could seek and receive emergency financing, which would otherwise be unavailable given the continued disruption brought on by the COVID-19 pandemic.”

Indeed, the subsidiary undoubtedly increased the chance of favorable loan terms by putting the new lenders on par with everyone else. But TPG’s existing lenders also claim they have offered $100 million in emergency funding that was denied, the lender source said.

Although TPG offered its loan at a slightly lower interest rate of roughly 5 percent, existing lenders were not given the opportunity to make a counter offer, this person added.

Cirque du Soleil declined to comment on the claim, saying only that an independent committee “concluded that the financing proposal of Cirque’s existing shareholders was the most favorable.”

Peeved lenders plan to present the board with a new $50 million loan at an even lower interest rate, they said. If the company accepts it, they will regain control of the bankruptcy and TPG and its co-investors once again stand to lose the $630 million they coughed up to buy the company.

If the board rejects the proposal, the lenders “will use the response to try to prove that the board should not be trusted,” explained Jones Day’s chief bankruptcy lawyer Bruce Bennett, who is not involved in the process.

Even before the pandemic, the sprawling company was struggling with bloat and creative fatigue after a consortium led by an American private equity firm acquired it in 2015, and accelerated a debt-fueled global expansion spree.

Now, with no certainty on the timing of a coronavirus vaccine or when cities will allow large public gatherings again, some are asking whether Cirque can survive.

“No one had ever modeled what we would do if we lost 100 percent of our revenue,” said Mitch Garber, Cirque’s chairman, comparing the pandemic to the Great Depression for the live entertainment industry. “We can’t function without fans.”

It is hard to overstate the hold that Cirque du Soleil has on the Canadian and global imagination.

The Montreal-based circus originated in the 1980s when a group of Quebec performers, stilt-walkers and fire-breathers, including the Cirque’s accordion-playing co-founder Guy Laliberté, delighted local residents on the shores of the St. Lawrence River.

Born in 1984, its animal-free mix of awe-inspiring acrobatics, dance, lavish costumes, live music, high-technology stagecraft and narrative whimsy created a new vision of what a circus could be.

Before the coronavirus outbreak, its seven shows in Las Vegas alone — including the critically-acclaimed “Ka,” featuring battle scenes 70 feet in the air, and the water-themed extravaganza, “O” — drew some 10,000 people nightly. The Cirque had more than $1 billion in revenues last year — although now it also has nearly $1 billion in debt.

Today, the circus’s normally frenetic costume-making atelier in Montreal, which occupies the length of a city block and produces 18,000 painstakingly tailored costume parts each year, sits eerily empty. Half-sewn wigs and unfinished masks are scattered on work stations, along with half-drunk cups of tea.

Gabriel Dubé-Dupuis, the creative director of two recent Cirque shows, “Cosmos” and “Exentricks,” has worked 23 years for the circus, where his father was a famous clown. He said he was owed tens of thousands of dollars.

“This is a business where circus artists risk their necks each night and if people aren’t paid, it creates a crisis of confidence,” he said.

On March 18, Moody’s Investor Service downgraded Cirque’s credit rating to near junk status, citing a “high risk” that it would default on its debt. Québecor, a Quebec telecommunications giant, recently expressed interest in buying Cirque but was coolly received.

Mr. Laliberté, Cirque’s poker-loving billionaire co-founder, also floated the possibility that he would get into a “wrestling match” to rescue Cirque. But people familiar with talks over Cirque’s future said he had sold his shares in the company and was unlikely to buy it back.

Daniel Lamarre, Cirque’s chief executive, said he initially thought the health crisis would be contained to China, where Cirque was forced in late January to close its recently opened show “The Land of Fantasy” in Hangzhou, a keystone of its vaunted China expansion.

But he recalled that, at the beginning of March, just minutes after a crisis meeting in Montreal, one city after another across the world began to shut down. As borders closed, Cirque had to race to load big-top equipment onto giant cargo planes and repatriate 2,000 employees.

“Our world changed overnight,” he said. “When I got the call on March 14 that we would have to close all seven shows in Las Vegas, the reality sunk in.”
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Mr. Lamarre said Cirque was considering all options including seeking bankruptcy protection. A recent injection of $50 million from its shareholders had bought some time.

He said he was optimistic the company would bounce back, buoyed by its glittering brand and a public zeal for live entertainment after months of confinement. Cirque was already in talks with its Korean and Chinese partners about reopening shows.

Meanwhile, he has new reading matter: studies about coronavirus vaccines.

“We’re probably talking about a year from now before going back to normal,” he said.

But for all his bullishness, some critics say that Cirque’s problems predate the pandemic and that its groundbreaking artistry has given way to facile story lines and kitsch spectacle, like acrobats in frog costumes.

In 2015, Mr. Laliberté, who became Canada’s first tourist to space in 2009, sold his majority stake to investors led by TPG Capital, the American private equity firm, for $1.5 billion. Cirque’s other shareholders are the Chinese investment company Fosun and a Quebec pension fund.

The company has since spent $550 million on acquisitions, creating new shows and refreshing existing productions.

But while triumphs like the revival of the Cirque classic “Alegria” have enchanted, there have also been big stumbles, including an ill-fated foray into New York.

Its live-action Las Vegas show “R.U.N,” which cost $60 million to develop, closed in March after just five months, weighed down by banal stunts and fight scenes.

“Over the last few years, there has been a shift toward profits at the expense of creativity,” Mr. Dubé-Dupuis, the Cirque veteran, said.

Now, retrenchment seems inevitable.

“We don’t know how Cirque can make money or not lose too much money if one of every four seats in a theater is empty,” Mr. Garber said.

The pandemic has also challenged Cirque’s small army of superhuman circus artists.

“There aren’t a lot of LinkedIn listings for unemployed contortionists,” Mr. Garber observed.

Fitzgibbon, who was speaking with opposition MNAs, would only say that the government would help the company recover, with the goal of keeping its headquarters in Quebec.

Fitzgibbon said it would be “totally inappropriate” to publicize any details while discussions continue. But he said he’s “very conscious” of the use of public funds and promised to be “prudent,” “rigorous” and “completely transparent” when an announcement is made.

Liberal MNA Monsef Derraji asked Fitzgibbon to confirm a report from Bloomberg News that the Cirque was in discussions with Investissement Québec for a C$500 million loan. Cirque chairperson Mitch Garber said Thursday that the company had not asked the government “for one dollar of financing.”

The Cirque du Soleil has debts of more than US$900 million, and received emergency financing of US$50 million from its three main shareholders — American investment company TPG Capital (60 per cent), China’s Fosun Capital Group (20 per cent) and the Caisse de dépôt et placement du Québec (20 per cent).

The COVID-19 pandemic forced the company to cancel its 44 shows and lay off almost all its staff — about 4,700 people.

Québecor CEO Pierre Karl Péladeau has expressed an interest in buying the Cirque, and founder Guy Laliberté suggested this week he could be involved in saving the company, three months after selling his remaining stake in it.

Three months after selling his stake, Cirque du Soleil's founder is considering the possibility of getting involved in the rescue of the entertainment company that's been greatly weakened by the COVID-19 global pandemic.

In an open letter sent on Wednesday, Guy Laliberte says the future of the acrobatic troupe will depend on patient investors who will resist the temptation to reopen too quickly.

The businessman predicts there will be a “battle royale” to rescue the Cirque, including current shareholders led by Mitch Garber, debt holders who took the risk of funding the Cirque, as well as various levels of government that wanted to keep the head office and jobs in Quebec.

He says the biggest threat to the Cirque's future are “sharks” who dream of buying it for “a song” and those with no experience in managing cultural organizations of this scale.

The Cirque du Soleil laid off 4,679 employees, or 95 per cent of its workforce, on March 19, and cancelled 44 shows around the world. It has a debt of $900 million.

Quebecor Inc. has expressed an interest in Cirque du Soleil and is ready to inject hundreds of millions of dollar despite not having access to the cirque's books.

“You can't win the Stanley Cup 36 years in a row, but with patience, heart and hard work, you can dream of holding it in your hands once again,” said Laliberte.