Before the coronavirus crisis, three of New York City’s largest commercial tenants — Barclays, JP Morgan Chase and Morgan Stanley — had tens of thousands of workers in towers across Manhattan. Now, as the city wrestles with when and how to reopen, executives at all three firms have decided that it is highly unlikely that all their workers will ever return to those buildings.

The research firm Nielsen has arrived at a similar conclusion. Even after the crisis has passed, its 3,000 workers in the city will no longer need to be in the office full-time and can instead work from home most of the week.

The real estate company Halstead has 32 branches across the city and region. But its chief executive, who now conducts business over video calls, is mulling reducing its footprint.

Manhattan has the largest business district in the country, and its office towers have long been a symbol of the city’s global dominance. With hundreds of thousands of office workers, the commercial tenants have given rise to a vast ecosystem, from public transit to restaurants to shops. They have also funneled huge amounts of taxes into state and city coffers.

But now, as the pandemic eases its grip, companies are considering not just how to safely bring back employees, but whether all of them need to come back at all. They were forced by the crisis to figure out how to function productively with workers operating from home — and realized unexpectedly that it was not all bad.

If that’s the case, they are now wondering whether it’s worth continuing to spend as much money on Manhattan’s exorbitant commercial rents. They are also mindful that public health considerations might make the packed workplaces of the recent past less viable.

“Is it really necessary?” said Diane M. Ramirez, the chief executive of Halstead, which has more than a thousand agents in the New York region. “I’m thinking long and hard about it. Looking forward, are people going to want to crowd into offices?’’

Of course, the demise of the Manhattan office market has been predicted for decades, especially after the Sept. 11, 2001, attacks.

Owners of office towers, including two of the largest landlords in the city, Vornado Realty Trust and Empire State Realty Trust, said they were confident that after this crisis, companies would value in-person communication more than ever. That’s especially the case given how isolated some workers have felt since the shutdown began in March, the landlords said.

The number of workers who actually prefer to be in an office because of the opportunity for social interaction is an unknown factor.

Still, when the dust settles, New York City could face a real estate reckoning.

David Kenny, the chief executive at Nielsen, said the company plans to convert its New York offices to team meeting spaces where workers gather maybe once or twice a week.

“If you are coming and working at your desk, you certainly could do that from home,” Mr. Kenny said. “We have leases that are coming due, and it’s absolutely driving those kinds of decisions.’’

“I have done an about-face on this,” he added.

Barclays, JP Morgan Chase and Morgan Stanley are part of a banking industry that has long been a pillar of the city’s economy, with more than 20,000 employees. Collectively, they lease more than 10 million square feet in New York — roughly all the office space in downtown Nashville.

Jes Staley, the chief executive of Barclays, the British bank, said that “the notion of putting 7,000 people in a building may be a thing of the past.”

The company is studying jobs that would be most adaptable to working remotely, a spokesman said, and some employees could be required to show up in person only on an as-needed basis.

James Gorman, the Morgan Stanley chief executive, declined a request for an interview. But he told Bloomberg that the company had “proven we can operate with no footprint. That tells you an enormous amount about where people need to be physically.”

In a recent email to employees, JP Morgan Chase, which until last year had been the largest office tenant in New York City, said the company was reviewing how many people would be allowed to return. More than 180,000 Chase employees have been working from home.

Other major companies, including Facebook and Google, have extended work-from-home policies through the end of the year, raising the prospect that some may never return to the office. Twitter, which has hundreds of employees in its New York office in the Chelsea neighborhood of Manhattan, told all its employees on Tuesday that they could work remotely forever if they want to and if their position allows for it.

Warren Buffett, the chairman of Berkshire Hathaway and one of the country’s most prominent corporate leaders, predicted that the pandemic would lead many companies to embrace remote working arrangements. “A lot of people have learned that they can work at home,” Mr. Buffett said recently during his annual investors meeting.

New York City has withstood and emerged stronger from a number of catastrophes and setbacks — the 1918 Spanish Flu, the Great Depression, the 1970s financial crisis and the 2001 terrorist attacks. Each time, people proclaimed the city would forever change — after 9/11, who would want to work or live in Lower Manhattan? — but each time the prognostications fizzled.

But this moment feels substantially different, according to some corporate executives.

The economy is in a sustained nosedive, with unemployment reaching levels not seen since the Great Depression. Many companies are in financial trouble and may look to shrink their real estate as a way to cut expenses.

More fundamentally, if social distancing remains a key to public health, how can companies safely ask every worker to come back?

“If you got two and a half million people in Brooklyn, why is it rational or efficient for all those people to schlep into Manhattan and work every day?” said Jed Walentas, who runs the real estate company Two Trees Management. “That’s how we used to do it yesterday. It’s not rational now.”

Still, workers do much more than fill cubicles.

Entire economies were molded around the vast flow of people to and from offices, from the rush-hour schedules of subways, buses and commuter rails to the construction of new buildings to the survival of corner bodegas. Restaurants, bars, grocery stores and shops depend on workers for their survival.

Real estate taxes provide about a third of New York’s revenue, helping pay for basic services like the police, trash pickup and street repairs. Falling tax revenue would worsen the city’s financial crisis and hinder its recovery.

“I get worried that the less money that is coming in, then we can pay less in taxes and less in services, and it becomes a vicious cycle,” said Brian Steinwurtzel, the co-chief executive at GFP Real Estate, the largest owner and manager of small tenant office and retail buildings in the city.

Chinatown in Manhattan typifies the bond between office workers and surrounding neighborhoods. While Chinatown attracts tourists, many restaurants and stores rely just as much if not more on workers who typically pour in every day from the Financial District and nearby courthouses and municipal buildings.

“It is not dramatic to say that we don’t know if Chinatown is going to be here when we come out of this,” said Jan Lee, 54, who owns two mixed-use buildings in the neighborhood, including one that his grandfather bought in 1924.

One of his three commercial tenants, a makeup store, has not paid rent since January. None of them, including two formerly busy restaurants, have paid May rent. Mr. Lee has a roughly $250,000 property tax bill due on July 1 that he cannot afford to pay.

“We have lost millions of dollars,” he said, “and millions of trips that people were taking to spend their lunch hour here.”

At Aux Epices, a Malaysian and French bistro in Chinatown, Mei Chau, the chef and owner, used to serve up to 50 people at lunch, mostly workers from nearby office buildings.

On Friday, she reopened the restaurant for takeout lunch. No one showed up.

“I have had a hard time, and I know I’ll have a hard time,” she said.

Landlords, developers and business owners were hopeful just a few weeks ago that the economy could largely reopen in June.

But the reality, they now concede, is that late summer or early fall seems more realistic for a partial reopening, while a true reopening — something that might resemble a bustling New York — will not surface until there is a vaccine or effective therapeutics.

Still, some developers are dubious that the sudden shift in work environments will become permanent in any significant way.

Anthony E. Malkin, the chief executive of Empire State Realty Trust, the owner of the Empire State Building and eight other properties in Manhattan, said New York’s appeal — a diverse and educated work force and large industries, including a fast-growing technology sector — would drive an economic rebound and a desire for office space.

“The absence of social contact through which people are living today is not sustainable,” Mr. Malkin said. “Can you pay the bills from home? Can you process things from home? Yes. But can you work as a team from home? Very challenging.”

Mary Ann Tighe, the chief executive of CBRE’s New York Tri-State Region, the commercial real estate firm, said offices would undoubtedly change, with a mix of employees working remotely. But workers will still want to interact face to face.

“This isn’t the nature of office work,” Ms. Tighe said, referring to work-from-home arrangements.

Steven Roth, chairman of Vornado Realty Trust, one of the largest commercial landlords in the city, said on a company earnings call this month: “We do not believe working from home will become a trend that will impair office demand and property values. The socialization and collaboration of the traditional office is the winning ticket.”

But driven by safety or financial considerations — or both — many companies, big and small, are rethinking the future of work.

Small Planet, a small software developer in Brooklyn, said about half its work force is likely to continue working remotely even after the city reopens.

“The world is going to be different when we come out of quarantine, and our habits and how we use office space will absolutely be different,” said Gavin Fraser, the company’s chief executive. “It really took the lockdown, if you will, to accelerate those trends.”

How real estate will change after COVID-19 https://t.co/zqbdm4M3Mo via @YahooFinance

— Leo Kolivakis (@PensionPulse) May 21, 2020

We asked experts in various fields for their best predictions on what the world will look like when the coronavirus pandemic finally recedes. In this segment of our series, ”The Next Normal,” we examine what happens when office life reopens and what becomes of remote work.

***

While President Donald Trump pushes states to allow businesses to reopen, companies in technology, financial services, insurance and other industries that can successfully function over internet lines are choosing to keep their people home.

Long commutes have been replaced with heavy Zoom use, and workers in big cities are in no hurry to sit on crowded subways and buses during rush hour.

Corporate leaders are waiting for some reliable combination of mass testing, therapeutics, contact tracing and possibly even a vaccine, before they’ll consider it a worthwhile risk to send employees back into the traditional workplace. Another consideration is child care, and with schools closed across much of the country and summer camps unlikely to proceed as planned, kids are likely to be at home during the day at least for the next few months.

Facebook said last week that most of its employees will be allowed to work from home through the end of 2020. Google parent-company Alphabet plans to open offices for up to 15% of workers as early as June, but the majority of people who can work from home will continue to do so, perhaps through the end of the year.

“We’re going to see this come back more slowly than you might have expected,” said Liz Fealy, who runs the global workforce advisory group at consulting firm EY. “Especially in organizations where people believe employees can be equally productive at home.”

A staggered return

Fealy said that she’s hearing companies talk about a variety of different ways to start sending employees back when they believe it’s safe.

One general theme is a staggered return, with people coming to the office in waves based on individual risk levels, and increasing in numbers as contact tracing improves.

Another approach could be “clustering employees on teams” so if there’s an infection it’s easier to identify who is most exposed and needs to be quarantined. Corporations are already looking to employ phone-based contact tracing to help track employees who have been in close proximity at the office, then use that information to inform workers who may have been exposed and ask them to self-quarantine.

Across the 198 global offices of Fidelity National Information Services, a financial technology company, roughly 95% of employees are working from home. Chief Risk Officer Greg Montana doesn’t see that lasting forever, but he says there’s no returning to the pre-coronavirus days of packed buildings.

From his home setup in Jacksonville, Florida, Montana told CNBC that the first phase of a return to the office will be for those employees who are itching to get back, either because they feel isolated in their current confines and yearn for human contact or because they’re struggling to be productive. Even that small initial wave is unlikely to begin until late in the third quarter or early in the fourth, Montana said.

“We are really focused on the health and well-being of our employees,” said Montana, who’s part of a 40-person crisis management team that’s meeting twice a week to work on the company’s reentry plan.

Montana said that FIS wants to make sure employees are getting temperature checks, masks are readily available and deep-cleaning processes are in place for meeting rooms. The company is also putting together procedures for travel, so employees can go to a website, type in the desired destination and determine if it’s advisable to make the trip.

In the meantime, the company has been issuing virtual private network licenses to employees so they can access the network remotely and offering wireless hotspots to those who lack reliable home Wi-Fi.

“If you’re able to be productive at home, we want to get you what you need to be productive,” Montana said.

At consumer products giant Newell Brands, parent company of Sharpie, Coleman, Rubbermaid and Crock-Pot, Samantha Charleston is leading the return-to-office task force.

Charleston, a vice president in human resources, told CNBC by email that she’s working with local leaders across each of Newell’s regions to determine how and when to begin the return process, taking into account government recommendations, office readiness and input from employees gathered through weekly surveys.

Like FIS, Newell is content to take its time, as Covid-19 breakouts continue to emerge in various parts of the U.S.

“For the time being, Newell Brands is continuing our remote work structure for the majority of the office population,” Charleston wrote. “The repatriation process back to the office will be slow to make sure we take every safety consideration on behalf of our employees.”

Remote tools are exploding

Experts say that even when the coronavirus is in the rearview mirror, many of us will still be working from home.

Now that so many companies have been forced to function with a remote staff and to adopt technologies that enable collaboration from a distance, they’ve already made the necessary investments, and they know they can save money on office and real estate costs. According to Global Workplace Analytics, employers can save $11,000 a year for every employee who works remotely half the time.

In addition to Zoom, Slack and Microsoft Teams, products like design software Figma and knowledge-sharing tool Guru have seen growth accelerate as companies cobble together a suite of work-from-home products. Alex Konanykhin said his company, TransparentBusiness, which helps customers securely manage remote workforces, has seen an 800% increase in subscriptions since March 1.

Some companies are also paying for remote mental health services and online learning sites for employees. And they’ve seen positive results.

“In some cases, productivity has accelerated,” Charleston said. “A benefit of the new situation is it has given employees an outlet to try new things, think differently, share ideas and find solutions.”

Chris Bedi, chief information officer of IT automation software provider ServiceNow, says the terms remote work and work from home are going to disappear.

“There’s just work, and it’s work from anywhere,” said Bedi, in an interview last week.

He said that the talent war will also fundamentally change, because employers will quickly realize that they can start hiring anywhere and attract a whole new set of prospects. And even though there’s a level of Zoom fatigue that’s setting in from nonstop video calls, the travel market is forever changed, he predicts.

“The concept of getting on a plane for six hours for a two-hour meeting and being jet lagged, people are going to go — why?” Bedi said.

‘Zero pressure’

Jeff Snyder, founder of Inspira Marketing Group, said his company approved the purchase of external monitors so the 90 employees with desk jobs could easily get up and running at home. Inspira has an additional 300-plus employees who work in the field doing event-based marketing, a business he says has been “crushed.”

Snyder said his human resources team has been actively reconfiguring the offices in Connecticut, New York and Chicago to allow for social distancing and cap the number of people that can be present at a time when they do start coming back. The company has also ordered 10,000 masks.

Despite all the available safety measures, Snyder’s not expecting many employees to rush through the door at their first opportunity.

“We know it’s not a light switch where all the sudden it’s game on,” he said. “There’s going to be zero pressure forcing people to come back.”

• People don't need to stress every morning to commute into work. They can sleep a lot better and wake up to log in to work.
• One data analytics person I know told me his entire team is set up to work from home and he's never going back to the office again. "Too risky for me, maybe some of the younger analysts but definitely not me. Don't need to, can do all my work from home and I'm more efficient because I don't get interrupted or get called into meetings."
• Of course, others hate it, kids drive them crazy, they can't focus, feel isolated and generally don't like the new normal. It's also true that you miss office interactions and spontaneous creativity.
• Working from home however will allow companies to hire the best people no matter their race, gender and disability. The competition for talent, especially tech talent is fierce. Millennials prefer working form home and they like companies that are flexible and provide a good work-life balance.
• But this shift also opens up the possibility of further globalizing the service sector. Goldman Sachs recently said it will honour job and internship offers to 1,460 Indian graduates and students this summer, the equivalent of a quarter of its workforce in the country, forging ahead with expansion plans despite uncertainties due to the Covid-19 pandemic. Who's to say Goldman (and others) won't hire cheaper offshore labor to do jobs they are currently paying professionals a lot more to do?
• So, if companies are going to hire more people with disabilities, that's good but if they use this new normal of working from home to offshore service sector jobs, that's not good as it exacerbates inequality and it's deflationary.
• Tech companies are increasingly shifting to work remotely and they are major anchor tenants of top office buildings so if they are doing this permanently, there's big trouble ahead for office buildings.

• Where are we most exposed across public and private markets?
• Are recent trends transient or permanent? If permanent how do we adapt? 
• From an ESG perspective, what are the pros and cons?
• Do we have the requisite skill set to understand all the risks and are we taking a holistic view to understand the repercussions across individual portfolios and our total portfolio? 

What was the point of offices anyway? https://t.co/n6oZi98SDh From @1843mag

— The Economist (@TheEconomist) May 16, 2020

When Apollo Global Management approached the Investment Management Corp. of Ontario about a credit fund it was raising in the market tumult caused by the coronavirus, the Canadian pension manger was ready to be nimble — even with its staff dispersed and working from home since mid-March.

“It was clearly in the maelstrom, in the midst of the market chaos,” Christian Hensley, IMCO’s senior managing director of equities and credit, said Thursday in an interview. “Apollo reached out as we had been in close contact with them about a number of opportunities.”

Demand from institutional investors drove the speedy fundraising of Apollo Accord Fund III B, a credit fund that closed on $1.75 billion in commitments within about eight weeks, according to a statement from the alternative asset manager Thursday. IMCO said it committed $250 million to the fund, moving “very quickly” to benefit from “dislocated opportunities as they arise.”

Apollo, a New York-based private equity firm known for distressed investing, said it saw significant opportunity during the first quarter as the novel virus wreaked havoc on markets. The Accord fund focuses on “mispriced credit risk,” John Zito, Apollo’s deputy chief investment officer of credit and co-head of global corporate credit, said in the firm’s statement.

IMCO said the new fund will seek to buy debt that has dropped in price for “non-economic reasons” as investors feel pressure to sell due to liquidity concerns when markets are dislocated. Apollo Accord Fund III B may invest in the debt of companies that are fundamentally sound, but whose credit prices have been dragged down by broad market selloffs during the crisis, Hensley explained.

“This is about liquidity-driven dislocations,” James Zelter, Apollo’s co-president and CIO for credit, said in an interview. “If you go back to the dark days of March, we quickly drew down all the remaining capital in Accord III and executed on our mandate. It became very apparent that there was appetite for III B.”

IMCO, which managed CAD$70.3 billion (about $50 billion) of assets at the end of December, plans to expand its credit investing. The Toronto-based pension manager expects to increase its credit assets to CAD$8 billion in the next five years, from CAD$3 billion currently, said Hensley.

His group was well-positioned to quickly commit to Apollo, he said, because it had the liquidity it needed as well as the technology to conduct meetings online. At times, Hensley said he felt like he belonged to a call center when working from home in the early days of pandemic.

“You get out of bed, you get ready in the morning, you turn on your screen, you hit a button, and you’re in a meeting,” he said. As the crisis was unfolding, Hensley said he hit that button repeatedly until suddenly it was past dinner time. “We were cranking away to react to — and be productive in — the market that we saw.”

IMCO relied on Zoom during the fundraising process for Apollo Accord Fund III B, according to Hensley. “It’s been a different experience,” he said. “We were fortunate for having had the opportunity previously to have met with the portfolio managers.”

In some ways, he found the online technology helped make the investment analysis more efficient when considering a commitment to the fund.

“We could accelerate the process because we could invite our risk teams, our legal teams, our accounting teams, our performance measurement and attribution teams to the same calls all at the same time,” Hensley said. “We could run in parallel because we knew this was an important inflection point in the market.”

While online meetings have proved productive, IMCO has been considering what working in the office might safely look like as economies begin to reopen during the pandemic.

“Our senior management team has been meeting regularly thinking about ways to transition back to a new normal,” Hensley said. “We want to make sure we’re respectful of people’s individual wishes, but also the constraints of government and the virus itself.”

The Investment Management Corporation of Ontario (IMCO) has committed US$250 million to Apollo Global Management, Inc.’s new Accord Fund III Series B (“The Fund”), in a Fund designed to enter the market during periods of dislocation and illiquidity. The Fund will focus on credits that have traded down due to liquidity-driven selling and non-economic reasons. IMCO’s Global Credit team closed the commitment on April 23, 2020, making it IMCO’s first investment with an Apollo-managed fund, one of the world’s largest alternative investment managers.

“Our participation in this fund demonstrates how nimble our team can be in seeking valuable opportunities for our clients,” said Jennifer Hartviksen, Managing Director, Global Credit. Hartviksen noted that the process, from analysis to fund close, took approximately one month, indicating how well-matched IMCO’s capabilities are with Apollo’s proven ability to take advantage of market dislocations. “This is an example of IMCO adapting to market conditions and exploiting our liquidity very quickly so that clients have access to dislocated opportunities as they arise,” she said.

IMCO recently launched its Global Credit program as a separate asset class to provide higher risk-adjusted returns than traditional fixed income, and to contribute additional diversification benefits to a total portfolio for clients. “As our program scales, we are initially relying on experienced strategic partners,” said Christian Hensley, Senior Managing Director, Private Equities and Credit. “The investment in this Fund is an example of the types of opportunities we’re pursuing — investments with sponsors that we believe have deep expertise, delivering diversifying and differentiating exposures, who are transparent, opportunistic, and value-oriented.”

Apollo’s fundamentals-approach and sector-specific expertise allows for selective deployment during periods of both market stability and volatility, in line with IMCO’s Global Credit strategy. The Fund’s judicious use of hedges, designed to address fundamental risks, is well suited for IMCO’s long investment horizon.

The bankruptcy could come as soon as Friday night. It would make Hertz one of the highest-profile corporate defaults yet stemming from the coronavirus pandemic’s impact on American travelers. https://t.co/kmUFxJRn4Y

— Edward Harrison (@edwardnh) May 22, 2020

Barring a miracle cure for COVID-19, the United States is drifting into a multi-year period of extremely depressed activity. There does not appear to be capacity to eradicate the virus, nor are older consumers or office workers willing to take meaningful health risks to benefit capitalism. Unless there is a magical transformation in the attitudes of the ruling elites, the fiscal policy response will remain reactive, and ineffectual. The Fed is the only entity in the United States that takes any responsibility for the effectiveness of policy, and so we should expect to see greater leaps in its policy framework.

Although yield curve control is the most likely next step, negative interest rates cannot be ruled out. Health worries might strengthen the hand of those advocating the abolishing of paper money, removing one institutional barrier to negative interest rates.

More than a third of people who contract the coronavirus are likely asymptomatic and don’t report symptoms, according to the CDC. The agency issued new guidance this week: https://t.co/TJrUI1h5wgpic.twitter.com/c5bZ2XQBot

— WebMD (@WebMD) May 22, 2020

Apollo Global Management’s massive buyout fund has shifted its strategy to gain ownership of companies in distress during the coronavirus crisis, according to co-founder Josh Harris.

Apollo’s $25 billion private equity fund has shifted “almost entirely” to a distressed strategy under which it aims to gain control of companies buy investing in their debt, Harris said during the firm’s first-quarter earnings call Friday. “We’ve seen the pace of that fund go up significantly in the last month and a half.”

The destruction caused by the coronavirus pandemic is likely to lead to an economic cycle that looks more like an “L” than a “V,” according to Harris. While the Federal Reserve’s emergency intervention has helped markets function during the crisis, he said the economy is “really hurting” and could see gross domestic product drop 30 percent in the second quarter.

“There’s a lot of companies that have no revenues,” said Harris. “Ultimately, a lot of the leverage that existed in the system is too high for cash flows that don’t exist over a medium term.”

Apollo’s own portfolio has been hurt in the pandemic. The value of its private equity funds dropped 21.6 percent during the first quarter, according to the firm’s earnings report.

None of the companies controlled by Apollo or its funds will be using the federal government’s Payment Protection Program as aid during the coronavirus crisis, Leon Black, the firm’s co-founder and chief executive officer, said during the earnings call.

“Similarly, although we are still reviewing the guidance recently announced by the Federal Reserve, we do not anticipate that the main street lending program will provide any relief or financial assistance to companies controlled by us or our funds,” he said.

Meanwhile, Apollo’s $25 billion buyout fund is only about a third invested, according to Black. He said “even with outsized opportunities, it’s probably going to be at least 18 to 24 months before we’re out fundraising again.”

Black expects to see “a lot more distressed opportunities” over the next two years, drawing a comparison to the period surrounding the great financial crisis.

Right after the “market dislocation” thirteen years ago, Apollo’s private equity fund VII was two-thirds invested in distressed, he said, compared with less than five percent for its next fund. “That is the bandwidth vis-à-vis distressed-for-control that can come out of the private equity funds.”

Jason Orestes of The Street reports Amazon is clearly what hedge funds are betting on these days:

Amazon has been a major beneficiary of the Covid-19 chaos, and hedge funds have taken notice.

The fastest bear market in history saw a 30% plummet followed by a rapid 30% rebound. But there has been a large bifurcation in this rally. While many stocks remain significantly depressed on the year, tech has flourished. The Nasdaq is actually up year to date, and megacap tech, buoyed by stay-at-home orders and an inexorable trend of work-from-home (WFH) policy becoming the norm, has reaped much of these gains.

Amazon’s 32% return has outpaced all FAANG + Microsoft names save Netflix (39%), but more importantly, Amazon has transmuted its tech designation to that of the ultimate “essential” business. The coronavirus pandemic has exposed the fragility of many business models, but it’s managed to do the opposite for Amazon. When something is fragile, it suffers or breaks under stress or change; when something is antifragile, it actually gains from uncertainty and disruption.

Amazon has shown itself to be perhaps the ultimate antifragile business. Already a superior trillion-dollar enterprise during normal times, its delivery and Amazon Web Services businesses (think WFH) will benefit from the new paradigm that coronavirus has ushered in.

It appears hedge funds by and large agree. Amazon is the largest position as of the end of the first quarter for many top funds such as David Tepper’s Appaloosa, Alex Sacerdote’s Whale Rock and Stanley Druckenmiller’s family office. And of all the megacap tech names, it was the only one that saw an increase in shares held across both institutions and hedge funds, per 13F data from WhaleWisdom.

Of 13F-filing hedge funds ($100 million or more in assets under management), Amazon is held by 40% of them, and is a top-10 holding of 21%. This ranks second to only Microsoft, which is held by 43% of them and is a top-10 holding of 25%. However, Amazon's institutional and hedge fund share count holdings increased by 1.82% and 4.73%, respectively, as opposed to Microsoft’s mixed bag (-3.85% and +0.7%, respectively). Netflix was the only other FAANG member to see an increase in holdings across both institutions and hedge funds, albeit much more tepidly so than Amazon, with a +0.23%, and +0.93% increase, respectively.

Apple (-3.69%, +.39%) and Google (-3.45%, +.29%) saw surprisingly high institutional reductions in the first quarter, and Facebook was a wash between the two (-1.07%, +1.2%).

Amazon’s rocketing favorability can also be seen by its weighting increase across hedge funds. The table below shows the top-10 stocks by summed percentage holdings across 13F-filing hedge funds. This is a way to glean insight into the overall conviction hedge funds have across symbols that adjusts for portfolio size. That's because if only a handful of massive funds bought huge positions in Amazon, it would show in the aggregate stats as a major uptick in shares held, but wouldn’t speak to the breadth or weighting of the stock by all funds. Using this method, however, a $10 billion fund with 10% of its assets in Amazon ($1B) is measured the same as a $100 million fund with 10% of its portfolio in it ($10M).

Even by this metric, no one saw as big an uptick as Amazon. Microsoft still holds the total top honor, however, Amazon’s 57% increase in summed portfolio weighting outdistanced all others. At a 42% increase, Microsoft came in second for greater weighting, and somewhat curiously Allergan came in 3rd with a 40% rise. The increase across other FAANG names was muted, and Netflix doesn’t even make the list.

The smart money consensus is clear: Amazon is the ultimate all-weather company.

No doubt about it, Amazon shares (AMZN) have been flying high during this pandemic and some even think Jeff Bezos will become the world's first trillionaire in six years:

Could Jeff Bezos really become the world's first trillionaire by 2026? (via @CNBCMakeIt) https://t.co/Pa0A2EqYeX

— CNBC (@CNBC) May 24, 2020

What do I think? I think Bezos is already obscenely wealthy and there's no chance he will be the world's first trillionaire in six years, especially if the US government goes after his company to break up its monopoly power (don't laugh, that's the biggest risk Amazon faces and Bezos knows it which is why he is lobbying Washington like crazy).

Anyways, it's that time of the year again  when we get a sneak peek into the portfolios of the world's top funds. What is interesting this time around is we get to see who bought the big coronavirus dip and what they bought and sold last quarter.

Zero Hedge did a good job going over what top funds bought and sold last quarter during the chaos:

• Warren Buffett’s Berkshire Hathaway which as we reported last night slashed its Goldman position by 84% and trimmed its JPM shares as the pandemic started to roil financial markets, before liquidating its entire airline portfolio.
• Larry Robbins’s Glenview and Zeke Capital Advisors, a money manager for ultra-wealthy families, were among those that drastically cut equity positions according to Bloomberg. Glenview slashed its stock market exposure during the first quarter, disclosing it held U.S.-traded equities with a stock market value of $3.7 billion at March 31, down from $11.4 billion at year end.
• Tiger Global Management trimmed its stake in alternative asset manager Apollo Global Management for the first time in five quarters, even as Bill Ackman built a $25 million stake in private equity powerhouse Blackstone Group during the quarter
• Managers were mixed on Facebook in the quarter. D1 Capital piled into the social-media giant, boosting its stake by 70%, and Soroban Capital Partners and Baupost Group started new positions. On the other side of the trade were Coatue Management and Viking Global Investors which both slashed their holdings. Facebook slumped 19% in the first quarter as its advertising business took a hit in the crisis.
• Aaron Cowen's Suvretta Capital Management acquired shares in several consumer-focused chains. The list includes a $55 million bet on TJX Cos., parent to TJ Maxx discount stores.

Below, courtesy of Bloomberg, is a summary of what some of the most popular hedge funds did during the most turbulent quarter for capital markets since the financial crisis:

ADAGE CAPITAL

• Top new buys: SO, MNTA, AMTD, SAFM, OSK, GLD, CX, REGN, ATRC, OGE
• Top exits: MMM, JCI, VST, SWX, SCHW, ECL, USB, SPG, MDU, AMRN
• Boosted stakes in: HON, LMT, TGT, LLY, ROST, AMZN, TEL, TJX, DG, SRPT
• Cut stakes in: RTX, BAC, JPM, BURL, T, BA, AAP, BRK/B, MA, UA

BALYASNY ASSET MANAGEMENT

• Top new buys: ATVI, LOW, DG, INTC, JPM, CHTR, TTWO, ICE, PFE, TFC
• Top exits: AIG, PNC, BAC, UNP, ETN, FB, BA, RTX, SPGI, MKL
• Boosted stakes in: NFLX, BSX, QGEN, JD, AMTD, ABBV, LM, KBR, HAS, LMT
• Cut stakes in: XOM, LHX, AJG, CRM, AAP, DE, ESS, AXP, ZEN, GS

BAUPOST GROUP

• Top new buys: GOOG, FB, HDS, ET, XPO, SPR
• Top exits: BMY, SYF, NUAN, ERI, MDRIQ
• Boosted stakes in: EBAY, HPQ, MCK, CARS, QRVO, NXST, LBTYK
• Cut stakes in: LNG, UNVR, PCG, ABC, AKBA

BERKSHIRE HATHAWAY

• Top exits: TRV, PSX
• Boosted stakes in: PNC, UAL, DAL
• Cut stakes in: JPM, GS, GM, LUV, AAL, SYF, AXTA, SIRI, SU, VRSN

BRIDGEWATER ASSOCIATES

• Top new buys: UNH, MCD, LMT, PM, PEP, ACN, SPGI, ABT, HON, FIS
• Top exits: JPM, BAC, WFC, C, USB, GS, MS, BLK, PNC, ADS
• Boosted stakes in: HD, SHW, LOW, ZTO, TAL, GDS, PDD, ORLY, WUBA, IQ
• Cut stakes in: SPY, VWO, IVV, EWZ, IEMG, HYG, EWT, VEA, EFA, IEFA

COATUE MANAGEMENT

• Top new buys: JD, TSLA, CRWD, CREE, LRCX, ZM, FIT, CGC, BBBY, DDD
• Top exits: ATVI, WDAY, EA, XRX, ILMN, CRM, V, PDD, INTU, SCHW
• Boosted stakes in: NKE, DDOG, NFLX, PTON, MU, AMZN, PYPL, GDOT, GLUU, DT
• Cut stakes in: NOW, MA, LBRDK, TWTR, ADBE, BABA, FB, RNG, MSFT, SHOP

CORSAIR CAPITAL MANAGEMENT

• Top new buys: VRT, QQQ, AAPL, CHNG, CC, PSEC, BBCP
• Top exits: IWM, IWO, MDY, EQH, AER, ALLY, CASH, DSSI, LTHM, SBLK
• Boosted stakes in: MSFT, SPY, GOOG, SMIT, CUBI, INFO, CHDN, PRSP, IQV, HMHC
• Cut stakes in: SPXC, KRA, FMC, HGV, LAUR, RHP, PLYA, VOYA, TROX, AON

CORVEX MANAGEMENT

• Top new buys: CRM, BABA, ATVI, UNP, VMC, MPC, GLD, NFLX, MTCH, CNC
• Top exits: FSCT, RTX, TMUS, TWLO
• Boosted stakes in: ZEN, ATUS, AMZN, MGM
• Cut stakes in: FANG, MSGS, ADBE

D1 CAPITAL PARTNERS

• Top new buys: DHR, MSFT, LYV, AZO, MU, PPD, NKE, UNH, USB, BAC
• Top exits: NOW, ARMK, CHWY, NVST, CRM, EXAS
• Boosted stakes in: ORLY, DIS, FB, FIS, LVS, JD, HLT, GOOGL, LIN, BABA
• Cut stakes in: NFLX, AMZN, TME, CCC, RACE

DUQUESNE FAMILY OFFICE

• Top new buys: PYPL, IQV, QCOM, TAL, EDU, LVS, TME, LK
• Top exits: IWM, EEM, JPM, HDB, FDX, PNC, WFC, AEM, MPC, SNAP
• Boosted stakes in: AMZN, NFLX, BABA, FB, GOOGL, ALNY, JD, FIS, NOW, ADBE
• Cut stakes in: GE, INDA, MSFT, FCX, HD, SE, ABT, COUP, PLAN, SNE

EMINENCE CAPITAL

• Top new buys: GLD, VRT, HDS, QSR, CHNG, PANW, MAR, BKNG, DD, SEE
• Top exits: PGR, EA, TTWO, MNST, PYPL, DPZ, WW, LB, NVST, EQIX
• Boosted stakes in: MS, AVTR, HAE, RCL, PINS, SHAK, DHI, ABG, UBER, NEWR
• Cut stakes in: BABA, GDDY, SCHW, NTNX, CI, CF, IQV, RJF, ICE, CNC

ENGAGED CAPITAL

• Cut stakes in: APOG, NCR, INWK

FIR TREE

• Top new buys: DELL, CMCSA, DIS, EXC, FLT, SHLL, THCA, GIX, NFIN, PIC
• Top exits: VER, JNJ, LHX, SATS, RTX, VVNT, PAE, VRT, DKNG, I
• Boosted stakes in: TMUS, ANTM, TRNE, LCA, SLM
• Cut stakes in: LAUR, CTXS, BKNG, CNC, CHAP, FPAC, MSFT, OAC

GREENLIGHT CAPITAL

• Top new buys: CHNG, CCK, CNC, MO, PAYX, AXP, GS, DHR, BRK/B, DIS
• Top exits: GM, DXC, SGMS, SATS, TPX, CEIX
• Boosted stakes in: CNX, BHF, AER
• Cut stakes in: CC, ADNT, ATUS, TGP, XELA

ICAHN

• Top new buys: DK
• Boosted stakes in: OXY, WBT, NWL, HTZ, LNG

IMPALA ASSET MANAGEMENT

• Top new buys: TGT, SIX, CSX, VMC, AAWW, MA, AMZN, FDX, EXP, FUN
• Top exits: HES, GD, FCX, CAT, CLR, XOP, HD, WAB, TRN, PII
• Boosted stakes in: KSU, MSFT, PCAR, KNX, TTWO, KBH, NVR, HOG, UFI, LPX
• Cut stakes in: RIO, SBLK, QCOM, WYNN

JANA PARTNERS

• Top new buys: HI, NEWR
• Top exits: ZBH, WMGI
• Boosted stakes in: AXTA, JACK, BLMN
• Cut stakes in: CAG, ELY, SPY, HDS

LAKEWOOD CAPITAL MANAGEMENT

• Top new buys: MA, HCA, NSP, APO, AGNC, MCD, AMZN, CB, ICE, KFY
• Top exits: CDK, ON, ATUS, SLV, GLD, MAS, RTX, FDX, KSS, BMCH
• Boosted stakes in: WRK, GTS, BIDU, DELL, ANTM, CWK, FB, BC
• Cut stakes in: C, CIT, ALLY, GS, ATH, CMCSA, WH, COF, WUBA, GOOGL

LANSDOWNE

• Top new buys: NSC, ONEM, DAR, VTIQ, AGI, NKE
• Top exits: AAL, TXN, GRUB, CVE, CNQ, GS
• Boosted stakes in: FSLR, ETN, MU, RTX, SMMT, ADI, IQ, REGI, EGO, LRCX
• Cut stakes in: DAL, UAL, TSM, GE, DHT, TT, BABA

LONG POND

• Top new buys: RHP, MGM, AVB, VAC, JLL, CPT, CUZ, ESS, MLCO, MAA
• Top exits: VTR, OC, DIA, LOW, LEN, CONE, PEAK, ALX, CTRE, EPR
• Boosted stakes in: WH, FR, PEB, AIV, JBGS, KRC, HGV, RRR, HLT, MSGS
• Cut stakes in: DHI, VNO, H, PGRE, SBRA, HPP

MAGNETAR FINANCIAL

• Top new buys: WLTW, HPQ, ETFC, MEET, DLPH, BROG, IOTS, DLR, PPD, TERP
• Top exits: SPY, MPLX, NVS, CCC, SDC, ANTM, MMP
• Boosted stakes in: QGEN, PFE, WMB, KMI, EPD, BSX, PRGO, ABBV, CHNG, BMY
• Cut stakes in: CZR, TIF, AMTD, WBC, ET, WMGI, PACB, LH, PAA, UBER

MAVERICK CAPITAL

• Top new buys: ONEM, AMZN, MNTA, ALKS, BX, GME, DECK, ARMK, WEN, JACK
• Top exits: WLK, INTC, AGCO, WDC, NKE, TAK, DEO, MKC, KSS, GIS
• Boosted stakes in: QSR, HUM, MSFT, FB, KKR, FLT, NKTR, FTDR, PEP, ADBE
• Cut stakes in: MNST, DXC, GOOG, CNC, TMUS, LOW, BABA, ALNY, STNE, NFLX

MELVIN CAPITAL MANAGEMENT

• Top new buys: AZO, MSFT, DPZ, DRI, JD, LB, EFX, ADI, DECK, WEN
• Top exits: ATUS, AWI, TEAM, SEAS, SE, BILL, CHWY
• Boosted stakes in: AMZN, EXPE, BABA, TTWO, FIS, EDU, FISV, NFLX, IAA, FICO
• Cut stakes in: WYNN, PLAN, MA, RACE, PUM, ADBE, NOW, DLTR, IQV, LK

OAKTREE CAPITAL MANAGEMENT

• Top new buys: TMHC, BIDU, LBTYK, PBR, SRLP, ERI, WMB, BATL, MELI, SQM
• Top exits: YPF, YETI, HUYA, VRS, FPI, XOG
• Boosted stakes in: BABA, SMCI, AFYA, TV, INDA, CX, LOMA, VEON, TEO, PAM
• Cut stakes in: IBN, BRFS, CEO, BCEI, MX

OMEGA ADVISORS

• Top new buys: JPM, NBR, FB, LEE
• Top exits: UAL, DD, NRG, UNH, CCL, FANG, HES, DOW, GLD, WFC
• Boosted stakes in: FOE, COOP, CNC, RTIX, AMCX, STKL, VICI, FLMN, NAVI, OCN
• Cut stakes in: FISV, GOOGL, C, CIM, ASH, TRN, GTN

SOROBAN CAPITAL

• Top new buys: AMZN, NOC, MSFT, LHX, FB, QSR, SNE
• Top exits: MAR, NXPI, HLT, RTX, AXTA
• Boosted stakes in: CSX
• Cut stakes in: BABA, NSC, UNP, GOOGL, GRA

SOROS CAPITAL MANAGEMENT

• Top new buys: AMZN, AAPL, V, TMUS, BKNG, STZ, CDK, LRCX, HDS, IAC
• Top exits: TSG, BABA, FB, CRM, AMT, PYPL, PANW, AMD, C, FCX
• Cut stakes in: GLD, GOOGL, ATUS, IBN, CHTR, YNDX, ORCC

SOROS FUND MANAGEMENT

• Top new buys: TDG, XLU, MUB, LM, LQD, TMUS, ARMK, TCO, NI, LNT
• Top exits: MDLZ, ADM, EPC, KDP, JPM, NLY, C, BAC, ALLY, NRG
• Boosted stakes in: PTON, ATVI, ETFC, ALC, WMGI, DHI, AMTD, EQH, BK, ALL
• Cut stakes in: LBRDK, VICI, GOOGL, ENR, NLOK, VST, UNH, BGCP, TIF, CZR

STARBOARD

• Top new buys: CVLT, MMSI, GDOT, ACIW, REZI
• Top exits: SPY, IWR, MGM
• Boosted stakes in: BOX, GCP, MD, EBAY
• Cut stakes in: CERN

TEMASEK HOLDINGS

• Top new buys: BILL, BEAM, VRT, VMW, FSLY, UBER
• Top exits: BP, TOT
• Boosted stakes in: MA, DDOG, HDB, PYPL, TMO, BGNE, V
• Cut stakes in: BABA, INFO, RDS/B, NIO, UNVR, WORK, STNE, VNET, TOUR, TAL

THIRD POINT

• Top new buys: DIS, CHTR, ROP, TEL, SERV, SHW
• Top exits: CPB, BSX, FOXA, FIVE, AMTD, BKI, SCHW, GO, XP, GTT
• Boosted stakes in: AMZN, CNC, RACE, SHY
• Cut stakes in: BAX, RTX, BURL, CRM, IQV, ADBE, DHR, AVTR, FIS, SNE

TIGER GLOBAL

• Top new buys: ATH, PTON, DNK
• Top exits: WORK, VXX
• Boosted stakes in: WDAY, RNG, BABA, DDOG, PLAN, EDU, CRM, ADBE, MA, CVNA
• Cut stakes in: APO, TDG, UBER, FLT, SPOT, GOOGL, AMZN, ZEN, PYPL, SMAR

TUDOR INVESTMENT

• Top new buys: GLIBA, PYPL, AAPL, MAA, SBBX, DEI, KO, CERN, SOXX, GL
• Top exits: IBKC, NNN, USB, LKQ, JCI, TAK, ESS, EXR, EQR, FLT
• Boosted stakes in: LM, RTX, AMTD, ETFC, MSFT, PJT, EQIX, AMZN, MTCH, TTWO
• Cut stakes in: SPY, CZR, TIF, EBAY, XLF, MPC, EW, PSX, TIP, STZ

VIKING GLOBAL INVESTORS

• Top new buys: JPM, AXP, WDAY, CME, MU, ORLY, A, PGR, LVS, CHNG
• Top exits: MNST, SQ, MET, UNH, ATVI, EQH, TXT, MCK, COUP, MIDD
• Boosted stakes in: CMCSA, MSFT, FIS, CI, GOOGL, CNC, IR, AON, BSX, NSC
• Cut stakes in: FB, NOW, ANTM, UBER, ADPT, MELI, CRM, NFLX, MOH, GOOS

WHALE ROCK CAPITAL MANAGEMENT

• Top new buys: ZM, DOCU, JD, INTC, MU, ZS, LRCX, ATVI, NVDA, AAPL
• Top exits: MTCH, MRVL, WDAY, SNAP, CRUS, GRMN, MELI, RVLV
• Boosted stakes in: AMZN, TSLA, MSFT, CRWD, DDOG, FTNT, BILL, SHOP, FIVN, NOW
• Cut stakes in: COUP, DIS, FB, STNE, CVNA, CDAY, W, TSM, BABA, MIME

It's funny, I didn't see Twilo (TWLO) on this list and it's the stock that impressed me the most since March, even more than Zoom:

I also read an interesting article on why Elliott Management might be in big trouble. Paul Singer's fund bought the iShares iBoxx Investment Grade Corp Bond ETF (LQD), the iShares iBoxx High Yield Corp Bond ETF (HYG) call options, the Energy Select Sector SPDR ETF (XLE) call options, and Tesla PRN and Dropbox put options

Accumulating XLE call options might have impacted Elliott’s return in the second quarter of 2020. In April, WTI crude oil prices turned negative. As a result, the entire energy sector’s stock prices collapsed.

Who knows? I wouldn't bet big against Paul Singer, I'm sure he will bounce back if he underperformed in Q2 (remains to be seen; you can view his top stock holdings here).

Now, before we go further, keep in mind this data is lagged by 45 days and there was a huge bounce from the March 23rd low when Bill Ackman went on CNBC to scare the bejesus out of retail investors (while he and his hedge fund buddies were loading up on stocks).

There really is one chart on my mind these days:

Retail Investors Are Crushing Hedge Funds Again | Zero Hedge https://t.co/bjGi1Ux4kz

— Leo Kolivakis (@PensionPulse) May 25, 2020

Many Americans used part of their coronavirus stimulus check to trade stocks @CNBChttps://t.co/uakAf8vLHr

— Leo Kolivakis (@PensionPulse) May 24, 2020

Bear market rally or new bull? Breaking down the market after another winning week https://t.co/rn20wNA2Si

— Leo Kolivakis (@PensionPulse) May 25, 2020

Why the Economy Is Headed for a Post-Coronavirus Depression https://t.co/KEHlkIFziE

— Leo Kolivakis (@PensionPulse) May 23, 2020

Viral video shows large crowd gathered with apparent lack of social distancing on Memorial Day weekend in Missouri. https://t.co/uz8MJ7yoiOpic.twitter.com/DJ7QOEJGTA

— ABC News (@ABC) May 25, 2020

Steffan Navedo-Perez of Chief Investment Officer reports that Goldman Sachs estimates public pensions are now less than 60% funded on average:

Average funding ratios for public pension funds have declined to 60% and below, down from 74% before the crisis, according to Goldman Sachs Senior Pension Strategist Michael Moran.

In an interview with Yahoo Finance, Moran discussed the most prominent issue pension funds will face: hitting their return targets. Usually set at about 7%, today’s extremely low interest rates will make that all the more difficult to attain in the future.

“What potentially changes [with public pension funds] is how they think about asset allocation and liquidity going forward,” Moran said. “Many of these plans have a 6.5% to 7% nominal return target, and I think many of them are questioning, ‘How do I hit that target in an environment where 30-year Treasury bond yields are below 1.5%.’”

“It just becomes more challenging and I think they’ll have to become more nimble, more tactical, certainly many of them have moved to alternatives over the past number of years, and I think that just accelerates going forward,” he said.

Hitting their return targets becomes even more difficult to achieve as local governments restrict their spending as a result of constrained budgets, which mean less money being funneled into the pension plans they’re associated with.

“A big issue for the public sector is not just what’s going on with their asset portfolios … [but also] what’s going on with state and local finances,” Moran said. “Because, as we have a recession, as state revenues decline, their ability to fund their pensions becomes a lot more challenged.”

The fiscal distress facing these local governments will make it more difficult for pensions to stay solvent, as it had in the past, Moran explained.

“Our work would indicate that coming into the year, public pensions were in aggregate funded about 72-73%, that has now dropped to below 60%,” he said.

“When we look at previous recessions—the period after September 11, or the period after the global financial crisis, for several years, many state and local governments under-contributed to their plans because they had budgetary stress and I think that’s going to be a key concern going forward,” he explained. “Their ability to make contributions, not just in 2020, but really over the next couple of years.”

• Pensions are all about managing assets and liabilities.
• The duration of pension liabilities is a lot bigger than the duration of pension assets because liabilities go out 75+ years at a typical pension.
• This effectively means a drop in long-term interest rates will increase liabilities A LOT MORE than any increase in assets, so even when assets recover, as long as rates remain at record lows, underfunded pensions are in big trouble.
• The perfect storm for pensions (all pensions) is when assets get hit and rates drop precipitously, but again, it's the drop in rates which really hurts pensions.
• Unlike corporate plans, US public pensions use a very high discount rate (not market rates) to discount their future liabilities. Many have lowered their discount rate from 8% to 7% but it remains way too high.
• In order for US public pensions to make up for the shortfall, contribution rates have to up (ie. discount rate needs to be lowered), benefits have to be cut or both.
• On top of this, many states have not topped up their public pensions because they are fiscally challenged but all this does is make the problem a lot worse over the years.
• Public pension deficits are path dependent, meaning the starting point matters. If these US public pensions were 70% funded prior to the COVID-19 crisis, they were taking a lot of equity risk and now they're 60% funded. In fact, in October 2019, the Fed warned US public pensions reaching for yield that they will run into trouble, and they have.
• In Canada, large pension plans are fully funded because they got the governance and risk sharing right. They manage public and private assets internally because they got the compensation right and if they ever run into trouble, they have adopted conditional inflation protection to get their plan back to fully funded status. Conditional inflation protection ensures the risk of the plan is equally split between retired and active members, effectively ensuring intergenerational equity.

The Canada Pension Plan earned a return of 3.1 per cent after expenses during the financial year ended March 31, the board that manages the fund's money reported Tuesday.

Net assets for Canada's national pension plan totalled $409.6 billion as of the end of March, up from $392 billion at the end of the previous financial year.

The $17.6-billion year-over-year increase included $12.1 billion in net income from its investments. The other $5.5 billion came from contributions of more than 20 million Canadian workers covered by the plan.

In the past five years, investment returns have added $123 billion to the fund's assets, the Canada Pension Plan Investment Board said Tuesday.

While the plan made money for the year as a whole, the fourth quarter was a challenging one because of COVID-19. The fund said fixed-income assets did well as investors fled for safety, but values of stock-based investments fell.

"Despite severe downward pressure in our final quarter, the fund's 12.6 per cent return on a 2019 calendar-year basis combined with the relative resilience of our diversified portfolio helped cushion the impact," chief executive officer Mark Machin said.

"Amid the significant number of concerns many Canadians have today, the sustainability of the fund is one thing they shouldn't worry about. The fund's long-term returns continue to help ensure the security of Canadians' retirement benefits."

A three per cent return may not sound impressive, but Michel Leduc, a senior investment executive with the fund, said in an interview that the fund's financial performance in the middle of a serious economic crisis is a testament to its strategy.

The CPP measures its own performance against a series of market-based benchmarks, the main one being the Reference Portfolio. That reference portfolio declined by 3.1 per cent in the past year, the same amount that CPP increased by.

'Quite resilient'

Leduc noted that the Dow Jones Industrial Average lost 23 per cent in the first three months of this year, its worst quarterly performance in its 135-year history.

If the CPP were just to have matched the stock market, "the fund would be would be $23 billion smaller today," he said. "You've got to look at in the context of going through an economic shock which we know we're going to go through from time to time…. To preserve $23 billion … I would say to Canadians that their fund is quite resilient and the active management put the fund in that safe harbour."

The Chief Actuary of Canada audits the CPP every three years to assess its ability to cover its obligations. At the last review in December 2018, the chief actuary deemed the CPP was on track to meet its obligations for the next 75 years at least, assuming the fund can earn a return of 3.95 per cent above inflation.

The CPPIB has achieved a real return of eight per cent, on average, over the past 10 years, and 6.1 per cent over the past five.

Buying opportunities

Leduc said the current downturn could lead to some attractive buying opportunities for CPP, but that doesn't mean the fund is running off on a buying spree without making sure that any investments fit the long-term objectives.

"We're one of the few institutional investors around the world that can pretty much acquire anything," he said. "We will look at opportunities, very carefully, but it's not the Wild West … we're not going out and buying everything."

While on track in terms of performance, the CPP has faced some criticism for the amount of money it spends on costs as it has grown and expanded over the years.

While its total value has quadrupled from $96 billion to $409 billion since 2006, that growth has come with added costs, as CPPIB now employs 1,824 employees around the world — 11 times more than the 164 it did back then. It only had one office then; today it has nine, including two in the U.S., two in Europe, two in Asia, one in Brazil and one in Australia.

That growth has come at a cost: CPPIB incurred more than $1.2 billion in expenses last year. That's about 30 cents out of every $100 invested, a slightly lower ratio than the previous year's level of 32 cents.

All told, CPP racked up $3.4 billion in expenses, management fees and transaction costs last year. That's up from $3.2 billion the year before.

CPP said it is "committed to maintaining cost discipline as we continue to build a globally competitive platform that will enhance our ability to invest over the long term."

The coronavirus pandemic and the economic fallout from efforts to contain it will have a long-term effect on the Canada Pension Plan Investment Board’s $409.6 billion fund, CPPIB chief executive Mark Machin said Tuesday, after the fund posted its worst annual performance since the financial crisis in 2009.

“I don’t expect as good returns in the next 10 years as they have been in the last 10 years,” Machin said in an interview after the CPP fund posted a 3.1 per cent annual return for the year ended March 31, a period that also contained punishingly low oil prices and deep interest rate cuts.

While there was a positive return for the fiscal year, that was largely due to strong investment gains in the first nine months. Among CPPIB’s holdings, energy and resources were hit particularly hard, posting the worst performance of the year at -23.4 per cent, compared to -0.6 per cent a year earlier.

Over the past 10 years, the fund’s net rate of return is 9.9 per cent, and $235.2 billion has been generated in net investment income after costs.

Machin said CPPIB, which invests on behalf of the Canada Pension Plan, doesn’t intend to make big changes to the portfolio despite the recent market conditions, which were described in the fund’s results as “devastating.” He noted that diversification of geography and asset classes helped weather the latest crisis.

“While there was nowhere to hide in the world, some countries were coming out of it as others were going into it,” he said, noting that countries in Asia and even Europe began to ease economic restrictions while North American was locking down to try to slow the spread of COVID-19.

Flights to safety, including government bonds, also boosted parts of the portfolio. This shifted specified weightings, which caused CPPIB to rebalance the portfolio, in part by buying lower-priced equity and credit investments and selling sovereign bonds.

Machin said the pension management organization is keeping a close eye on geopolitical developments around the world, such as trade tensions between the United States and China, some of which pre-dated the pandemic.

“Those tensions are very real and it’s not just tensions with the U.S., it’s tensions with a lot of places around the world,” he said.

“We need to be aware of where policy is today, where policy may go tomorrow, and how that’s going to impact those two economies and economies around the world, and companies, and sectors, and markets. It’s important for us to really understand where things might go on all of those fronts.”

For the time being, though, CPPIB remains committed to increasing its exposure to emerging markets including China, he said. Investments in emerging markets totalled $87.6 billion, or 21.4 per cent of total assets, at the end of fiscal 2020. That was up from $77.9 billion, or 19.9 per cent of assets a year earlier.

Machin said less than 11 per cent of the CPPIB portfolio is invested in China, which is about one-third of the amount invested in the United States. Before the pandemic hit, the huge and booming Chinese economy was seen as a major draw for the Canadian fund. A year ago, Machin told the Financial Post he expected the portfolio allocation to China to be in the “mid-teens” by 2025, in keeping with the strategy of boosting the representation of emerging markets including India, China, and Brazil to 33 per cent in that timeframe.

He indicated no change to that strategy during Tuesday’s interview, and noted that equities had declined by far less in China than in Canada, the U.S., or the United Kingdom.

For the fiscal year, CPPIB’s investments in China — where key holdings include a long-term stake in e-commerce company Alibaba — produced returns of 9.8 per cent, he added.

The fund’s overall growth to $409.6 billion in fiscal 2020 was driven by $12.1 billion in net income and $5.5 billion in net CPP contributions.

Canada Pension Plan Investment Board returned 3.1 per cent for the fiscal year, its worst showing since the financial crisis, as the selloff in equity markets and energy in February and March hurt the fund.

Net assets were $409.6 billion as of March 31, the fund’s fiscal year-end. That represented growth of $17.6 billion, consisting of of $12.1 billion in net income from investments and $5.5 billion in new contributions, CPPIB said in a statement Tuesday.

The numbers mean Canada’s largest pension fund suffered about $15.8 billion in investment losses in the first three months of 2020. The fund had reported $27.9 billion in investment gains for the nine months ended Dec. 31.

“Despite severe downward pressure in our final quarter, the fund’s 12.6 per cent return on a 2019 calendar-year basis, combined with the relative resilience of our diversified portfolio, helped cushion the impact,” Chief Executive Officer Mark Machin said in the statement.

The fund’s 10-year and five-year annualized net nominal returns were 9.9 per cent and 7.7 per cent, respectively, which “should give Canadians comfort that, even with periodic shocks, their pensions ultimately draw from decades of steady performance,” Machin said.

The fund’s 3.1 per cent investment gain outperformed its benchmark portfolio’s 3.1 per cent loss, which equates to a value-added return of $23.4 billion for the year, after deducting all costs, the fund said.

Losses in Resources

CPPIB is designed to serve contributors and beneficiaries for decades, so long-term results are a more appropriate measure of performance than quarterly or annual cycles, the fund said.

“The COVID-19 pandemic poses a massive challenge for health, societies and economies globally. Amid the significant number of concerns many Canadians have today, the sustainability of the fund is one thing they shouldn’t worry about,” Machin said.

The fund’s holdings of Canadian public equities lost 12.2 per cent for the year and emerging markets stocks dropped 9.1 per cent, while foreign stocks generated a return of 1.6 per cent.

All credit investments returned 0.5 per cent and real estate returned 5.1 per cent, while infrastructure dropped one per cent. Canadian private equity investments lost 5.1 per cent, while foreign PE returned six per cent. Energy and resources lost 23.4 per cent.

Caisse de Depot et Placement du Quebec returned 10.4 per cent in 2019 as stocks and fixed income shielded Canada’s second-largest pension fund manager from a poor performance in real estate. Ontario Teachers’ Pension Plan delivered a 10.4 per cent return last year, lagging its 12.2 per cent benchmark. The failure to beat the hurdle tends to happen when public equities have exceptional returns, Teachers said.

Ontario Municipal Employees Retirement System returned 11.9 per cent on its investments last year, pushing assets to $109 billion. The pension fund cut its stock holdings last year and added to its infrastructure bets.

Canada Pension Plan Investment Board (CPP Investments) ended its fiscal year on March 31, 2020, with net assets of $409.6 billion, compared to $392.0 billion at the end of fiscal 2019. The $17.6 billion increase in net assets consisted of $12.1 billion in net income after all CPP Investments costs and $5.5 billion in net Canada Pension Plan (CPP) contributions.

The Fund, which includes the combination of the base CPP and additional CPP accounts, achieved 10-year and five-year annualized net nominal returns of 9.9% and 7.7%, respectively. For the fiscal year, the Fund returned 3.1% net of all CPP Investments costs.

Steady gains from global active investment programs over the first three quarters of the fiscal year pushed Fund performance forward. Fixed income investments performed well in the fourth quarter, reflecting investors’ search for safer investments and the expectation for lower interest rates across major markets. However, the steep decline in global equity markets in March 2020 had a significant effect on results as the financial impacts of the COVID-19 pandemic tore through virtually every economy.

“Our long-term returns of 9.9% over 10 years should give Canadians comfort that, even with periodic shocks, their pensions ultimately draw from decades of steady performance,” said Mark Machin, President & Chief Executive Officer, CPP Investments. “Despite severe downward pressure in our final quarter, the Fund’s 12.6% return on a 2019 calendar-year basis combined with the relative resilience of our diversified portfolio, helped cushion the impact.”

In the five-year period up to and including fiscal 2020, CPP Investments has contributed $123.4 billion in cumulative net income to the Fund after CPP Investments costs. Since CPP Investments’ inception in 1999, it has contributed $259.7 billion on a net basis.

CPP Investments continues to build a portfolio designed to achieve a maximum rate of return without undue risk of loss, taking into account the factors that may affect the funding of the CPP and the CPP’s ability to meet its financial obligations. The CPP is designed to serve today’s contributors and beneficiaries while looking ahead to future decades and across multiple generations. Accordingly, long-term results are a more appropriate measure of CPP Investments’ performance compared to quarterly or annual cycles.

“The COVID-19 pandemic poses a massive challenge for health, societies and economies globally. Amid the significant number of concerns many Canadians have today, the sustainability of the Fund is one thing they shouldn’t worry about,” said Mr. Machin. “The Fund’s long-term returns continue to help ensure the security of Canadians’ retirement benefits.”

Our dollar value-added (DVA) compared with our Reference Portfolios for the fiscal year was $23.5 billion as a result of the continued resilience of many of our investment programs. DVA is a volatile measure, and so again we look at our results over a longer horizon. Since inception of our active management strategy, we have now delivered $52.6 billion in compounded DVA.

Our long-term returns are expected to exceed what the Fund needs to remain sustainable. I say that with confidence because this year the Fund’s sustainability was independently validated by the Office of the Chief Actuary. And while that report was produced prior to the COVID-19 pandemic, it does account for financial market volatility, changes to long-term demographic trends, and so on.

The Chief Actuary’s latest assumption is that, over the 75years following 2018, the base CPP account is on track to earn an average annual real rate of return of 3.95% above the rate of Canadian consumer price inflation, after all costs. The corresponding assumption is that the additional CPP account will earn an average annual real rate of return of 3.38%. As of this year, CPP Investments’ average annual real rate of return over a 10-year period is 8.1%.

1. They improved their processes dedicated to fair value in private markets
2. They use independent auditors to determine whether their fair value is robust and these auditors often find that their valuations are very conservative in private markets.

The Colleges of Applied Arts and Technology pension plan saw a strong 2019, delivering a 16 per cent return, net of investment management fees, while growing its assets under management to $13.5 billion.

“On an absolute basis, all asset classes contributed positively to returns in 2019, with global developed equity, long bonds and real assets being the largest contributors,” said the annual report. “Interest rate and inflation hedging asset classes returned 11 per cent in aggregate, while return-enhancing asset classes returned 20.5 per cent. The plan’s currency hedging policy added 1.8 per cent to returns.”

For 2019, the CAAT plan is 118 per cent funded on a going-concern basis.

While 2020 markets have gotten off to a bumpy start, the CAAT plan has a long-term perspective. “Even though we are monitoring what’s going on in the marketplace, I don’t have any real concerns from an investment perspective at this time,” says Derek Dobson, chief executive officer of the CAAT plan.

He highlights the plan’s fairly large funding reserve and asset smoothing reserve, at $2.9 billion and $0.8 billion, respectively. “And the volatility in the marketplace hasn’t even used up our asset smoothing reserve yet. So we’re still very much [in] a strong, well-funded position.”

Further, the plan has a globally well-diversified portfolio, adds Dobson, noting the portfolio is performing as expected. “Clearly, with a 16 per cent net rate of return in 2019, I’m super pleased and proud that our asset mix and our team’s performance is exceeding my expectations.”

The CAAT also regularly conducts asset-liability modelling studies to measure its health against different scenarios. These studies have confirmed the plan can weather severe downside situations.

For its Jan. 1, 2020 valuation, the plan’s discount rate was lowered from 5.5 per cent to 5.15 per cent to reflect expected lower returns in the future.

“The lower discount rate marginally lowers the plan’s 2020 funded status, but increases the likelihood that its funded status will improve in the future because it is more likely that future investment returns will exceed the lower discount rate,” the annual report said.

Overall for 2019, Dobson says he’s most proud of the work the CAAT plan has done to expand defined benefit coverage in Canada, noting in 2019, it added more than 10,000 members by welcoming single-employer plans into its DBplus plan. “If we were to look at our purpose, which is to make simple, secure, valuable workplace pensions accessible to all Canadian workplaces, I think we made a major step — or even two or three major steps in 2019 — to contribute to the retirement income security industry.”

The CAAT Pension Plan’s financial results, released today, confirm that the Plan is well-funded and has ample reserves to weather the recent investment market downturn. The Plan has been steadily building reserves over the past decade, consistent with the focus on benefit security.

The CAAT Plan concluded 2019 with a total of $13.5 billion in assets, up from $10.8 billion the previous year. The fund returned 16.0%, net of investment management fees, over the one-year period, and moved its 10-year annualized rate of return net of fees to 10.0%.

The health of the Plan is very strong. Based on prudent assumptions about the future, the Plan is 118% funded on a going-concern basis, with a $2.9 billion funding reserve, plus an additional $0.8 billion in asset smoothing reserves to absorb investment market volatility.

CAAT also regularly conducts asset-liability modelling studies to measure its health against a variety of diverse economic and demographic scenarios. These studies confirm the Plan will remain strong even under the most severe downside scenarios.

“The markets’ response to the COVID-19 pandemic has created near-term investment declines; but the Plan has prepared well for the unexpected,” explains Derek W. Dobson, CEO of the CAAT Plan. “The Plan’s globally diversified asset portfolio has also helped mitigate recent declines in the equity markets.”

“The lifetime pensions members have earned are not affected by short-term investment market fluctuations,” adds Dobson. “Our stability and focus on benefit security provide beneficiaries with peace of mind in an uncertain world.”

CAAT’s DBplus plan design has made secure defined benefit pensions accessible to more working Canadians in different sectors across the country. More than 15,000 members from 28 new employers have joined CAAT, representing nine industries across the for-profit, not-for-profit, and broader public sectors, and includes the support and participation of 14 different unions. Welcoming more groups of workers from across Canada will continue to strengthen the Plan.

Read the complete 2019 CAAT Pension Plan Annual Report, Valuable workplace pensions made simple (PDF).

Corporate profits drop in first quarter by most since 2008 Great Recession https://t.co/ZBoPaYPEBv

— MarketWatch (@MarketWatch) May 28, 2020

Swiss National Bank Ready To Buy Much More Tech Stocks To Weaken The Franc | Zero Hedge https://t.co/Qb68uHzMd9

— Leo Kolivakis (@PensionPulse) May 28, 2020

The S&P 500 rose slightly on Friday, erasing losses earlier in the session, as traders breathed a sigh of relief after President Donald Trump signaled no changes to the trade deal with China despite rising tensions.

The U.S. equity benchmark finished the session up 0.4%, or 14.58 points, at 3,044.31. The Dow Jones Industrial Average fell 17.53 points, or less than 0.1%, to 25,383.11 as American Express and JPMorgan weighed. The 30-stock index ended the day well off the lows as it was down as much as 368 points at one point. The Nasdaq Composite jumped 1.2%, or 120.88 points, to 9,489.87 as chip stocks rallied.

The S&P 500 and the Dow gained 3% on the week, bringing their advance in May to 4.5% and 4.2%, respectively. The tech-heavy Nasdaq rose 1.7% this week, pushing its rally this month to 6.7%.

During a much-awaited news conference, Trump said he would take action to eliminate special treatment towards Hong Kong. However, he did not indicate the U.S. would pull out of the phase one trade agreement reached with China earlier this year, easing trader concerns for the time being.

“Basically the items he could have talked about he chose not to talk about, but it’s not an end point,” said Julian Emanuel, chief equity and derivatives strategist at BTIG. “It’s a continuation on the way to more tensions.”

The iShares PHLX Semiconductor ETF (SOXX) jumped to its session high following the news conference, ending the day 2.5% higher. Marvell Technologies and Nvidia were among the biggest gainers in the ETF, rising 8.8% and 4,6%, respectively.

The news conference comes after China approved a national security bill for Hong Kong that experts warn could endanger the city’s “one country, two systems” principle. That principle allows for additional freedoms that mainland China residents don’t have.

Tensions between China and the U.S. have risen lately as Trump criticizes the Chinese government’s response to the coronavirus outbreak. U.S. lawmakers have also been critical of China increasing its stronghold over Hong Kong.

White House economic advisor Larry Kudlow said Friday that people in Hong Kong are “furious,” adding: “the U.S. government is ... I’ll use the word furious at what China has done in recent days, weeks and months. They have not behaved well and they have lost the trust, I think, of the whole Western world.”

JPMorgan strategist Marko Kolanovic, who called the comeback for the market in March, said Thursday evening he was turning more cautious because of a possible economic clash with China.

“A complete breakdown of supply chains and international trade, primarily between the two largest economies (US and China), would justify equities trading drastically lower,” Kolanovic wrote.

Paul Christopher, head of global market strategy at Wells Fargo, said he expects more rhetoric from the U.S. regarding Hong Kong and China, noting: “It could end up being a headwind once the market finishes pricing in all of this hopium.”

Still, the market has had a massive run on optimism about economic reopening, with the S&P 500 bouncing about 38% off its March low. The benchmark is about 10% below its record high set in February.

“The market has discounted the coronavirus very quickly and has correctly predicted the apex of the virus,” said Mike Katz, partner at Seven Points Capital. “Having said all that, prices are up there. The S&P 500 trading above 3,000 is pricing in a full recovery.”

“If there is a second wave of the virus that ends up being more detrimental than people think, then I would think the S&P 500 is not valued correctly,” said Katz.

My friend Larry Kudlow always says that Profits are the mother's milk of stocks. That used to be true when we had a real economy. But sadly, that is no longer factual because we now have a global equity market that is totally controlled by central banks. To prove this point, let's look at the last few years of earnings. During the year 2018, the EPS growth for the S&P 500 was 20%; yet the S&P 500 Index was down 7% over that same time-frame.

Conversely, during 2019, the S&P 500 EPS growth was a dismal 1%; yet the Index surged by nearly 30%. What could possibly account for such a huge divergence between EPS growth and market performance? We need only to view Fed actions for the simple answer: it was the degree to which our central bank was willing to falsify asset prices.

During 2018, the Fed raised the overnight bank lending rate 4x and by a total of 100bps, and at the same time, it increased the amount of its Quantitative Tightening Program from $10 billion per month to $60 billion per month. In sharp contrast, Mr. Powell indicated one month before 2019 began that the Fed would stop raising interest rates; and by early '19 he indicated that the pace of balance sheet runoff was flexible and its termination was in sight. The Fed then announced in July of '19 that it would cease the selling of its assets come August. Most importantly, by the end of the summer, the Fed did a complete 180-degree pivot--it was once gain cutting interest rates and re-engaged with Quantitative Easing. The Fed ended up cutting interest rates by 75bps during 2019.

Hence, 2018 was a terrible year for equities despite surging EPS growth. However, 2019 turned out great for stock investors despite having virtually zero earnings expansion.

Turning to 2020, the S&P 500 EPS growth rate is projected by FactSet to decline a whopping 15.8% during Q2, and GDP is tracking to shrink by around 25-30% at a seasonally adjusted annualized rate. Adding to the misery, the unemployment rate is projected to reach a depressionary 17%. Nevertheless, the S&P 500 is down a very ordinary and pedestrian 10% YTD. How did the Fed pull off this magic trick yet again? Take a look at what its balance sheet has done so far this year.

Mr. Powell has committed to buying everything at this point except stocks. This includes junk bonds, issuing primary loans to businesses, and purchasing corporate bond ETFs. It has so far printed nearly $2.5 trillion in less than two months just to boost equities back to the thermosphere.

Because of these actions, the stock market is far more expensive today than it was prior to the start of the Wuhan virus crisis. This is because the ratio of total market cap to GDP has increased. Simply stated, the numerator is down just slightly while the denominator has crashed. Equity market capitalization is reported to be 138% of GDP as of this writing. This is down from the record high of 150% reached at the start of this year. Nevertheless, the current ratio is still extremely high, historically speaking. However, that figure is based on antiquated GDP data. As the new data is reported for Q2, expect the ratio to soar.

There are now over 30 million newly unemployed Americans who have lost their jobs in the past six weeks. We have now completely wiped out the 22.7 million new jobs created since the Great Recession ended in June 2009 plus another near 8 million. The damage to US balance sheets is immense, and that debt is accretive to the $71 trillion already oppressing growth. Tremendous psychological injuries have occurred to consumers and corporations, as they are forced to take on new debt due to a dearth of liquidity. For example, listed US companies took on an additional over $300 billion in new debt since March alone. At that pace of corporate debt accumulation—which was already at an all-time high both nominally and in terms of GDP pre-virus--will surge by nearly 25% in just one single year. But what else would you expect when the Fed is promoting more borrowing by providing a huge fat bid for businesses to sell all the debt they need…and more.

The stock market has already priced in a "V" shaped recovery in the economy, but the rebound will most likely be of the insipid variety. The question is will stocks care even if economic growth doesn't rebound? It is my view that the economy and EPS will certainly not return to pre-Wuhan virus levels for a very long time.

Therefore, the answer to how stocks react to a sluggish economy even after the lockdowns are lifted can be found within the confines of D.C. Will the continued panoply of negative earnings news and economic data cause the Federal government to announce even more fiscal stimulus programs to bail out states and municipalities? And, will the Fed continue to monetize all that debt? I believe the answer to those questions is a resounding yes, but only after we see another crash in asset prices that results from a negative reaction to a failed reopening of the global economy. This is the salient risk during the mid-May through July time-frame. A failed opening can be defined as one in which consumers don't return to normal activities because of balance sheet, unemployment, and wealth effect issues. And, the virus makes a comeback in the context where there is no effective treatment or vaccine yet available.

One sentence from the Fed's meeting of April 29, which produced an unusually-horrific statement even for the FOMC, "The Committee expects to maintain this target range (of zero percent interest rates) until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.". In other words, the Fed will be offering free money until the 30 million displaced workers find a job, and inflation runs well above its 2% target on its core PCE favorite metric, which removes all prices that go up—interpretation; expect ZIRP for another decade.

We continue to hold 20% gold-related investments, 15% invested in defense, healthcare, and clean energy, and 10% TIPS. Passive Index investing has become a sure way to lower your standard of living, and therefore, we will continue to actively trade the portfolio with a continued vigilance on the cyclical dynamics of growth/recession & inflation/deflation. Is your wealth manager monitoring these changes? Or are they just telling you to hang on to their brand of an index fund that is blindly and passively heading towards the slaughterhouse yet again?

The Atlanta Fed's GDP Now Estimate for Q2 Economic growth is minus 41.9%.

Thirty-nine million people filed Initial Jobless Claims in the past nine weeks. Continuing Jobless Claims (including Pandemic Unemployment Assistance) surged to over 31 million individuals.

US home construction fell by 30.2% in April.

The fiscal deficit in April (which is always a surplus month) was minus $738 billion!

Yes, unfortunately, we are in a depression. But that fact is not at all reflected in stocks.

The total market capitalization of equities is now back to 140% of GDP. That level is at the ceiling of the ratio's history, and it is purely due to unprecedented central bank actions. However, even that eye-popping level is understating things by a great deal because the ratio is calculated using a denominator based on previously reported GDP data, which has since crashed. But it is critical to note that money printing has its limitations even when governments are buying stocks.

Look at a chart comparing the S&P 500 vs. Japanese stocks (EWJ) and China's shares (CNYA).

As you can see, the S&P 500 is up 34% in the past 5 years, even though the Fed hasn't yet resorted to buying stocks. For now, it has instead bought everything else, including junk bonds. In contrast, the PBOC and BOJ have purchased everything, including stocks. In the case of Japan, its central bank has been buying equities since 2013, and the Communist/Dictatorship that controls China has commanded the PBOC to support the market since at least 2015. And yet, China's shares are up a paltry 13%, while Japanese stocks have actually made zero progress throughout the past five years. Meanwhile, both of those country's indexes are still 50% off of their all-time highs.

The truth is that central bank equity purchases do not at all guarantee there will be a roaring bull market, but they can support stocks even when an economy has become zombified.

Indeed, Mr. Powell is breaking records in his attempt to reflate the market. The balance sheet of the Federal Reserve, which is a proxy for the amount of debt monetization undertaken by the central bank, has skyrocketed by $3.2 trillion (from September 2019 through today) --that is a grand total of only eight months. This compares to a $3.7 trillion increase in Fed money printing from the start of the great recession (in December 2007), through 2018--which is a total of over ten years.

Nevertheless, the bluffing game is over for central banks, as they can no longer pretend there is a pathway to normalcy. Perhaps this is what the gold market has been sniffing out over the past 20 years. The precious metal has soared by over 500% since 2000, while the S&P 500 has merely doubled in the past two decades. The fact that gold has trounced the S&P proves that the faith in fiat currencies is collapsing, and the Wuhan virus has expedited this process.

The current illusion of stock market prosperity has three predicates. The first is that there will be a robust reopening of the economy as the virus dissipates in the context of imminent therapies and vaccines. The second is that inflation is far off in the future, which will enable the Fed to control the level of long-term interest rates much more easily. And, the third is that central banks will have no interest in letting up on the monetary throttle for a very long time. The second and third conditions are indeed far off in the future. However, whether or not we have a successful reopening of the economy depends entirely on the progression of the virus; and that verdict will be known in the very near future.

This begs the question: even though the predicted economic depression has arrived, where do markets go from here? We should all understand that in the longer term, a viable economy cannot be engendered through the process of diluting the purchasing power of a currency and falsifying asset prices. But what will happen to stocks while we wait for stagflation to run intractable? To help answer that question, we must monitor the number of new Wuhan virus infections and deaths.

The hope is for a viable treatment and/or a vaccine by the fall. On the subject of vaccines, it should be noted that Moderna Pharmaceutical made positive comments about finding an effective and safe vaccine on May 18, which sent the Dow up 900 points. However, it is very disturbing that Moderna only partially released results of an interim Phase 1 trial without any specific data on neutralizing antibody counts; and then conveniently announced a $1.34 billion stock offering the following day. If the company's confidence in the vaccine was robust, then why not wait a few more weeks until the Phase 1 trial data could be fully released, with peer-reviewed status, and then make the secondary offering at a much higher price?

It also should be noted that the Wuhan virus is a coronavirus. The common cold is also a type of coronavirus, and so is SARS and MERS. These differ from the influenza virus, and there has never been a vaccine approved for any coronavirus…ever. In addition, vaccines normally take years to develop in order to ensure both their safety and efficacy. Nevertheless, President Trump wants one ready to disseminate in just a few months' timeframe. The President's "operation warp speed" is seeking 100 million vaccine doses by November. But a vaccine not only must not harm people, it also cannot give them a false sense of protection. Despite all this, Moderna has amazingly created its mRNA-1273 vaccine within just two months from the first breakout of this novel virus.

In any event, the economy is now in the reopening phase, and it is imperative to analyze the capacity levels within the leisure and hospitality sector to determine how consumers are responding to being let out of lockdown. For example, airlines breakeven at 75% capacity but are currently flying at just around 28%, with bookings plunging by 95%. According to the WSJ, after the 9/11 terrorist attacks, it took three years before airline capacity recovered; eight years before the average fare got back to what it was in 2000, and it was six years before airlines turned profitable once again. Looking at hotels, occupancy on the island of Oahu, for example, during the week ending April 6 was down 90%. Turning to the foodservice industry, regulators are requiring restaurants to open at between 25%-50% capacity; but they need around an 80% capacity level to breakeven.

Analyzing the rate of change with this data will be critical to determine how to correctly allocate the portfolio according to the appropriate economic cycle. Our IDEC Model currently has the portfolio positioned in 25% stocks, 15% gold, and 10% TIPs. Our 50% cash hoard is being used to generate income right now until we can determine the quality of the reopening. Much more will be known during June, and I will analyze how the 20 components of the IDEC Model react to it and then take the appropriate action.

Carl Icahn isn’t buying stocks right now. He’s hoarding cash, shorting commercial real estate and preparing for more virus havoc

— Bloomberg (@business) May 8, 2020

Billionaire Icahn exits Hertz with 'significant' loss after bankruptcy filing https://t.co/RHw6FeIPDK

— Leo Kolivakis (@PensionPulse) May 28, 2020

The Federal Reserve's balance sheet rose marginally to $7.1 trillion as of Wednesday, up from $7.04 trillion last week. A large chunk of that growth came from a $33 billion increase in the central bank's emergency lending programs aimed at buying corporate bonds. But that increase in the lending facilities reflects the Treasury Department's equity contributions. Taking that into account, the facilities only saw a $1.2 billion increase in buying of corporate debt exchange-traded funds.

Liquidity withdraw.

Lowest weekly Fed stimulus since the market top.

Not only that:

Public debt increased ~4x the Fed’s $60B in the last 7 days!

Largest net decline in Fed assets vs. government debt since the repo crisis started.

Debt overhang sucking all new liquidity. pic.twitter.com/lcFjk2PuX5

— Otavio (Tavi) Costa (@TaviCosta) May 29, 2020

First he expects the Fed to establish a more consistent quantitative easing program, as the current purchases are done on an ad hoc basis. Mericle says the Fed will settle on a pace of roughly $80 billion to $120 billion in U.S. Treasury securities a month, and $25 billion to $35 billion of mortgage-backed securities.

He also expects a change to its forward guidance. Drawing on comments from Governor Lael Brainard, he says the Fed could say it won’t increase interest rates until the economy reaches full employment and 2% inflation. “Waiting to make sure that inflation reaches 2% before raising interest rates would seem roughly consistent with what Fed officials appear to mean by average inflation targeting — aiming for a range of 2-2.5% inflation during the expansion phase of the cycle, while stopping short of a full make-up strategy,” he says.

After the Fed clarifies its forward guidance, it could move forward with yield curve control, Mericle says, and it would move to cap interest rates, of shorter maturities, out to a horizon somewhat short of the date when the Fed forecasts its liftoff criteria will be met.

Federal Reserve Chair Jerome Powell on Friday said forward guidance and QE are no longer non-standard tools, and said the central bank would comfortable using them.

The market isn’t expecting a hike anytime soon, with Eurodollar contracts not pointing to a possibility until 2023.

The yield on every Treasury security with a maturity of 10 years or shorter is below 1%, with the 30-year yielding 1.44%.

Stocks have benefited from the Fed’s actions, with the S&P 500  up 35% from the March lows.

Why the stock market right now is stronger than even the most bullish investors believe - MarketWatch https://t.co/mPWoGMnvMX

— Leo Kolivakis (@PensionPulse) May 29, 2020

Swiss National Bank Ready To Buy Much More Tech Stocks To Weaken The Franc | Zero Hedge https://t.co/Qb68uHzMd9

— Leo Kolivakis (@PensionPulse) May 28, 2020

Corporate profits drop in first quarter by most since 2008 Great Recession https://t.co/ZBoPaYPEBv

— MarketWatch (@MarketWatch) May 28, 2020

U.S. savings rate hits record 33% as coronavirus causes Americans to stockpile cash, curb spending https://t.co/K80yNDeRGL

— Leo Kolivakis (@PensionPulse) May 29, 2020

LOL! pic.twitter.com/QbP88F5jpF

— GreekFire23 (@GreekFire23) May 29, 2020

OMERS is pleased to announce the official appointment of Blake Hutcheson as President and CEO, effective today. Mr. Hutcheson, currently OMERS President, succeeds Michael Latimer as CEO. His appointment supports OMERS long-term plans for continued global expansion and completes the leadership transition announced in December 2019.

“Since its founding in 1962, OMERS has lived its purpose as a defined benefit pension plan to meet the retirement income needs of its members which consists of employees of municipal governments and local agencies and boards in the Province of Ontario,” said Mr. Hutcheson. “Right now, many OMERS members are working directly on the frontlines of Ontario’s response to the pandemic. I am deeply honoured and humbled to have the opportunity to work every day for them and all of our more than 500,000 members, and 1,000 employers.”

“It is a privilege to lead this purpose-driven organization. I am blessed to be surrounded by an outstanding, world-class team of deeply committed senior executives who put the best interests of our members above all else. Together, we will position OMERS to meet current and emerging challenges, find new opportunities to grow and deliver on our promise to our members,” Mr. Hutcheson added.

“On behalf of the OMERS Administration Corporation’s (AC) Board of Directors, I want to express our support for Blake as CEO. Throughout my career, I have worked with many successful CEOs, and I cannot think of anyone better suited to lead us at this point in our journey,” said George Cooke, Chair of the OMERS AC Board. “Canadian defined benefit pension plans, such as OMERS, have over time become globally-significant investors, active across various asset classes. In our case, OMERS world-wide investment footprint now stretches from Singapore to Stockholm to Santiago de Chile. This speaks to the strong foundation patiently constructed by Blake’s predecessors and given his more than 10-year track record with OMERS, we know Blake will skillfully build on that foundation, delivering on plans for further expansion,” he added.

Additional Background on Blake Hutcheson:

Blake Hutcheson is now officially President and CEO of OMERS. He is responsible for the overall leadership and performance of the OMERS enterprise. Prior to that, he was OMERS President and Chief Pension Officer. He previously served as President and CEO of Oxford Properties Group from 2010 to June of 2018.

Prior to OMERS, Mr. Hutcheson headed Global Real Estate with Mount Kellett Capital Management, an international private equity firm, and prior to that he was Chairman and President of the Canadian, Latin American, and Mexican operations for CB Richard Ellis, the world’s largest real estate services company.

A former recipient of Canada’s Top 40 Under 40, Mr. Hutcheson is a graduate of the University of Western Ontario. He also completed a Graduate Diploma in International and Comparative Politics at the London School of Economics (with Distinction) and a Master’s Degree in Real Estate Development at Columbia University (from which he received the Distinctive Alumni Award in 2017).

About OMERS:

Founded in 1962, OMERS is one of Canada’s largest defined benefit pension plans, with $109 billion in net assets as at December 31, 2019. OMERS is a jointly-sponsored pension plan, with 1,000 participating employers ranging from large cities to local agencies, and over half a million active, deferred and retired members. OMERS members include union and non-union employees of municipalities, school boards, local boards, transit systems, electrical utilities, emergency services and children’s aid societies across Ontario. Contributions to the Plan are funded equally by members and employers. OMERS teams work in Toronto, London, New York, Amsterdam, Luxembourg, Singapore, Sydney and other major cities across North America and Europe – serving members and employers and originating and managing a diversified portfolio of high-quality investments in public markets, private equity, infrastructure and real estate.

• Working from home isn't everyone's preference but it's here to stay.
• Companies are looking to cut costs and improve productivity and renting large office space is questionable in a post-COVID-19 world.  
• Giant tech companies hunting for talent are setting the new trend by allowing their employees to work from home indefinitely, and others will follow their lead or risk being left behind in the talent war.
• Millennials prefer working from home but so do senior partners at law firms and accounting firms who don't want to be exposed to COVID-19.
• There is a fundamental shift going on in terms of the nature of work, working from home will make it easier to hire more women, visible minorities and people with disabilities but it will also make it easier for big companies to offshore high-paying service sector jobs to India, China and elsewhere.
• Working from home is much better for the environment, no question about it.

Not surprisingly, Public Equity was the top-performing asset class as stocks came roaring back in 2019 after the huge selloff in Q4 2018.

Some of you may have noted the S&P 500 gained 32% total return last year, which is correct, but OMERS and other large Canadian pensions don't just invest in US stocks, they invest in global stocks.

In private markets, I note that Private Equity returns fell sharply from 2018, registering a gain of 4.6% last year after delivering a gain of 13.5% in 2018.

OMERS' PE head, Mark Redman, recently departed the organization and was replaced by Michael Graham. I don't know Mr. Graham but someone I trust told me "he's very nice and solid".

I also don't know if Mark Redman's departure had anything to do with the poor showing in Private Equity but one thing I can share with you is OMERS Private Equity always touted its "purely direct" approach and I always found this peculiar.

Importantly, when I look at Canada's leader in Private Equity, CPPIB, its approach of fund investing along with sizable co-investments to lower fee drag, is what makes the most sense to me over the long run in developing a successful private equity program.

And it's not just CPPIB, Ontario Teachers', CDPQ, BCI, AIMCo, PSP, virtually every large pension in Canada that has a successful PE program has gotten it through fund investing and co-investing, not through purely direct deals (they do some but it's a minuscule fraction of their overall PE portfolio, most direct investing comes through co-investments).

Why did CDPQ deliver 10.5% in Private Equity last year while OMERS didn't make half that gain? I suspect because OMERS did a lot of purely direct deals which delivered paltry gains.

To be fair, I need to look at 5-year results but they're not available yet, which is also peculiar. At the very least, OMERS should follow CDPQ and release its 5 and 10-year results in every major asset class, as well as the benchmark results.

Me: Mark, do you invest in purely direct deals in private equity where you originate the deals?

MWD: No, we don't and there's a simple reason. Unlike infrastructure where we go direct, private equity requires strong partnerships. If I could hire David Bonderman, I would but I can't afford him so in private equity, we will always invest in funds an co-invest with them on larger deals to reduce overall fees.

[...] a Neiman Marcus bankruptcy could spell even bigger trouble for Hudson Yards owned by Oxford Properties, OMERS's real estate subsidiary, and Related:

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.

Real Estate Daily News also reports that Neiman Marcus threatens Hudson Yards Mall:

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.

As you can see, if Neiman Marcus does file for bankruptcy, it will sting two big Canadian pensions.

According to #OECD, the world’s wealthiest nations are set to take on at least $17tn of extra public debt as they battle the economic consequences of the #pandemic. How are we going to pay for this?@FThttps://t.co/5WBZcxOwIy

— Mark Wiseman (@MarkDWiseman) June 1, 2020

U.S. stocks rose on Monday to start off the new month amid increasing hope of a successful reopening of the economy. Here's how the major averages performed:
- The Dow rose 91 points.
- The S&P 500 gained .38%.
- The Nasdaq advanced .66%. https://t.co/4gYsLjvrRrpic.twitter.com/srdFWIaCJk

— CNBC (@CNBC) June 1, 2020

"The Pain Trade Is Clearly Up": How One Bear Is Hedging The Continued Market Meltup | Zero Hedge https://t.co/S2Il7Up82F

— Leo Kolivakis (@PensionPulse) June 1, 2020

Caisse de dépôt et placement du Québec (CDPQ) today released its Annual Report for the year ended December 31, 2019, a little later than usual due to the exceptional situation related to COVID‑19. In addition to the detailed analysis of its financial results released on February 20, the report provides a complete overview of its activities. Here are some highlights:

PERFORMANCE OVER TEN YEARS

• Annualized return of 9.2%.
• Net assets increased from $131.6 billion in 2009 to 340.1 billion in 2019, with $191.0 billion in net investment results and $17.5 billion in net deposits.
• The proportion of assets invested in international markets rose from 36% in 2009 to 66% in 2019.

PERFORMANCE OVER FIVE YEARS

• Annualized return of 8.1% and net assets grew $114.2 billion, with net investment results of $106.0 billion and net deposits of $8.2 billion.
• As at December 31, 2019, CDPQ’s five-year return outperforms its benchmark portfolio by 0.9%. This difference represents $11.0 billion in value added.
• Returns for the eight main depositors ranged from 7.2% to 8.9%.

PERFORMANCE IN 2019

• Global return in 2019 of 10.4%, below the benchmark portfolio by 1.6%.
• Net assets grew by $30.6 billion on net investment results of $31.1 billion, offset by net depositor withdrawals of $0.5 billion.
• Returns for the eight principal depositors ranged from 9.5% to 10.8%.

CDPQ’S IMPACT IN QUÉBEC

• Total assets in private Québec companies have now reached $47.6 billion, an increase of over 155% in 10 years.
• Partnered with over 750 companies, including over 650 SMEs.
• New investments and commitments of $21.9 billion over five years.
• Several solid achievements in each pillar of CDPQ’s strategy in Québec, including:
• Impactful projects: Continued construction on several branches of the Réseau express métropolitain (REM), including 2 kilometres of rails on the South Shore, and the launch of construction on ten stations.
• Growth and globalization: Investment and support for the growth and globalization of Québec companies, including Alt Hotels, Sollio Cooperative Group (formerly La Coop fédérée), Golf Avenue, Nuvei and Top Aces.
• Innovation and the next generation: Creation of a $250-million fund for companies specializing in artificial intelligence and launch of a $50-million envelope for seed funds for innovative companies.

GLOBALIZATION

• Continued globalizing CDPQ’s activities, a pillar of its strategy, which has resulted in a 2% increase in exposure to global markets, reaching 66% at the end of 2019, including:
• Increased investments in the United States, including one in partnership with Hilco Global, a leader in financial services, to support its growth strategy, and another with Ontario Teachers’ Pension Plan (OTPP) and Constellation, to launch a global insurance platform.
• Key transactions in growth markets with partners, including LOGOS in India, Prologis in Brazil and Australis Partners, IFC and Organización DeLima in Colombia.

LESS-LIQUID ASSETS AND CREDIT

• Private Equity: Investments of $10.5 billion in various growing companies in Québec and around the world, major transactions in various sectors, including security services in the United States, health care in Australia and the pharmaceutical industry in Mexico.
• Infrastructure: Almost $5 billion in investments with acquisitions of significant stakes in various companies, including alongside a global energy leader established in Brazil and a U.S. leader in wireless communication towers, as well as in various ports around the world.
• Real Estate: A market undergoing major changes that requires an active transition to lower the weight of more traditional assets and prioritize opportunities in tomorrow’s sectors. In 2019, more than $11 billion in acquisitions, capital investments and sales, significant increase in assets in promising industrial real estate sectors, especially in Asia Pacific, Brazil and India, and in logistics in the United Kingdom.
• Credit: Loans to various companies, including Lightsource BP to create a global solar asset platform and to Maestria Condominiums to finance the construction of this residential project in Montréal.

RISK MANAGEMENT

• In 2019, market risk remained stable compared to 2018 and was slightly above that of the benchmark portfolio.
• During the year, CDPQ enhanced its post-investment monitoring process.

STEWARDSHIP INVESTING

• To accompany its Annual Report, CDPQ published its Stewardship Investing Report, which sets out its vision and commitment to priority topics:
• Climate change
• Diversity
• Governance
• Investing in the community
• In terms of the fight against climate change, CDPQ has added $16.8 billion in low-carbon assets since 2017, including $6.9 billion in 2019.
• Since 2017, the portfolio’s carbon intensity was reduced by 21% against an objective of a 25% reduction by 2025.
• Proactive leadership in co-founding the Net-Zero Alliance, an initiative that calls on major investors to commit to achieving carbon-neutral portfolios by 2050.
• Since 2018, in collaboration with 14 international peers, CDPQ has taken concrete and direct action on climate change, diversity and sustainable infrastructure as part of the Investor Leadership Network.
• The electronic version of the Stewardship Investing Report.

COMPENSATION

The principles underlying the compensation program for CDPQ employees in Québec and around the world remain unchanged: pay for performance that is aligned with returns delivered to depositors, offer competitive compensation and link the interests of management and depositors (see page 91 of the Annual Report).

However, as the world is experiencing the unprecedented COVID‑19 pandemic, CDPQ decided, given current economic conditions, to freeze the salaries of all leaders in the organization for 2020 and postpone the payment of 2019 variable compensation to the third quarter. In addition, the members of the Executive Committee have decided to postpone and co-invest the maximum possible of their variable compensation for a period of three years as of January 1, 2020, until 2022.

Implementation and application

• Rigorous benchmarking against reference markets by a recognized independent firm—Willis Towers Watson—and studies on positions based outside of Canada by McLagan.
• At the request of the Board of Directors, validation of the application of the compensation program was conducted by Hugessen Consulting, an independent consulting firm recognized for its expertise in the compensation of pension fund personnel.
• CDPQ’s Compensation Policy complies with the Principles for Sound Compensation Practices issued by the Financial Stability Board and endorsed by the G20 nations: effective compensation governance; alignment of compensation with long-term, measured risk-taking; and regular review of compensation practices.
• Review the performance of each employee using a rigorous evaluation process to determine the variable compensation, based on individual performance, portfolio or team returns and CDPQ’s performance, measured over five years.
• A component is linked to the carbon footprint intensity reduction target to support CDPQ’s strategy to address climate change.

Mandatory co-investment thresholds

• To foster better alignment of employees’ interests with CDPQ’s ongoing long-term success, a significant portion of total variable compensation of management and senior professionals is deferred for a period of three years, in compliance with the rules of the Canada Revenue Agency, which requires the amounts to be paid at the end of that period.
• It is mandatory to place minimum amounts in a co-investment account for employees who have direct influence on CDPQ’s organizational and financial performance:
• At least 55% of the total variable compensation of members of senior management, thereby strengthening the alignment of management and depositor interests and making this measure even more stringent than common industry practice–with the exception of 2019, for which the threshold was raised to include the maximum possible variable compensation due to COVID‑19.
• 35% of total variable compensation for vice-presidents and intermediate and senior investment employees.
• 25% for other managers and high-level professionals.
• The deferred amounts to be paid in 2022 that relate to 2019 are put at risk, as they will rise and fall in tandem with CDPQ’s absolute overall return during this period.
• This year, as part of the variable compensation program, employees (including senior management) have deferred until 2022 a total of $44.2 million. Employees of CDPQ’s international subsidiaries deferred a total of $13.3 million into the co-investment portfolio.
• Amounts co-invested as part of the variable compensation program were paid in 2019, in compliance with program conditions and applicable tax rules. Amounts paid in 2019 that had been co-invested and reported in 2016 by the five most highly compensated executives reporting to the President and CEO are presented in Table 38 on page 101 of the 2019 Annual Report.

Variable compensation

• Since 2016, performance has been measured over a five-year period, which further strengthens its long-term sustainability.
• Including variable compensation, total compensation for CDPQ employees in 2019 was slightly below the median of the reference markets for superior performance over five years, where the 8.1% annualized return corresponds to $11 billion in valued added compared to the benchmark portfolio (page 94).
• In keeping with CDPQ’s strategy to deliver sustained long-term performance, the following table contrasts the 2019 variable compensation awarded to CDPQ employees relative to absolute returns generated and value added, which includes a deferred portion that will rise and fall with future returns.
• The increase from 2018 to 2019 in variable compensation awarded mainly stems from an increase in the number of investment employees.
• CDPQ’s exposure to global markets now represents 66% of the portfolio and generates advantageous returns for its depositors.
• CDPQ also generated conclusive results over the last five years in Québec, with over $21 billion in new investments and commitments over the period.

2019 Compensation

Compensation for 2019 reflects sound management and rigour in control over costs, as the following facts show:

• CDPQ’s operating expenses and external management fees, which remained around the same level in 2019 as in 2018, was 23 cents per $100 of average assets—up barely 1 cent—a ratio that compares favourably to that of its industry.
• Around 90% of CDPQ’s assets are managed internally, which is five times less costly than managing assets externally.
• Senior executive compensation is below the maximum of 42% on average (see the tables on pages 94 and 100).

“To perform in a competitive environment, you need to have the best talent, both here and around the world. This will be even more important in the next decade, as the global economy suddenly lost steam and CDPQ’s portfolio is tested. Our organization has the teams to take on this challenge under the leadership of Charles Emond as President and Chief Executive Officer,” said Robert Tessier, Chairman of CDPQ’s Board of Directors.

Compensation of the President and Chief Executive Officer

Base salary and direct compensation

• Pursuant to policies on achieving CDPQ’s business objectives and organizational performance, the Board considers that “the President and Chief Executive Officer had surpassed the objectives that he had been given at the beginning of the year and that his performance during 2019 greatly exceeded their expectations of him.”
• Mr. Sabia’s base salary remained unchanged at $500,000 in 2019 and his variable compensation awarded for performance for the year was $3,857,000, which will be paid in the third quarter of 2020. Including the value of the pension and other forms of compensation, his total awarded compensation for the year was $4,425,300.

Co-investment

• In light of his stepping down, and pursuant to the variable compensation program, his co-investment accounts for 2016 to 2018 were fully disbursed at the time of his departure.

Pension plan and severance

• When Mr. Sabia was appointed he waived membership in any pension plan for the duration of his mandate, except for mandatory plan membership under Retraite Québec rules for management personnel.
• He also waived any severance.

Comparison to reference markets

• Additional details on the compensation of the President and CEO and the five most highly compensated executives are provided on pages 96 to 104 of the Annual Report.

The electronic version of the 2019 Annual Report and 2019 Additional Information are available at:

• 2019 Annual Report
• Additional Information

ABOUT LA CAISSE DE DÉPÔT ET PLACEMENT DU QUÉBEC

Caisse de dépôt et placement du Québec (CDPQ) is a long-term institutional investor that manages funds primarily for public and parapublic pension and insurance plans. As at December 31, 2019, it held CAD 340.1 billion in net assets. As one of the largest pension fund in Canada, CDPQ invests globally in financial markets, private equity, infrastructure, real estate and private debt. For more information, visit cdpq.com, follow us on Twitter @LaCDPQ or consult our Facebook or LinkedIn pages.

• 2019 Annual Report
• Additional Information
• Stewardship Investing Report 

• Working from home isn't everyone's preference but it's here to stay.
• Companies are looking to cut costs and improve productivity and renting large office space is questionable in a post-COVID-19 world.  
• Giant tech companies hunting for talent are setting the new trend by allowing their employees to work from home indefinitely, and others will follow their lead or risk being left behind in the talent war.
• Millennials prefer working from home but so do senior partners at law firms and accounting firms who don't want to be exposed to COVID-19.
• There is a fundamental shift going on in terms of the nature of work, working from home will make it easier to hire more women, visible minorities and people with disabilities but it will also make it easier for big companies to offshore high-paying service sector jobs to India, China and elsewhere.
• Working from home is much better for the environment, no question about it.

How Will Toronto Be Without Bankers in the City? - Bloomberg https://t.co/8y9oWFjVrz

— Leo Kolivakis (@PensionPulse) May 31, 2020

More evidence of a shift in real estate is going on ... https://t.co/27eYJkQO5B

— Leo Kolivakis (@PensionPulse) June 2, 2020

• 2019 Annual Report
• Additional Information
• Stewardship Investing Report 

As Warren Buffet once said, “Only when the tide goes out do you discover who’s been swimming naked.”

• The Alberta Investment Management Company (C$119 billion AUM), Allianz Structured Alpha 1000 and 1000 Plus ($9.5 billion AUM, est.), and Malachite Capital ($600 mm AUM, est.) all come to mind. 
• All three funds pursued short volatility or variance strategies. Despite their claims to the contrary, the losses were predictable and had precedent in other markets.
• AIMCo’s estimated C$2.1+ billion loss should be viewed in the context of their asset base of approximately C$119 billion; the loss is large, and certainly disturbing, but not unheard of in a fund that size and with similar return expectations.
• The broader issue with AIMCo is not the strategy employed, evidently flawed as it was. Rather, it was the decision to pursue such strategies in the first place and the prevailing culture, investor expectations, and management that allowed it to occur.
• In all three cases, the incidents highlight the often-misplaced allure of complex strategies, the proper role of risk management in a fund environment, and unreasonable return expectations. 
• Post-loss assessments must address these underlying factors, and not just trade specifics, to be valuable; similar trading debacles, of which there are many, provide valuable lessons to avoid reoccurrence.
• The knee jerk reaction by existing funds may be to employ new risk management controls, metrics, and monitoring. However, if they are too onerous or burdensome, they may jeopardize the ability to meet return objectives.

*****

Serious market disruptions usually claim victims and the latest one stemming from the COVID-19 pandemic is no exception. Not surprising: extreme events produce extreme results. In this case, AIMCo, Allianz Structured Alpha Funds, and Malachite Capital reported losses from short volatility or variance strategies. On the face of it, they all used clever strategies to earn what seemed to be consistent, low risk returns, “picking up small puts” as it were. As we will see, things didn’t turn out quite as expected.

In AIMCo’s case, a fund composed mostly of public sector pension plan and provincial endowment funds, what was surprising was not necessarily the magnitude of the loss but its source: certain “volatility-related investment strategies,” as AIMCo’s CEO, Kevin Uebelein, put it in a letter dated April 30th. He didn’t elaborate any further, but one could surmise that the fund was selling some variety of equity variance swaps. According to him, “markets behaved in a manner never-before-seen and the result was a very unfortunate loss.”

Some perspective is in order. AIMCo is a large pension with an estimated C$118.8 billion in AUM. The loss from the volatility strategies was reported in a letter dated April 30th at an estimated C$2.1 billion (actual losses won’t be known until June when the strategy is completely cut). Although certainly concerning, a 1.8% loss from an individual strategy in a fund that size is not surprising and is to be expected given their return requirements (higher return requires higher risk). In addition, the C$2.1 billion is the loss from just one trade in the overall strategy; one doesn’t know the strategy’s total profitability since it was conceived.

Since such strategies had been reportedly going on for some time, one could surmise they were profitable – except for the last trade, that is. As is often the case with selling volatility, it just takes one volatility blowout to render the whole strategy disastrous. You are only as good as your last trade.

Allianz and Malachite Capital have similar stories. In the case of Allianz, their Structured Alpha Fund 1000 and 1000 Plus funds were reportedly selling insurance against a market sell-off in the short term and buying it in the long term. In other words, they were short puts on US equity indexes. “We are acting like an insurance company, collecting premiums,” said the CEO in a 2016 marketing video. Malachite Capital’s reported strategy was to “capture short-term volatility risk premium…” Like the Allianz funds, they were also short volatility. In both cases, the spike in volatility last March resulted in insurmountable losses and their liquidation.

While the specifics of recent losses may differ from that of other trading debacles, the underlying reasons and symptoms are all too familiar:

1. Inherently flawed strategy that only comes to light during extreme market conditions:

The mission of a Wall St. derivatives salesman is to sell new and clever products that make money for themselves and the firms for which they work. Variance swaps provide an interesting twist to this, however, as they can be considered a “capital relief” transaction. Regulatory mandated stress tests on banks’ capital incentivized them to devise products to get risk off their books.

The product that AIMCo supposedly sold, capped-uncapped variance swaps, did just that, covering unlimited losses in the case of a catastrophic market shock. In other words, they were selling insurance that rarely pays out. Assuming you can accurately assess the probability of paying out and the correct pricing for the premium, it generally works out. Since pensions are long term investors that can supposedly weather volatility swings, both parties should be happy. Add to this that the Bank might actually overpay to meet regulatory requirements, and it would seem like a consistent low risk trade. And most of the time it is -- until it isn’t. Allianz and Malachite seem to be in same boat.

All the traders involved seem to be experienced and intelligent and all were seemingly well supplied with risk and performance attribution metrics. What happened? A few things:

• Underestimating the probability of extreme market moves. As any experienced option trader can tell you, so called “fat tail” events occur with far greater frequency than models predict. Hence, short volatility losses are almost always blamed on unprecedented events, as if to indicate that it was beyond the traders’ control. It wasn’t.
• Ignoring history. Were the moves last March really unprecedented? Unfortunate, yes; unprecedented, no. Commodities, especially energy and power, regularly experience extreme and sudden volatility moves exceeding 100% and are very instructive as to what could happen to short volatility positions under pressure. Traders, especially those on the losing side, like to think that their experiences are unique; they rarely are.
• Faulty theory/logic. As the PM of Allianz’s Structured Alpha Fund put it in a marketing video, “We are acting like an insurance company, collecting premiums.” Although the comparison is tempting, selling variance swaps and volatility is not like selling insurance. Insurance companies sell thousands of policies on different events to diversify and avoid concentration risk. Some will pay out, but the majority will not. That is not the same as selling volatility wherein the risk is concentrated and undiversified. Rather, the funds involved were acting like an insurance company selling only one policy.
• Belief that volatility will remain within a relatively tight band and that increases will be short-lived and manageable; related belief that volatility pricing will remain rational and predictable during extreme market scenarios. It is tempting to believe that things will remain the same quarter after quarter and that one has the resources and experience to handle unexpected and extreme events. After all, volatility sellers could be secure in the knowledge that the VIX had been in a relatively narrow range since 2012. Had they reviewed earlier history, or events in other asset classes, they would have better appreciated that a) extreme volatility events usually appear from nowhere and are always unanticipated, and b) illiquidity usually accompanies them, making hedging or defensive trading difficult and liquidation almost impossible, and c) historically “normal” volatility relationships across time and between puts and calls can become unstable, irrational, and unpredictable under extreme circumstances. These three factors must be part of any realistic scenario analysis. In short, complacency was not merited.
• Trading complex or esoteric strategies whose relation to the overall portfolio is questionable; belief that diversification will mitigate the risk: In the case of AIMCo, just how did a staid pension justify getting involved with short variance swaps in the first place?

From Kevin Uebelein, AIMCo CEO, excerpted from his statement of April 30:

“I believe that one lesson that will be reaffirmed by us all is the power of diversification over the long run. Inherent in this principle of diversification is the notion that some asset classes or strategies will perform negatively under certain circumstances.”

One problem here: selling volatility evidently was not diversifying the portfolio. Diversification has many benefits (some of them debatable) but can break down during periods of high volatility and unstable correlations. In addition, and as noted above, one could make the argument that AIMCo’s short variance trade was concentrating and adding to, not diversifying, overall risk.

Variance swaps are often used to diversify long only equity portfolios. Given the assumption that volatility is negatively correlated with equity markets (i.e., increases as the broad market declines), then buying variance swaps could provide a diversification benefit. So, in theory, it could be argued that variance swaps were an appropriate product for a pension, but from the long side only. Unfortunately, AIMCo was short. One can therefore reach the conclusion that the short variance strategy was a separate, speculative trade whose utility was divorced from the overall portfolio.

The real question not just for AIMCo but for other pensions as well is whether the strategy betrays other, more fundamental issues regarding the management of the overall fund. Are other pensions at risk due to similar, inappropriate strategies? Do other pensions contain similar variance swaps? Don’t bet against it.

At all times, common sense and overall investment objectives should always prevail.

2. Strong pressure, internally or externally driven, to produce “incremental alpha” or to compare favorably with similar funds; the allure of Wall St.’s “latest and greatest”:

Return pressure is severe at all funds and the temptation to dabble in strategies or products outside of the fund’s main investment strategy is strong. In the case of AIMCo, their returns have tended to lag similar funds by as much as 1.5% over the last decade. Recently, politics has also entered the mix. In its latest budget, the Alberta government proposed that management of the Alberta Teacher’ Retirement Fund, as well as some other funds, be shifted to AIMCo. This has been vocally opposed in some quarters, most notably by The Alberta Teachers’ Association union on the grounds that AIMCo’s returns have lagged over the last decade.

Add these two factors together and it leads one to the conclusion that AIMCo was under some pressure to produce higher returns and was susceptible to inappropriate strategies.

There can be a psychological element as well. Arguments can be made about the suitability of short volatility strategies for a pension portfolio, but the desire to trade the most sophisticated and complex products offered by Wall St. should not be underestimated. Wall St. derivatives salesmen are unrelenting and have only the best quantitative and market analyses to make the case. In the case of Malachite, it was reported that a consultant, Fund Evaluation Group (FEG) was actively marketing the fund as a “diversifying strategy.” This is not rare; there is a whole ecosystem of consultants and capital acquisition specialists whose sole job is to recommend and vet new managers, strategies, and offer advice on portfolio allocation. Often, they directly run portfolios as well. Despite their representations of independence and fair-mindedness, their main objective is to make money for the firms for which they work.

3. Improper use of risk management:

Invariably, fund losses are ascribed to “a failure in risk management” or “lack of risk controls.” By definition, that is certainly true, but it is much more nuanced than that. Almost all trading debacles occur in organizations that claim they have world class risk management second to none, well-staffed and qualified risk management departments, and experienced and skilled traders.

The problem isn’t the lack of risk management. Rather, it’s the wrong type of risk management. In too many organizations, risk management is relegated to providing risk and performance metrics for senior management and the Board or tasked with policing limits and compliance directives. Many are staffed with quantitative personnel well-schooled in financial theory but more attuned to risk limitation and control than maximizing risk adjusted return. In addition, many have limited practical knowledge of trading and market realities and therefore have difficulty communicating clearly with investment personnel or telling them something that they don’t already know. Adding to the issue is that sometimes quantitative personnel have almost a quasi-religious belief in risk models, metrics, and related stress tests, regardless of historical precedent or common sense.

The result is that there is often a quiet rift between risk management and investment personnel with neither side understanding nor appreciating the contribution of the other. Rarely does this show up in the due diligence process.

Another issue is that the Board is sometimes provided with risk metrics or commentary that they either don’t fully understand or appreciate. In my experience, Boards receive full and complete risk information (sometimes too much) but mostly rely on senior management to highlight the most important matters. If senior management isn’t communicating effectively with risk management, or is receiving poor risk metrics, the Board will then be surprised when losses occur.

Whatever the specifics, risk management is often an adjunct to the investment process but not really part of it. In the most cynical case, it is for the benefit of investors and provides only a showcase, informational role. In other words, lots of statistics and metrics buried in reports with little understanding of their import.

*****

Undoubtedly, the experience of AIMCo, Allianz, and Malachite has caused many funds to re-examine their portfolios and wonder whether they could have wound up in the same situation. For funds that have not yet experienced similar issues, their experiences provide a useful guide on avoiding disaster.

I kept asking about Aimco's vol blow-up, and insiders kept telling me the story was bigger than Alberta. And it is:https://t.co/eFwIJgbvB2pic.twitter.com/z53mC7RprL

— Leanna Orr (@LeannaO) June 3, 2020

For example, AIMCo had great appetite for effectively selling extreme crash insurance, protecting banks from infinite downside in an unprecedented crash. Those trades — called capped-uncapped variance swaps — blew up spectacularly. 

CPPIB, in contrast, prefers to limit its worst-case scenarios, according to sources. “Canada is definitely known for having some of the most sophisticated players, and CPPIB is known for being one of the best,” said one hedge fund manager. “By being in Canada, AIMCo piggybacks on the reputation.” 

This is the greatest 50-day rally in the history of the S&P 500 https://t.co/IDI1wrJhrS

— Leo Kolivakis (@PensionPulse) June 3, 2020

"Are Markets Suffering A Moment Of Madness?" | Zero Hedge https://t.co/vZXpocIxlj

— Leo Kolivakis (@PensionPulse) June 3, 2020

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

The Investment Management Corporation of Ontario ("IMCO") and Stonepeak Infrastructure Partners announced a deal providing euNetworks €250 million of growth capital:

euNetworks Group Limited (“euNetworks”), a Western European bandwidth infrastructure company, today announced that it has secured an additional €250 million of capital from the Investment Management Corporation of Ontario (“IMCO”), an investor since 2018, alongside a new commitment from a vehicle managed by Stonepeak Infrastructure Partners. Pro forma for the capital raise, Stonepeak will continue to own a majority stake in euNetworks. The equity commitment will be allocated to fund further organic growth, M&A and other general corporate purposes.

euNetworks is focused on delivering high bandwidth data centre to data centre connectivity between and within cities in Europe. The company owns and operates deep fibre networks in 17 cities and also operates a highly differentiated long haul network that spans 15 countries. euNetworks continues to invest in its network, building unique routes, adding multiple diverse paths and extending reach into key hyperscale data centre sites, data centre clusters and network aggregation points. These investments continue to fuel the company’s growth and are driven by the capacity requirements of euNetworks’ customers.

“Bandwidth and Internet Infrastructure underpins much of commerce and society and that impact continues to grow exponentially,” said Brady Rafuse, Chief Executive Officer of euNetworks. “We are laser focused on deploying capital to support the requirements of our customers, whose bandwidth requirements typically double every year. We are delighted to have secured additional investment from IMCO and Stonepeak and thank them for their support as we continue to build and deploy fibre network infrastructure in Europe.”

“When we made our initial investment, we recognised that euNetworks had distinguished itself in an increasingly connected society where certain backbone fibre networks underpin the digital infrastructure ecosystem, said Brian McMullen, Senior Managing Director of Stonepeak. “That remains the case today, and the team continue to do an exceptional job, delivering critical network infrastructure to euNetworks customers. There continues to be no shortage of compelling capital opportunities in Europe and we remain committed to building further on the unique position of euNetworks.”

“We seek to invest in world class infrastructure businesses globally and are excited to be supporting one with our investment in euNetworks as they continue growth of their European platform,” said Tim Formuziewich, Managing Director and Global Head of IMCO’s Infrastructure program. “We see bandwidth demand growth being extremely differentiated to other value drivers of infrastructure assets that offers diversification to our clients’ portfolios. That growth profile combined with euNetworks’ leading position in the European bandwidth infrastructure market and track record of successful capital deployment presented a strong investment opportunity for IMCO.”

In recent years, euNetworks has added new metro networks in Manchester, Milan, Madrid and Vienna, connecting all key data centres, as well as additional density and extensions to many of its existing city networks. The company has also extended its long haul network, adding unique routes, deploying new fibre on existing routes and in late 2019, completed the build out of critical Internet infrastructure linking Dublin to London and Lowestoft. This new Super Highway includes the first new subsea cable system in the North Irish sea for some years (Rockabill), and the entire route was built with new ultra low loss fibre to deliver the lowest cost per bit.

About euNetworks

euNetworks (https://eunetworks.com) is a Western European provider of bandwidth infrastructure services. We focus on delivering scalable, fibre based products and solutions to a customer base that is at the centre of technology transformation. Our customers require fibre based data centre to data centre connectivity, both within the key cities in Europe and between these cities, supporting both their bandwidth growth and the performance requirements that their applications demand. Our customers’ needs shape how we develop our network further. We own and operate 17 dense fibre based metropolitan city networks. These are connected with an intercity backbone covering 51 cities in 15 countries. Our metro networks are in London, Manchester, Dublin, Amsterdam, Rotterdam, Utrecht, Paris, Frankfurt, Cologne, Dusseldorf, Stuttgart, Munich, Hamburg, Berlin, Vienna, Milan & Madrid. euNetworks leads the market in data centre connectivity, directly connecting over 430 in Europe today, with further data centres indirectly connected. We are also a leading cloud connectivity provider, direct connection to all key cloud platforms and access to additional platforms. Our product set of Fibre, Wavelengths and Ethernet is bundled to deliver bandwidth solutions for our customers, from euTrade to Cloud Connect, DC Connect, and Media Connec

ABOUT IMCO

The Investment Management Corporation of Ontario manages $70.3 billion of assets on behalf of its clients. IMCO’s mandate is to provide broader public sector institutions with investment management services, including portfolio construction advice, better access to a diverse range of asset classes and sophisticated risk management capabilities. IMCO is an independent organization, operating at arm’s length from government and guided by a highly experienced and professional Board of Directors. Follow us on LinkedIn and Twitter @imcoinvest

About Stonepeak Infrastructure Partners

Stonepeak Infrastructure Partners (www.stonepeakpartners.com) is an infrastructure-focused private equity firm headquartered in New York that manages $18.2 billion of assets for its investors (as of December 31, 2019). Stonepeak invests in long-lived, hard-asset businesses and projects that provide essential services to customers, and seeks to actively partner with high-quality management teams, facilitate operational improvements, and provide capital for growth initiatives.

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.

The United States is prepared to reassess its intelligence-sharing arrangement with Canada if Huawei is given the green light to take part in building Canada's 5G networks, US State Department says. https://t.co/zOEfvBas7M

— CBC News Alerts (@CBCAlerts) June 4, 2020

If private equity firms cannot clearly show outperformance of the stock market soon, surely even their stoutest defenders among investors will start questioning the hefty fees they pay.

Private equity firms insist they have learned their lesson. After the global financial crisis they were too slow to take advantage of all the cheap assets up for grabs. They are determined not to make the same mistake again. Some observers say they cannot afford to.

It may seem crazy to suggest that the private equity industry is under pressure. After all, firms have been deluged with money in recent years as investors have desperately searched for returns in a world of rock-bottom interest rates.

Yet the industry has signally failed to produce those returns, at least relative to booming stock markets. At some stage that will have to change, or investors will start to look elsewhere. Now may be the industry’s best chance.

For several decades the top private equity firms produced remarkable returns that comfortably justified their remarkable fees. Yet following a series of reports by academics and investors that have examined their performance there is now little argument that, at least since the financial crisis, US funds have failed to beat US public equities. In absolute terms the returns have been healthy. But matching public equities is hardly what investors pay fees of up to 6% for.

A recent report by Harvard economist Josh Lerner and consultants Bain & Co found that US private equity returns have lagged the S&P 500 index over the decade to June 2019, the first time that has happened over any ten-year period.

Now work by Ludovic Phalippou, a professor at Oxford University’s Saïd Business School, suggests that the lacklustre performance dates back further.

For 15 years, Phalippou has been dissecting what he sees as the highly misleading way that the industry presents its returns. One trick is to adopt the most flattering index for comparing relative performance. The standard benchmark for US funds used to be the S&P 500 index but it has increasingly been replaced by the MSCI World Index, which has performed much less well in recent years.

Phalippou points out that most companies in which private equity firms invest fall below the size range of the S&P 500, the MSCI World Index or the FTSE 100. So it would be fairer to compare funds with indices that exclude the largest companies. On that basis he found that US private equity fund returns were similar to US public equities not only in the most recent period, but also between 1996 and 2005 (when big companies underperformed).

The picture in Europe is less clear. The Bain study found that European funds continued to outperform over the last decade. That was relative to the FTSE 100 index, however, which has done less well than smaller company benchmarks. An earlier study by another Oxford professor, Tim Jenkinson, found that just like US firms European funds had lost their edge since 2006, though this was based on a small sample.

Even if the average returns have been disappointing the leading private equity firms have been able to produce figures showing that they have turned in consistently strong returns for decades. Yet Phalippou claims this is based on the use of internal rates of return, an “absurd” measure that is easily gamed and flatters the industry leaders which all had spectacular returns in the early years. His analysis suggests that their recent returns have been close to the average and to the returns from US public equities.

Whatever the truth of this the industry as a whole clearly needs to raise its game. And the crisis presents just the sort of opportunity firms say they have been waiting for. Even though the industry did not make the most of the bargains on offer after the global financial crisis, funds from the 2009 vintage produced bumper returns.

But firms also face daunting challenges. Much of the immediate focus has naturally been on shoring up existing portfolio companies, many of which have seen business evaporate. Some firms have taken advantage of government-backed loan schemes, but others are wary of the strings attached and there is continued wrangling about whether some companies with very weak balance sheets should be disqualified by EU rules.

Some in the industry are rightly nervous about a possible backlash against high corporate debt, which is seen as making businesses less resilient in the crisis and more dependent on taxpayer bailouts. This could result in restrictions on leverage and further limits to the tax deductibility of interest which could hit future returns.

Although there will be plenty of distressed assets, finance will be less generous and some executives fear competition will drive prices too high given the uncertainties about the pace of recovery and changing consumer behaviour.

All of which means the crisis will be a huge test of the real value private equity firms add. If they can’t begin outperforming public equities again soon even their doziest investors will start questioning the model — and those remarkable fees.

• Private equity is all about active management and I hate comparisons with public indexes. There are many terrible PE funds out there and a handful of great ones. Even the big brand name funds have terrible vintage years they'd like to forget about but my point is this: median returns don't cut it in private equity. If you look at the broad universe, no doubt you're better off investing in the S&P 500 over the long run.
• On top of this, there's too much money and competition in private equity and now the industry successfully lobbied Congress to gain access to 401(k)s, which might turn out well or it might be an unmitigated disaster.
• Fund returns have been steadily declining over the years as a wall of money chases scarcer deals and valuations are being bid up to nosebleed levels. Couple that with the fact that long-term rates are at zero and risk going to negative, you see there's tremendous pressure of PE funds to deliver the double-digit returns of the past.
• Still, top funds are posting solid returns and some of them are ramping up new funds to take advantage of distressed opportunities as they arise. IMCO just took a $250 million stake in Apollo's new $1.75 billion fund. KKR has raised close to $4 billion from investors to snap up corporate debt at significant discounts, as the coronavirus outbreak weighs on big swathes of the corporate world. It doesn't want to repeat mistakes it made in 2008. There are plenty of other examples.
• Vintage year 2020 should turn out to be a great one for top PE funds as they are able to raise money fast and put it to work, taking advantage of opportunities in distressed debt. It also helps that the Fed has committed to shoring up credit markets, effectively aiding and abating these funds.
• Canada's large pensions have solid partnerships with top PE funds which allows them to gain access to large co-investment opportunities. To do this properly, Canada's large pensions have the right governance which allows them to attract talent, pay them properly, and analyze co-investments quickly and maintain their allocation to private equity.
• For example, CPPIB has almost 25% of its $400 billion in total assets in private equity. If they did this solely through funds, they'd never achieve this scale, they need to invest with top funds and gain access to co-investments to maintain scale and reduce fee drag. 
• As Mark Machin notes in the Fiscal 2020 Annual Report:"Our dollar value-added (DVA) compared with our Reference Portfolios for the fiscal year was $23.5 billion as a result of the continued resilience of many of our investment programs. DVA is a volatile measure, and so again we look at our results over a longer horizon. Since inception of our active management strategy, we have now delivered $52.6 billion in compounded DVA. "  That should put at ease all of you who think private equity can't add value over the long run if the partners and approach are right.
• US pension funds are hampered because they can't attract and retain the requisite talent to do co-investments (a form of direct investing where you pay no fees) so they mostly do fund investments and are significantly under-allocated to private equity.
• Lastly, it is true that pandemic and lockdowns have brought about private equity's Minsky moment and that may over-leveraged PE portfolio companies are n big trouble, but the critics of private equity are too critical and generalize way too much.

S&P 500 erases its loss for the year as stocks rally on reopening optimism https://t.co/I50oH6kqax

— Leo Kolivakis (@PensionPulse) June 8, 2020

If You're Scratching Your Head at the Market's Moves, You're Not Alone - RealMoney https://t.co/lhsBuEFwDZ

— Leo Kolivakis (@PensionPulse) June 8, 2020

$HTZ is now substantially higher than it was before it declared bankruptcy pic.twitter.com/GUBLALI0WQ

— Joe Weisenthal (@TheStalwart) June 8, 2020

1. Let me get out (exit their investments) now that the going is good
2. Let me replenish my cash pile to take advantage of opportunities when the market collapses

Mohamed El-Erian 'uncomfortable' betting on longer rally in stocks https://t.co/8qP0HWIKRV

— Leo Kolivakis (@PensionPulse) June 8, 2020

Druckenmiller Says He Was ‘Far Too Cautious’ During Rally https://t.co/lTME44DR5g

— Leo Kolivakis (@PensionPulse) June 8, 2020

1. Speculative trading is reaching extreme levels and stock market melt-ups never end well
2. If rates keep inching higher, it will put pressure on stocks
3. Global pensions and large sovereign wealth funds will rebalance at the end of this month which is end of quarter.

An Opposition MLA is attempting to reverse changes the Alberta government made last year to the control of several public sector pension plans.

NDP MLA and labour and immigration critic Christina Gray tabled a private member's bill on Monday that also seeks to halt cabinet ministers from withdrawing Alberta from the Canada Pension Plan — a proposal floated by Premier Jason Kenney.

"Albertans are very concerned about making sure that they can rely on that retirement, particularly now during the pandemic with the economic uncertainty that is happening," Gray said in a Friday interview.

"Albertans want to know that their money they have earned through a lifetime of contributing to their country will be there for them when they retire."

In its inaugural October 2019 budget, the United Conservative Party government said changes were coming to the oversight and investment requirements of four major public sector pension plans.

Government backs AIMCo

Finance Minister Travis Toews said in the legislature on Monday the government has confidence in AIMCo. He said every pension manager in the world has been hit this year by an economic downturn resulting from the COVID-19 pandemic. The corporation has exceeded its benchmarks in eight of the last 10 years, Toews said.

In a Monday email, Toews' press secretary, Jerrica Goodwin, said government wants to consolidate pension management with AIMCo to achieve "economies of scale."

"AIMCo's size enables it to participate in sophisticated investment opportunities, such as international private equity and real estate investments, that are difficult for some smaller investment managers to access," she said.

Government has no intention of changing its mind, she said. The minister had not reviewed Gray's bill as of Monday afternoon.

Gray's Bill 203, tabled in the legislature Monday afternoon, would reverse the UCP's pension changes and require that a current or future government consult with pension holders before making future changes to the plans' administration.

"The UCP, the party of the free market, is choosing to force all Albertan pensioners to use AIMCo rather than allowing them the opportunity to have competition within the market," Gray said at a Monday press conference. "They are creating a monopoly."

If passed, the Pension Protection Act would also halt Alberta withdrawing from CPP.

Pulling Alberta out of the CPP and creating a provincial pension plan was one of the ideas considered last fall by the Fair Deal panel. The group of MLAs and other Albertans was tasked with holding public hearings and studying ways for Alberta to seize more autonomy from Ottawa. Their report has been submitted to the government, but not yet released.

Gray said the panel floated the idea before Albertans without presenting information about merits or risks of a switch.

In the legislature, Toews said the government would put the question of a provincial plan to Alberta voters in a referendum if ministers believe the idea is worth pursuing.

Three retired teachers opposed to changes to their pension plan also spoke at the NDP's Monday press conference.

'Beyond outrageous'

Retired Sherwood Park teacher Dianna Millard said the change without consultation is anti-democratic.

"I feel powerless and vulnerable," she said. "We're not being listened to and there's no justification for this to be happening at all."

Retired Edmonton teacher Dolaine Koch pointed to an ATRF analysis released earlier this month showing the teachers' pension fund would have been worth $1.3-billion less if managed by AIMCo between 2013 and 2019.

She said when she tried to meet with her MLA about her pension concerns, he told her she could vote for an opponent during the next election if she was unhappy.

Lin Zurawell, a retired teacher from Sherwood Park, said she feels as if the government is reaching into her savings account without her permission and reallocating her money.

"It's beyond outrageous," she said. "It's terrifying. When your pension is your single source of income, it's terrifying to think that your government can manipulate it this way."

Toews said Monday all public sector pension plans are fully funded, and their money is safe and secure.

Previously, cabinet ministers have said switching investment management of teacher pensions to AIMCo would save both taxpayers and teachers millions of dollars each year in fees.

Private members' bills go before an all-party legislative committee before being debated in the legislature. The committee, which has a majority of government members, can opt to recommend the legislature not consider the bill.

The NDP has launched a website to collect stories from Albertans concerned about pension changes. Submissions are automatically emailed to committee members in an attempt to pressure the committee to allow the bill to proceed to the legislature.

• As I explained in my comment on hijacking Alberta's Teachers Retirement Fund, the Government of Alberta was wrong not to consult teachers on the proposal to move assets over to AIMCo but it does make rational sense over the long run as significant economies of scale will be achieved if AIMCo manages ATRF assets.
• I followed up that comment with another one on the teachers' battle heating up in Alberta to go over more arguments on why this proposal makes sense but I also was dumbfounded by another proposal to opt out of the Canada Pension Plan.
• At the beginning of the year, I wrote a comment on making Alberta's pensions great again, heavily criticizing the proposal to opt out of the Canada Pension Plan to start an Alberta Pension Plan where assets are managed by AIMCo.
• Then all hell broke loose when AIMCo's volatility blowup hit the news wires. Whether it's $3 billion or $2 billion is immaterial, it was a royal blunder and while AIMCo's CEO has responded, the Board hired OTPP's former Chief Risk & Strategy Officer, Barb Zvan, as well as KPMG Risk to review what went wrong. 
• In a recent comment, AIMCo's all too familiar vol blowup, Brett Friedman, Managing Partner at Winhall Risk Analytics, discussed his insights on what went wrong. I also discussed how CPPIB lost C$700 million betting on market volatility but that organization sized the trade appropriately and didn't take the same risks as AIMCo.

In fact, AIMCo put out a one page backgrounder which you can all read here addressing the difference in year-end performance and discussing the benefits of scale.

When adjusting performance to reflect different year-end reporting dates, it turns out AIMCo's Balanced Fund outperformed ATRF over one year (9.8% vs 9.6%) and more importantly over the last four years, it's pretty much the same (8.2% vs 8.1%) net of all fees.

And this despite the fact that ATRF's Private Markets (Private Equity, Real Estate and Infrastructure) outperformed those of AIMCo over the last four years.

But here too, you need to be careful as AIMCo has a lot of legacy investments it is dealing with in private markets and the mid-market space where the ATRFs of this world primarily invest in has been outperforming of late but not over the long run.

The most important thing in AIMCo's one page backgrounder, however, isn't its 4-year performance edging out that of ATRF, it's the fact that it addresses scale, diversity and governance head on:

When informing Alberta's teachers of the benefits of joining AIMCo, they should familiarize themselves with the mandate and roles of AIMCo as well as its diligence and governance.

Moreover, Alberta's teachers can have joint governance over their pension plan, just like AIMCo's three largest clients. This should address points 3, 4 and 5 of ATRF's letter to the Minister.

The main point I think is lost in all this is that AIMCo is a world-class organization investing across public and private markets all over the world.

Importantly, nothing will happen to Alberta teachers' pensions if assets are managed by AIMCo. If anything, they will be bolstered over the long run because AIMCo at $150 billion+ in assets will be an even stronger force to be reckoned with.

What about Ontario Teachers', OMERS, HOOPP, IMCO and OPTrust? All great organizations but in theory, Doug Ford's government can amalgamate them to to create one big Ontario pension fund just like BCI in British Columbia or the Caisse in Quebec. This will lower administrative costs significantly and improve performance over the long run. In fact, some people have privately told me it's going to eventually happen.

I say in theory because in practice, there will be great pushback as these are all extremely well run, successful and mature organizations and there is no comparable Ontario fund where assets can be moved to amalgamate them.

Again, as I expressed in my last comment on the hijacking of Alberta Teachers' Retirement Fund,  the Government of Alberta made a series of blunders, the biggest one not properly consulting the teachers before moving ahead with this proposal. That was a blatantly dumb and arrogant mistake.

Also, ATRF is a great organization with exceptional people. I feel their angst but as I said, there's no way some people will not be absorbed into AIMCo and they too will be better off over the long run (better compensation, bigger, more stable organization).

When the coronavirus pushed equity markets off a cliff, Canadian defined benefit pension plans had to mobilize to address a number of concerns.

The Canadian National Railway Co. pension recently shifted towards a more defensive investment strategy, said Marlene Puffer, president and chief executive officer for the CN investment division of the company, at a webinar hosted by the Association of Canadian Pension Management last week.

As a highly mature plan, with about $18 billion under management, it pays out around $1 billion each year, she noted. “Being a corporate plan that’s federally regulated, solvency matters. So we were well positioned for this kind of situation. Obviously, we didn’t predict the pandemic, but we were concerned about equity valuations. And we were concerned about interest rates falling further, so we shifted our asset mix to have additional interest rate hedging in place. And we also had in place a sophisticated downside protection program related to the equity markets . . . and shock absorbers within almost every asset class that we have. And with that, we came through this period quite strongly.”

After making it through a dramatically difficult couple of quarters, the CN Rail plan’s return for the year is still in the green, added Puffer. “It seems strange to be talking to my members and saying, ‘I’m delivering a modest, positive number and I’m very excited about that.’ But that’s exactly where we are.”

Prior to the pandemic, she noted, the plan addressed its traditional home-bias in its equity portfolio and switched to using an all-country world index as its benchmark portfolio. “At the time, we really thoughtfully did that with the thought that, should there be any form of crisis in the global economy, it would be a defensive play relative to our previous positioning.”

Unhedged U.S.-dollar exposure also boosted the plan’s returns through the crisis as the U.S. dollar appreciated, boosting equity returns in local currency terms here in Canada.

In addition, as the crisis roiled through markets, the plan had sufficient liquidity to take on some rebalancing efforts, said Puffer. “The good news is that means, as equities were falling, we were actually buying and as equities would recover, we would sell a bit at these sorts of mini peaks. So that activity over the past couple of months has added value to our fund.”

In order to perform this strategy, the plan had to manage its liquidity concerns very carefully, she added, noting that, while the fund has made rigorous use of derivatives as a method of liquidity management for some time, other factors came into play. “It was important though that, for example, our government of Canada portfolio was almost unencumbered coming into the crisis and was our source of extra liquidity through the repo market. And the Bank of Canada stepped in as well to offer pension plans direct access. That was important as a second backstop to give us additional reassurance that, should we need some additional liquidity, it was easy to access.”

Liquidity was notably less of a concern for a less mature plan like the Alberta Teachers’ Retirement Fund, said Derek Brodersen, its chief investment officer, also speaking during the webinar. While the ATRF is about the same size as the CN Rail plan, it still has net cash inflow of about $300 million a year. “That’s really helpful in a stressful market because we actually don’t need to sell anything to pay pensions because we’re actually collecting more money in contributions than we need to pay every month.”

Nevertheless, he said, aspects of the portfolio required careful managing in terms of maintaining adequate liquidity. “We have a lot of unhedged exposure to foreign markets. Our public equity portfolios and our private equity portfolio is entirely unhedged, but some of our private market asset classes, we’ve hedged those back to Canadian dollars by policy. As the Canadian dollar fell, we needed liquidity to fund some of those currency hedges.

“We spent a lot of time thinking about that and how we could ensure we had available liquidity without having to impact our asset mix in any meaningful way — without having to sell something we didn’t want to sell. And I think we managed to do that pretty effectively. We tapped the repo market when it was still available and made sure we had lots of liquidity.”

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

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

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

Stocks rose on Friday in volatile trading as traders tried to regain some of the sharp losses from the previous session. The major averages, however, clinched their worst week since March as traders took profits and grew nervous of a resurgence in Covid-19 cases.

The Dow Jones Industrial Average gained 477.37 points, or 1.9%, to finish the day at 25,605.54. The blue-chip index had traded over 800 points higher earlier in the day. The S&P 500 rose 1.31% to 3,041.31 while the Nasdaq Composite added 1% to close at 9,588.81.

For the week, the Dow and S&P 500 lost 5.5% and 4.7%, respectively, while the Nasdaq shed 2.3%. All three notched their worst week since March 20.

The stocks of companies that depend on a successful reopening of the economy rose on Friday with Delta Air Lines up 11.8% and cruise-ling operator Carnival Corp. adding 14.5%.

Those stocks were hit heavily during Thursday’s sell-off as investors feared the reopening of the economy could be delayed by a second wave of cases.

“Given the magnitude of the rally, it would shock me if we had a one-day sell-off and that’s it,” said Morgan Stanley Investment Management’s Andrew Slimmon.

“The stocks that are up the most from the lows are still the risk-on, high beta, value, small-cap stocks,” Slimmon, who is a managing director and senior portfolio manager at the firm, told CNBC’s “Squawk Box Asia” on Friday morning Singapore time. “They’re still the big winners and I would suspect that there’s more pain to come near-term before the market clears out kind of this excessive speculation that we’ve seen recently.”

Wall Street’s fear gauge signaled more wild trading ahead. The CBOE Volatility Index rose to its highest level since April and traded above 43 before moving back below 36 by the closing bell.

The Dow, S&P 500 and Nasdaq on Thursday all recorded their biggest one-day losses since mid-March on Thursday, posting losses of at least 5%.

Wall Street’s weekly losses came as data compiled by Johns Hopkins University showed the number of new coronavirus cases has risen in states like Arizona, South Carolina and Texas as they continue their reopening process. Arizona cases have nearly doubled since Memorial Day.

Still, Treasury Secretary Steven Mnuchin told CNBC’s Jim Cramer the U.S. can’t shut down the economy again. Overall, more than 2 million coronavirus cases have been confirmed in the U.S. along with over 100,000 deaths.

Stocks had been ripping higher prior to this week, as investors cheered the prospects of the economy recovering as states and countries eases quarantine measures.

“We had gone straight up more than 30% without a real sell-off, so you’re due for one, and I don’t think it’s the worst thing in the world,” said JJ Kinahan, chief market strategist at TD Ameritrade. “As more states get back, the question becomes: Are they going to ramp up fast enough to please Wall Street? What you’re seeing is it’ll be hard to do that.”

The S&P 500 and Dow remain more than 37% above the intraday lows reached on March 23. Most of those gains have been driven by stocks that would benefit from the economy reopening, including airlines, cruise lines and retailers.

“Some of these stocks may have gotten ahead of their skis,” said Kinahan. “When you see some of the airlines being priced at the levels they were before this all started when they say they’re going to do 60% of their business just doesn’t make sense.”

The decline this week at one point pushed the S&P 500 back below its 200-day moving average, a widely followed level by traders. It managed to re-top the moving average by the end of the week.

“Once the S&P 500 crossed above the 200-day moving average [last month], it gave investors the green light to buy stocks; it said things are OK with the economy,” said Mitchell Goldberg, CEO of ClientFirst Strategy. “It also signaled hedge fund managers who got too heavy into cash are now way behind their benchmarks and are now performance-chasing.”

U.S. stocks on Thursday booked their worst daily plunge since fears about the economic impact of measures to curtail the spread of the COVID-19 pandemic took root in investors’ psyches back in March.

The Dow Jones Industrial Average tumbled roughly 1,862 points and the S&P 500 lost 5.9% to tally their worst one-day declines since March 16, according to Dow Jones Market Data.

Bespoke Investment Group noted that the broad-market S&P 500’s greater-than-5% tumble, on the back of rejuvenated fears of an emerging second wave of the illness derived from the novel strain of coronavirus and a sobering outlook from Federal Reserve Chairman Jerome Powell, was only the 28th time since 1952, when the S&P 500 converted to a five-day trading schedule, that the index has tumbled by at least 5% in a day.

Five of those declines have been in the past three months alone. The investment and research provider also noted that an unraveling of the market on a Thursday is also a rarity, with all such previous Thursday 5%+ drops occurring amid the 2008 financial crisis and none before that, going back to 1952.

All that said, declines of this magnitude have historically been followed by sizable rebounds in the days, weeks and months to follow (see attached table).

Bespoke notes that, on average, the S&P 500 has rallied 2.14% the day after a decline of 5% or more, and has been positive the next day 81.48% of the time.

Of course, the longer the time horizon, the greater the likelihood and intensity of the bounceback. About a year after such drops, the S&P 500 has averaged a gain of 18.92% and has had positive returns 82.6% of the time, Bespoke noted.

Check out the attached chart:

It’s important to note that Thursday’s selloff may not represent the end of a bullish phase for stocks after they hit their lowest point in a coronavirus-inspired selloff on March 23.

Keith Lerner, chief market strategist at SunTrust Advisory Services, said that valuations for stocks had gotten lofty after the run-up for equities from their lows. For example, the Dow remains up 35.2% from its closing low on March 23 at 18,591.93, the S&P 500 has gained 34.2% from that low, while the technology-laden Nasdaq Composite Index COMP, 0.51% is 38.4% above that nadir, even after Thursday’s punishing decline.

“After a 40%-plus rebound in the S&P 500 since March, stocks became stretched to the upside and vulnerable to bad news,” wrote Lerner in a Thursday research report.

“Markets started to bake in a very smooth economic reopening process, even while we continue to expect it to be positive but uneven. Last Friday’s much-better-than-expected jobs report further lifted investor expectations, and with elevated expectations, bad news surrounding the coronavirus went a long way in hitting markets,” he wrote, referencing the Labor Department employment report last Friday that showed a surprising 2.5 million jobs were created in May.

Powell on Wednesday, following the Federal Reserve’s policy update, said during a news conference that investors shouldn’t overestimate the degree and pace of the recovery for the jobs market, noting that millions of jobs may remain unfilled due to forced closures and business shutdowns.

That said, Lerner also is of the view that the current retreat for the stock market represents a bump in the road and possible point for investors to digest the powerful gains from the lows of the past few weeks. He drew parallels to the rebound from the 2008 financial crisis, when the stock market saw a similar sharp pullback on a longer road to recovery.

“Notably, this setback has come around the same period as it did during those bull markets, where stocks took a pause to digest gains and subsequently traded in a choppy sideways pattern,” the SunTrust strategist wrote.

“While history is only a guide, we believe this is a reasonable road map for the market’s near-term direction,” he said. Check out the attached chart:

To be sure, past results are no guarantee of outcomes for the future and the pandemic has managed to befuddle a number of investment pros already. The continued threat from the deadly pathogen that has infected ore than 7 million people worldwide is a serious one. Bloomberg News on Thursday reported that Houston-area officials are “getting close” to reimposing stay-at-home orders as cases rise.

Some 20 states are seeing signs of rising cases of COVID-19, and although there has been movement on remedies and cures for the illness, there are exists no bona fide vaccines or treatments.

With the #SPX now just 6% below the Feb. high, it’s well above the 14% drawdown in the ‘22 estimate. To me, that can only mean 3 things: Either the #market needs to correct, the fwd #earnings estimates are too low, or valuations will remain elevated due to #Fed intervention. pic.twitter.com/9zMKzuR0hR

— Jurrien Timmer (@TimmerFidelity) June 10, 2020

Rampant speculation in the stock market — you ain’t seen nothing yet. Thank the Federal Reserve - MarketWatch https://t.co/FioApb4T9w

— Leo Kolivakis (@PensionPulse) June 12, 2020

"The Most Absurd Moment In The History Of Capital Markets": Hertz Plans To Sell Up To $1 Billion In New Bankrupt Stock | Zero Hedge https://t.co/zY1AAKrsm2

— Leo Kolivakis (@PensionPulse) June 12, 2020

Hertz granted approval to sell up to $1 billion in shares https://t.co/kZN9VDlHK1

— Leo Kolivakis (@PensionPulse) June 12, 2020

Warren Buffett is ‘an idiot,’ says investor who claims daytrading is ‘the easiest game I’ve ever played’ https://t.co/eyC0cej4lw

— MarketWatch (@MarketWatch) June 9, 2020

Barstool Sports’ Dave Portnoy Is Leading an Army of Day Traders https://t.co/BMBTSxpI92 via @YahooFinance

— Leo Kolivakis (@PensionPulse) June 12, 2020

Peter Lynch on buying stocks that are down pic.twitter.com/jJ7Gy4gSHr

— NeckarCap (@NeckarValue) June 9, 2020

Robinhood traders are not behind the rally, Barclays says @CNBChttps://t.co/dt35phsNU8

— Leo Kolivakis (@PensionPulse) June 12, 2020

Pandemic boredom + no sports = Robinhood https://t.co/ZqdpRmemFb

— Lisa Abramowicz (@lisaabramowicz1) June 12, 2020

• Will they continue climbing up, making new highs but with some severe pullbacks along the way?
• Will they retest March lows?
• Will they slice right through March lows and make new lows?

US Printing Money on Steroids to Prevent Deflation, Says Ed Yardeni https://t.co/IJBJvXek8q

— Financial Sense Wealth Management (@FinancialSense_) June 12, 2020

The Illusion of a Rapid US Recovery by James K. Galbraith @ProSynhttps://t.co/3e42sUXnx5

— Leo Kolivakis (@PensionPulse) June 9, 2020

A day after the mega-cap stocks lost nearly $270 billion in market value, our traders check out $AAPL$FB$MSFT$GOOGL and $AMZNpic.twitter.com/WCMlVTQL4y

— Trading Nation (@TradingNation) June 12, 2020

Brace for a 'gut check' summer sell-off, Peter Boockvar suggests https://t.co/ulF1G9HcL6

— Leo Kolivakis (@PensionPulse) June 11, 2020

• Large cap one day moves
• Large cap 5-day moves

Guggenheim Co-Founder: We Are Fundamentally Altering Capitalism in the UShttps://t.co/IXNsFOr8a2

— The Sounding Line (@TapsCoogan) June 11, 2020

Banks have been behaving badly again, and another financial crisis, hastened by the pandemic, could be on the horizon, writes @FrankPartnoy. This one could be worse than the last. https://t.co/RjUq1JrTKw

— Leo Kolivakis (@PensionPulse) June 10, 2020

AustralianSuper, Australia's largest superannuation fund, is seeking private equity opportunities and looking to lift credit holdings as it sees limited returns from government bonds.

The fund is holding more cash than it would traditionally, Mark Delaney, the chief investment officer of Melbourne-based AustralianSuper, said Tuesday. It is underweight government bonds and maintained its long-term weightings in equities during the market turbulence amid the coronavirus pandemic, Mr. Delaney said.

"If we get a chance and the markets pull back substantially we'll look to deploy some of that cash, otherwise we'll look to start dribbling money into aspects like credit and hopefully really good unlisted opportunities," he said.

The superannuation fund that manages A$165 billion ($115 billion) of retirement savings for more than 2.1 million workers needed to move away from relying on fixed income to diversify given that rates are close to zero, Mr. Delaney said. It may boost foreign-currency holdings, employ synthetic strategies such as options and consider unlisted investments, he said.

Despite the dire economic data at the moment, Mr. Delaney said he was more confident about the economic outlook in 2021. There would be pressure on government bond yields to rise if a recovery took hold, he said.

"The underlying running yields are still very low now and the prospect of capital gains from here is quite limited unless there was a renewed, substantial economic downturn," he said.

AustralianSuper wants to ramp up private equity investments both in Australia and overseas, Mr. Delaney said. It's looking to do that through co-investments and co-sponsorships — where it gets in on a deal at the early stages — as well as taking underlying management exposure, he said.

"We've got an aspiration to grow our private equity exposure," he said. "We look to do that carefully as the market opportunities emerge and we can find good quality deals."
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Technology companies are spending less and less time on stock markets, as private equity firms, armed with a record amount of dry powder, move fast to take them private.

The median time from initial public offering to buyout since the financial crisis has narrowed to around six years, according to a new study by data provider PitchBook. At the smaller end - for deals worth $400m to $1.25bn - the time to buyout nearly halved from 12.2 years since 2015. Meanwhile, for companies worth between $1.25bn and $4bn, the median time to being taken private fell from 9.8 years to 6.4 years over the same period.

Turning their focus more towards growth, private equity firms have increasingly targeted fast-growing public tech companies in recent years.

"The revenue growth profile has risen for tech take-privates in recent years while operating margins have fallen," the authors of the report wrote. "This is likely a byproduct of PE firms opting to purchase more nascent and growth-oriented companies, focusing less on profit margins and debt capacity.”

Notable deals last year include the $3.8bn takeover of cybersecurity business Sophos by Thoma Bravo and the $5.4bn takeover of Tech Data by private equity firm Apollo.

The trend is set to continue, with PitchBook highlighting a number of potential buyout targets. These include security-focused companies such as SecureWorks and A10 Networks, education software providers like Rosetta Stone and K12, as well as stock photography company Shutterstock and crowd-sourced reviews website Yelp.

"We see security-related companies continuing to be a trendy target as tech-focused GPs roll up disparate offerings to try and create multifaceted offerings while riding the growth curve for the industry," the authors noted.

Norwegian stock plunges after cruises put on hold through September https://t.co/YDuDCKGg5d

— MarketWatch (@MarketWatch) June 16, 2020

OPTrust Select has welcomed 38 organizations and over 1,000 members have joined the defined benefit pension offering from OPTrust since enrollment began in early 2019. OPTrust Select is designed specifically for organizations in the nonprofit, charitable and broader public sectors in Ontario and brings the advantages of OPTrust’s large scale and investment expertise to organizations that did not previously offer a defined benefit pension. The people who have joined OPTrust Select provide a range of critically important services including healthcare, community support and environmental advocacy.

“Nonprofit workers are essential to the wellbeing of our province, which means that their wellbeing is essential too,” said OPTrust President and CEO, Peter Lindley. “The need for security and predictability has never been greater, and by joining OPTrust Select, the vast majority of these workers will have access to the income security of a defined benefit pension for the first time.”

Some of the most recent workplaces to join the Plan employ workers who are represented by OPSEU, making these the first OPSEU members of OPTrust Select. An additional fifty organizations from across Ontario are in the process of applying to join and organizations have continued to apply throughout the COVID-19 pandemic.

“This isn’t just a victory for the new members of OPTrust Select, it’s a victory for nearly a million workers across Ontario who don’t yet have the security of a defined benefit pension plan, including 25,000 OPSEU members working in the broader public service,” said OPSEU President, Warren (Smokey) Thomas. “When OPSEU first proposed this idea more than a decade ago, it was because we believed then, as we do now that all workers deserve to have access to a secure and dignified retirement, and OPTrust Select is making that a reality.”

OPTrust Select is the recommended pension plan of choice for the Ontario Nonprofit Network (ONN), the independent network of the nearly 58,000 organizations and one million nonprofit workers in Ontario. Further details on OPTrust Select can be found at optrustselect.com.

"Nonprofit workers are committed to serving their communities, and a pension plan is a way for organizations to commit to decent work practices for the long term,” said ONN Executive Director, Cathy Taylor. “A defined benefit plan like OPTrust Select provides stable income for life after retirement. We are thrilled that so many nonprofits have joined OPTrust Select, and we continue to hear from more interested organizations every day."

• There are over 58,000 nonprofit organizations in Ontario with over 1 million workers. 
• 80% of these workers are women making a modest salary (pension poverty discriminates based on gender, more women than men succumb to it for a lot of reasons). 
• They are very pleased to have onboarded 1000 new members from various nonprofit organizations (see full list here), offering them retirement security.
• Peter told me they are now talking to over 50 other organizations and are well ahead of their projections in terms of onboarding new members. "The demand for OPTrust Select remains very strong".
• They project they will be able to onboard 1000 to 1500 new members a year over the next five years taking their total members over 100,000.
• He said COVID didn't stop their ability to onboard new members but they still need to make the calls, get payroll data and other data to onboard them properly.
• In terms of advertising OPTrust Select, they rely a lot on Cathy Taylor and the Ontario Nonprofit Network (ONN)."Cathy is great, we are very lucky to have her and her team as partners for this new venture."
• Peter did admit that COVID has hit a lot of nonprofits hard as "many of these organizations are small, they don't have an IT department so their workers can't work remotely, and their funding dried up." But he said the Ontario Government will likely step in to support nonprofits with a $680 million stabilization fund (see details here).
• He said it's "really gratifying" to offer workers in the nonprofit sector a secure retirement as "most of them are women making a modest income doing very important work." 

• He was pleased to see how quickly people adapted working from home and said "productivity levels are high".
• He admitted however there are "external realities" some employees need to deal with like children at home.
• As far as remaining engaged, he told me: "I did two Town Hall meetings recently, one in the morning and one at night because I wanted to connect with all our employees all over the world."
• As far as due diligence on investments: "We don't like relying on third parties so that is more challenging. We have committed to management teams we know well and have already conducted due diligence on but yes, this is an issue for newer funds."
• As far as returning back to the office: "We are taking a wait and see approach, for selfish reasons, we want to see how others are doing it and learn from them. We are not going back to the office before Labor Day. The truth is we are missing interactions that can only happen in an office setting but there are many logistical issues like deep cleaning, social distancing, etc. that make it hard. Some people want to come in to the office, others aren't ready. We need to ensure the health and safety of all our employees. Flexibility is critical."

Lawyers Financial has inked a deal with the Colleges of Applied Arts and Technology pension plan to offer law firms the chance to join the CAAT’s DBplus.

The organization, which is a brand of the Canadian Bar Insurance Association, started looking into pension options for the legal community back in 2016. Over the past few years, a task force delved into which plan design to choose. Ultimately, it opted for the CAAT’s DBplus, which was launched in 2018 and allows employers outside of the college sector to join.

“We started talking to CAAT because all the research we had done and all the decisions we had made on what kind of plan it should be and what kind of contributions we should make and what kind of benefits at the end of retirement should look like, CAAT checked all those boxes,” says Dawn Marchand, president and chief executive officer of Lawyers Financial.

After doing a deep dive into the options, Marchand says being able to offer staff at Canadian law firms a DB plan over a defined contribution plan was seen as key because the former offers a guaranteed benefit for life. Also, DBPlus handles the administrative side and takes on the fiduciary risk, she adds.

Lawyers Financial is set to promote DBPlus this spring, with the DB plan expected to be available for law firms by July. But even before the promotional push, Marchand says the excitement for the DB plan is already palpable. “The appetite is huge; at this point, I’m getting four to five calls a week and it’s increasing all the time.”

The hunger for a plan like DBPlus is so large because many in the Canadian legal community, from administrative staff at a small-town firm to partners at big-city outfits, don’t have any pension at all, she says.

While there is intense interest, the details of how DBPlus would serve the diverse legal community is still being worked out. Partners at law firms and solo practitioners, for example, aren’t usually considered employees, says Marchand, noting that both groups would likely have to have a professional corporation set up and then the corporation would be considered the employer and the partner would be the employee.